Should I Sell My Rental Property? 7 Signs It’s Time to Sell

Do your current investments match your long-term goals? If you’ve got a headache property, maybe you’ve had the thought, Should I sell my rental property? The truth is that there are times when parting with one asset to invest in another is the right decision. Keep reading to find out what these circumstances are and how to invest the equity from the sale!

Summary:

• While many rental properties are great investments, low cash flow, landlording headaches, and better investing opportunities are a few common reasons to sell.

• Before selling your rental property, consider the costs you might incur—commission fees, depreciation recapture, and capital gains tax.

• You can often stabilize a struggling property by refinancing and reinvesting your home equity, hiring a new property manager, or renovating to increase rents.

• Passive, turnkey rentals in cash flow markets are some of the best alternatives to underperforming or “headache” properties.

When to Sell a Rental Property 

There are many reasons why investors sell their rental properties: retirement, management headaches, low return on investment, or the opportunity to make more money elsewhere. Specifically, you might consider selling in any of the following circumstances:

1. It’s No Longer Cash Flowing

Property taxes, insurance, and other expenses have spiked in many markets. If your rent hasn’t kept pace, you may no longer be earning real estate cash flow—or worse yet, maybe you’re paying to keep your investment afloat.

Don’t know how to calculate cash flow? Try our rental property cash flow calculator! 

2. It’s Sucking Up Your Time

Do you find yourself constantly tending to your rental property? Even if it cash flows, ongoing maintenance, bad tenants, or property management issues could be burning you out. Some properties aren’t worth the emotional burden or effort!

Looking for headache-free cash flow? Turnkey rentals come with pre-screened tenants and management in place!

3. You Have Significant Equity

If you’ve held your property for several years, chances are you’ve built up a significant amount of equity. Are you using it, or could redeploying make it work harder for you?

Calculate Return on Equity

Return on equity (ROE) is a quick way to see how your property’s returns are faring relative to the equity you’ve built up. You can calculate your return on equity and compare it to that of other investments using this formula:

Net income / equity = return on equity (ROE)

Let’s say you’ve got a paid-off $400,000 property making $500 in monthly cash flow. $500 x 12 = $6,000/year. $6,000/$400,000 = .015 or 1.5% . You’re only making a 1.5% return on your equity!

Now, suppose you put 5% down on a $300,000 turnkey rental making $300 in monthly cash flow. $300 x 12 = $3,600 / $15,000 (your equity) = .24 or 24% return on equity!

4. You’re Nearing Retirement

You probably don’t want to be a landlord forever, especially as you approach retirement age. Instead, you might consider trading a self-managed property for one of the best retirement investments for passive income—turnkey real estate!

5. You’ve Maxed Out Tax Benefits

The IRS allows you to take depreciation on your rental property. If you’ve held the property for a while, that depreciation could be running out, or the house may have appreciated to the point that depreciation is barely making a dent in your taxable income.

6. Your Market Is Peaking

In many US rental markets, prices are up, rent is flat, and inventory is rising. Cashing in now allows you to realize your gains and reallocate that money to cash flow markets or areas with higher upside!

Invest in some of the best cash flow markets in the nation!

7. You’ve Got a Better Opportunity

Your rental property might’ve been a home run investment at one time, but maybe you’ve found a much better real estate investing opportunity that will make your money go further—like a turnkey rental property. With low money down, these properties can give you a much higher cash-on-cash return than most investment properties!

What to Do Before You Sell

Before selling your property, you want to be certain that it’s the right move. Run the numbers fast and accurately with a tool like our rental property calculator! Then, consult a tax professional about capital gains, depreciation recapture, and whether a 1031 exchange could be the right move for you. Finally, line up your next purchase—a simpler, more hands-off investment like a turnkey rental!

Factors to Consider When Selling

If you’re unsure when to sell a rental property, carefully consider the following costs you could incur before making your decision:

Commission Costs

You’ll typically need to pay a real estate agent 5%-6% of the sale price, depending on your market. That’s several thousand dollars that will come out of your equity!

Depreciation Recapture

Many investors claim depreciation on their rental property early on to help reduce their tax burden. If you sell your property, keep in mind that the IRS will want to recapture some of that money.

Capital Gains on Profit

If your property has appreciated, you’ll need to pay taxes on the capital gains. There is one exception—a 1031 exchange—which allows you to trade one rental property for a similar property without paying capital gains tax on the sale!

Alternatives to Selling Your Rental

Not quite ready to part with your rental property? Here are a few improvements you can make to your investment first:

Refinance to Increase ROE and Invest More 

Got hundreds of thousands in equity in your rental? That equity you’ve built up isn’t working very hard for you. With a cash-out refinance, you can put some of that equity back in your pocket and invest in other assets!

Hire New Property Management 

Maybe you’re tired of self-managing your property or have a bad property manager. In either case, finding a high-quality property manager can turn a headache into a more passive real estate investment.

Renovate to Improve Rents

While renovating requires some extra funds up front, updating your property or maximizing its square footage could make it more attractive to renters, help you command higher rents, and potentially boost your cash flow!

Swap Your Headache Rental for Passive Income!

If your current rental property is giving you more trouble than you bargained for, consider trading it in for a turnkey rental instead! These brand-new or recently renovated rentals have property management and tenants already in place, giving you a more hands-off investment on day one.

Rent to Retirement has turnkey properties in some of the best states to buy rental property, and you can use the equity from the sale for your investment property down payment. If you buy a new build, you could even use Rent to Retirement’s 5%-down loan for even less upfront costs on your next rental property and pocket the rest of your equity—or buy multiple rental properties!

Should I Sell My Rental Property FAQs

At What Point Should You Sell a Rental Property? 

To figure out when to sell a rental property, determine the return on the equity you’ll gain from the sale. If you’re earning less than you could elsewhere and/or are tired of hands-on management, it might be time to sell and reallocate that equity.

Is My Rental Property Worth Keeping?

How well does your current rental property align with your investing, financial, and lifestyle goals? For most investors, a rental with solid cash flow, long-term appreciation, and very few headaches is worth keeping.

What is the 50% Rule in Rental Property?

The 50% rule states that roughly half of your gross rental income is used to pay expenses (not including your mortgage). This can be a good starting point when analyzing a rental property, but it is by no means a “rule” you should confidently follow.