Real estate investing is usually associated with buying properties, and the more houses you get to buy, the better. However, sometimes you need to sell a property too as a real estate investor, which is an aspect of the business which many tend to forget about. There are various reasons why a property investor might decide to part with one of their houses. Here is how to know if the time has come to sell your investment property.
Negative Cash Flow.
Of all the reasons which an investor might have to sell one of their properties, the most crucial one is having negative cash flow. As an investor, you should always strive to achieve positive cash flow as this is the only way to make money in real estate. Nevertheless, no matter how carefully you have analyzed the deal before buying a certain property, circumstances might change, and you might end up with a negative cash flow property a few years down the road. As soon as you realize that this the case, you should not waste any time and sell your house right away, unless you can think of a quick fix to turn your cash flow positive again. Any extra month in which you hold on to a negative cash flow rental means you lose more money from it.
Decrease in Demand
A seasoned real estate investor will realize things are taking a turn for the worse early on, before they end up with a negative cash flow property. One of the signs will be a drop in the rental demand in the area which will translate into a lower occupancy rate, higher vacancies, and eventually declining rental rates. The causes of the slowing rental demand could be economic (economic stagnation), demographic (negative population growth), or real estate-related (more people buying a home rather than renting a property). Once you start noticing any of these warning signals, you should take action. List your investment property for sale before the market cools down too much and look for an alternative rental market to relocate to.
Lower Return on Investment
Even if rental demand is not going down, there could be other reasons why you begin to make less money from your investment property. It could be that interest rates went up, so you have to pay more for your mortgage (in case of an adjustable-rate mortgage – ARM), that property taxes went up, or that recent changes in the local regulations concerning landlords and real estate investors imposed more costs on you. In this case you will observe a decrease in your cap rate and cash on cash return, resulting from higher ongoing expenditure. If your current property starts making less money for you, you need to explore options in other markets where the legal and regulatory framework favors landlords and consider selling your existing rental to buy another one, in a different location.
Expensive Maintenance Work Coming Up
You, as the owner of your investment property, know your property best. You know its state and condition, when major works were last done, and when massive repairs and maintenance will need to be implemented in the future. Having expensive maintenance work coming up could be a well justified reason to sell your property. Not only will you need to spend a lot of money on fixing it up, but you will also have to deal with all the mess and handle contractors in addition to losing a few weeks or potentially months of renting out while doing the works. However, you should be careful if you decide that you would rather departure with your house which requires significant maintenance than fix it as you will need to sell at a lower price than the optimal one. So, before listing your property for sale, make sure this step makes financial sense and that you are not losing too much of the value of your property.
Entering a Buyer’s Market
Even if the real estate market is much less volatile than the stock market, it still goes through occasional changes. One of the most important changes for real estate investors is the shift from a seller’s market to a buyer’s market (and vice versa, of course). If your local housing market has recently turned into a buyer’s market, it might be the best time to sell your investment property. What this means for the owner of a real estate property is that houses for sale are now in high demand, home values have gone up, and homebuyers are ready to pay high prices, sometimes even fully in cash, just to beat the competition. So, even if you have no other reason to sell your house, this shift in the real estate market could be enough. First of all, you will benefit from high long-term return on investment (due to the accelerated appreciation); and, second, you will end up with enough cash to invest in one or more rental properties in another, more affordable market.
High Real Estate Appreciation in Recent Years
Another important reason to sell your investment property now is if you realize that real estate prices have gone up significantly in your market in the last few years. This could be because of high population growth, new businesses opening up, slowdown in new real estate development projects, or many others. If all of a sudden your house’s value has increased by 30-40% in the past decade, you should give the idea of selling it some thought. With the profit you make, you will be able to invest in properties in another market which promises high return in the upcoming period.
Alternatively, you may need to sell your house because of negative real estate or overall economic prospects in the future. As soon as you start hearing the words “recession”, “slowing economic activity”, “negative population growth”, or “housing bubble” filling in the local economic and business news, you should get ready to sell your investment property before it loses too much of its value and before you become unable to find a buyer. Although your market is most probably bound to bounce back in a few years, it doesn’t make sense to lose money meanwhile when you can relocate your real estate investing business to another place.
Expanding Your Real Estate Investment Portfolio
The last but not least reason to sell your rental property is to grow and diversify your investment property portfolio. Even if the local housing market and economy have been stable and your house is in an excellent shape, it might be a smart investment decision to sell it. One such case is when you finish the repayment of your mortgage. As soon as you are done paying for your investment property, it makes sense to sell it for a higher price (as natural appreciation should have already taken place) and use the money from the sale to buy two new investment properties in the same market or new places. First, you will be able to generate more cash flow and more return from two properties instead of one. Second, you are diversifying your portfolio in this way, which means that you are spreading the risk, making your real estate investment even lower-risk.
As a real estate investor, you should never get emotionally attached to your portfolio properties. You need to treat real estate as a business and be ready to sell a house as soon as it makes financial sense to do so. This is the only way to maximize your profit and return.
This article has been contributed by Daniela Andreevska.
Daniela Andreevska is Marketing Director at Mashvisor, a real estate analytics tool which helps real estate investors quickly find traditional and Airbnb investment properties. A research process that’s usually 3 months now can take 15 minutes.