How do I know when to sell my property?

Alright, Kelly, well I appreciate the question. It’s a great question. I’ve got obviously some questions for you based on what you just described, but it doesn’t sound like to me you purchased these in good neighborhoods. I’m obviously making an assumption here and I don’t know for sure, but given the fact that you’ve had damages, turnover and squatters followed by you saying you name, it tells me that you’ve probably purchased in some less desirable or sketchy neighborhoods.

What I’ll classify as typically lower grade or C minus type neighborhoods. I’m not judging or being prejudice or anything like that. It’s just if you grade your neighborhoods as ABC’s and D’s and A’s being the premium prime areas, the most desirable, you know, certainly above the median price of an area or a market, your C’s and your D’s, your D’s would be essentially war zone C’s would be your lower income areas. Some of them are fine and profitable, producing good cash on cash returns, but also a lot of C areas are going to be areas that are not so favorable. You know, higher crime, just not ideal if you will, but everybody needs a place to live and you know, we pick and choose where we live and we live where we can. So let me give you some ideas and thoughts about what you’ve got going on.

I can’t really, really tell you whether to sell them or not or what you should do. None of this is financial advice, but deciding when to sell rental properties involves considering one or more factors. And often these are both personal and market driven. So here are some points and some ideas food for thought, if you will, to determine if and when is the right time to sell. And you know, keep in mind it’s hard for me to give you very specific type of information without knowing more specifics in your situation. I’m not gonna dissect what you have, but I’ll give you enough that you can figure this out on your own. Okay, so the first thing is basically considering market conditions. Properties generally appreciate over time, especially if they’re in good or or very desirable areas. But if you have a property and its value has increased significantly since you bought it and you believe the market is peaking, then it might be a good time to consider selling.

I’m gonna describe selling here in a little more detail before I’m done. When I say sell, I don’t necessarily mean sell for the sake of selling or selling and taking out your equity and realizing a gain and then doing nothing with it. Often when I talk about selling, it’s usually selling one property or a set of properties in exchange for one or more other properties, either a larger portfolio or moving up in scale size. Meaning going from a single family to a duplex or fourplex or potentially a, a small portfolio of residential properties like single families and duplexes moving up into small apartment buildings, that’s not necessarily the best path or the right path and that’s certainly not for everybody. It’s just one of 101 ways that you can invest and reinvest in real estate. So don’t think that you have to move up in unit count, it really just depends on what your overall strategy and plan is.

So don’t think that selling and buying more property means buying bigger property. That’s not necessarily the case. It can be, but it’s not necessarily the case. So anyway, I just wanna clear up the whole thing about what, what I mean when I say sell. So if your properties have appreciated considerably, you’ll want to consider other factors and variables in this equation and what it means to rebalance your portfolio. Maybe you do this once a year, maybe in January or late December, you do an analysis and you reevaluate what you have and what is the best option for you. And this is something I think every investor should do come late December or January, is look at what you’ve got, look back at what it’s done over the past year, how have your investments performed? And then do an analysis. You know, just see are you in the best assets?

Are you in the best properties? Are you in the best markets? So if your property has appreciated, maybe it’s a good time to consider selling. You also have to look at real estate market trends. You have to pay attention to trends. I’ve talked about this many times on the show, but pay attention to trends such as increasing interest rates, slowing home sales, increasing home sales, dropping inventory, increasing inventory in your area, changes in supply and demand. All these things will have an impact on real estate, sometimes more so than others. It just depends on how many variables you’re looking at and how extreme they are. But if you have a lot of positive trends, it may be worth keeping the property. If you have a lot of negative trends in your area and your market, and we’ll call that headwinds, then it might be time to consider moving your equity, selling the property and investing elsewhere, whatever the case is.

Here’s another trend, call it a micro trend, but based on your question, you’re talking about, you know, a lot of issues and difficulties that you’ve had over the last year or so, six months or so with damages, turnover, problem, tenants, squatters, whatever it may be. Well maybe that’s a trend, it’s a, you know, not a market trend or macro trend, but a micro trend. And if you have that on an ongoing basis and that’s happening year after year, that’s probably a sign that you bought in the wrong place and you should never have invested in those properties or in that neighborhood more specifically. And maybe you should move to a better neighborhood or reinvest in a better area or a better neighborhood. Another market condition type of factor to look at are things like economic indicators more broadly speaking, you know, economic factors such as inflation, what is that doing?

What are employment and unemployment rates doing, especially if they impact the industry or industries in your area or in the markets you’re in or in the areas or the market, the neighborhoods that you’re in. What is happening with, you know, GDP and economic growth that might be in the state or region or city that you’re in. You know, that could have an impact on the real estate prices in your area. So those are things to consider. What about your financial goals? Like are you targeting certain amount of capital gains? You know, you gotta consider the tax impacts of that and there’s ways around that, like with a 10 31 exchange for example. But holding a property for more than one year obviously has advantages. You are gonna benefit from lower capital gains taxes, but have you reached your financial goals in terms of equity in that property?

Do you have financial goals that you’ve achieved in terms of cash flows? Maybe you have exceeded your goals, maybe your goals are too low, you know, you have to look at what your property’s producing and how well it’s doing and is it improving or is it getting worse? But yeah, consider, you know, the the equity, the capital gains, the equity growth, the cash flow, if it’s underperforming overperforming based on your goals or target. Also in light of your retirement planning. Is it part of your retirement portfolio? Is it something that you wanna build upon or reposition but consider all your financial goals and are your properties or the property you’re talking about, is it helping you achieve it or is it actually working against you and holding you back? So keep that in mind. Then you need to consider the property performance is the rental income versus expensive in line?

Meaning if the rental income no longer covers your expenses such as maintenance repairs, property management fees, et cetera, et cetera, along with your debt service, which is your mortgage payment or poor mortgage payments, then it may be time to sell. You don’t wanna be upside down on a property for a prolonged period of time. If, if it’s temporary like a month or two or very short term because of changes or upgrades that you’re making to change the rental income, okay, then that’s fine. You’ve got a plan and a and and a strategy in place. But if you are gonna have negative cash flow almost indefinitely, then it’s probably time to make changes to increase that rental income. So you have a rent to price ratio that’s in line with positive cash flow or it may be time to sell it. You also have to consider if you’re gonna have ongoing maintenance and repairs, and it sounds like you’ve had issues with that, but if you have large capital expenditures coming up in the years to come and you’re not gonna have the reserves or the cash flow to meet those capital expenditure expenses, then it would be time to consider selling the property sooner than later.

Because the next person who comes along is gonna look at the same thing and they’re gonna say, well, there’s a very short lifespan on these mechanicals or the roof or whatever it may be. And they’re going to ask for a discount in the price. So it may still be in your favor, but it’s gonna avoid those capital expenditures coming out of your pocket down the road. So, you know, if, if the property requires costly repairs or ongoing maintenance is becoming a burden or an issue, then selling could be a good option. Next, you want to consider local market conditions. You know, I’ve touched upon this just briefly here a little while ago, but are there significant changes in the neighborhood if the neighborhood is declining or facing issues like increasing crime rates or decreasing desirability for whatever reasons those may be. You know, it might be a good time to consider selling and move your equity and whatnot elsewhere.

But consider that look for these changes, these trends. Also zoning changes or developments that are popping up around your area or your property, your street, whatever those upcoming changes in zoning laws or or nearby development projects could potentially decrease the property value of your home or duplex fourplex. But it could also do the same thing the other way around. It could increase property values depending on what the development is. So these are things you want to consider because local market conditions directly have influence on the properties value. Then you have to look at personal circumstances. You know, sometimes we have issues with our own finances or family or whatever it is. It’s not so much the property or the real estate life changes, for example. You know, changes in your personal life such as job relocation may have an influence in your rental portfolio. Family expansion, health issues, you know, things that are significant have influence in whether your financial situation changes.

You know, these are things you have to consider. Also your investment strategy. If your investment strategy changes such as, you know, shifting from real estate to some other asset class for whatever reason that might be, then you know, it might make sense for you to sell, to get rid of your rental portfolio and move or shift into those other asset classes. So that’s a consideration. And you know, of course throughout this you always still have to consider the tax implications or tax considerations. If you’re looking to reinvest in other property, you know, the best thing to do, one of the best things to do is to consider doing a 10 31 exchange, a tax deferred capital gains exchange, moving your equity from your property to another property elsewhere. This is something that is in the tax code and it’s a beautiful benefit. It just allows you to sell real estate and move your equity into other properties tax deferred.

And then of course, you know, talk to your professional. But estate planning considerations, if you’re thinking about real estate in light of estate planning, selling could be a part of transferring that wealth to your heirs, you know, to your children in a tax efficient manner. Now this is a big topic and it’s something that you definitely have to talk to your tax professional and your estate planning professionals about because there are many options and nuances to all this. And last but not least, you know, consider professional advice. You know, this podcast is for entertainment purposes only. It’s not meant to be financial advice, but you know, if you talk to your experts, your consultants, whoever they may be before you decide to sell, you know, work with your team, your real estate agents, financial advisors, tax professionals to get a comprehensive view, ideally a 360 degree view around everything that you’re doing and about your situation before you make a move.

Sometimes the decision is pretty obvious and pretty clear, but it never hurts to understand the impact it will have with your taxes, your finances, your cash flows, your whatever it may be, your long-term projections. So by evaluating these factors, you can get a more informed decision or make a more informed decision about when to sell your rental properties. My personal feeling about all this is this, and I’ve said this before, real estate is something that should be purchased or invested in prudently and as often as you can and as early as you can. And the idea is to keep your good investment property forever and only sell it to grow your portfolio and or increase your cash flows. If that’s not what you are doing with your rental portfolio, then you are missing the mark, you’re missing the point or you’re under utilizing the capability and potential of what you can use your rental portfolio for.

So again, my personal philosophy is just keep good investment property forever, put it in your estate, put it in your will, put it in your, whatever it may be, keep it, use it, grow your wealth from it, increase your cash flow and then pass it on to your children or your heirs and only sell it to improve your financial situation, to grow your portfolio, increase your cash flow. So Kelly, I hope this was helpful. It’s really conceptual and to some degree it’s not numerically specific, certainly not to your situation, but I get what you’re saying and I understand point. So as far as you know when to sell or how do you know when to sell, consider all these factors. Look at your cash flows, look at your personal situation. Look at what those properties are going to do for you or how they’re gonna impact you over the next one to three years.

And if you don’t feel good about it, then it’s probably a good time to, you know, cut your losses and move whatever equity you can pull from those properties into better performing properties. You could sell or finance these potentially, but that’s not necessarily a good option. I would say sell it whether you do it on your own or through a real estate agent. But yeah, for me the tipping point is when I see the cash flow being low or negative and I don’t see that turning around in the near future, the next one or two years. And I also see ongoing maintenance and repairs, especially if they’re caused by tenants, that would be a sign that this is gonna be a money pit. I would seriously consider selling a property if I was in that situation ’cause I don’t wanna be in that situation for a prolonged period of time.

And I’ve been there, I’ve been there with multiple properties many years ago. So it’s not a fun place to be, it’s just an ongoing source of stress when you have properties that are in good condition, have great tenants, the tenants take care of the property. There’s little, I’m not gonna say no maintenance issues, but few maintenance issues on an ongoing basis. You know, that’s the type of property and the type of tenant that you wanna have. Alright, well I appreciate the question, so thank you for sending that in. If you’re listening to the show and you have questions about investing or finance real estate specifically and you’d like me to address it on the show, sometimes I just reply to emails directly instead of covering it on the show. But just send those to me at the website at passiverealestateinvesting.com and we will go from there. I hope this has been helpful and thank you for listening. I’ll see you on our next episode.