1. Major Home Components Are Reaching the End of Their Useful Life
The systems that make a home function deteriorate over time and can be very expensive to replace. The average cost of a new townhome roof in Maryland, where I invest, is $6,000–10,000. If your rental income cash flow is $400 a month, the cost of that new roof could mean the equivalent of zero cash flow for 25 months. It could be more advantageous to sell a few years before the roof needs replacing.
2. Your Property Ticks All the Hot Buttons in a Hot Market
Buyer preferences fluctuate. And homes that tick all the hot buttons buyers are looking for sell faster. If there’s a spike in demand for the style and type of your investment property, it may be time to consider selling.
The same is true for location. For example, if a specific area has become more popular because a metro station was built in the vicinity (causing all the homes to appreciate quickly), it could be a good time to sell. You can find these kinds of deals at Origin Investments, for example.
The stock investor’s goal of “buy low, sell high” is also a recipe to make money investing in real estate. The housing market fluctuates. Consequently, there are good times to sell — referred to as a “seller’s market” — and good times to buy — a “buyer’s market.”
Unlike investing in the stock market, where you can sell your shares the same day you choose to do so, real estate transactions take time to close because the process is more complex. That means you need to anticipate the market’s direction and start the selling process prior to the market top if you want to sell for top dollar.
3. Ownership Costs Are Rising More Rapidly Than Rents
Things can happen that increase your ownership costs while you hold an investment property. Rapidly rising property taxes can be a signal to sell. Or maybe there’s a pending special assessment from your condo or homeowners association that will decrease your cash flow significantly when it is approved.
If your return on investment on a property has been declining, it might be a good idea to sell and purchase a different property in a better location that’ll have better cash flow and profitably.
4. You Grow Tired of Being a Landlord
I’ve been helping an investor who is, one home at a time, liquidating his rental property portfolio. His reason for selling? The hassles of being a landlord became greater than the joy of cashing those rental checks.
Being a landlord is not an easy or glamorous job. And you may eventually decide you’d rather do something else with your money and time.
5. You Can’t Afford the Maintenance or Needed Renovations
Maintenance and renovations are a constant cost of rental property ownership. Maybe you’ve been putting off maintenance because your tenant has been there for 10 years and never complained. But now they’re moving out, and you don’t have the funds for those neglected repairs and necessary upgrades before placing a new tenant. This could mean it’s a good time to sell to another investor in an “as is” condition and move on.
6. You Want to Diversify Your Investment Holdings
Real estate is an expensive asset class. To be substantially invested in it while maintaining a diversified investment portfolio, you need quite a bit of money.
As your holdings appreciate in value, it’s easy to end up with too much of your portfolio invested in the same asset type. And that makes your overall portfolio unbalanced. You may want to sell real estate and invest that money into a different asset class.
Or you may want to diversify your holdings within real estate. So you sell a few single-family homes to invest in a commercial real estate opportunity.
7. You’re Operating With a Negative Cash Flow
Not all investments work out. Maybe you inadvertently purchased a money pit. And now it costs way more to maintain it than the annual rental income it is producing. This is a sure sign it’s time to sell.
Be sure to look into tax-loss harvesting. It may be feasible to cut your overall income tax at the same time you cut your losses on an investment property that didn’t turn out as hoped.