Buy, Hold… or Sell - Rental Property:
What's Your Next Strategic Move?
One of the wisest things you can do as a Real Estate Investor is to regularly consider and calculate your options: Buy, hold or sell?
This is particularly true if you’re building your real estate portfolio as a primary investment vehicle that you’re planning to use to pay for kid’s college tuition or your own retirement.
There is no flawless strategy or perfect moves, when it comes to managing real estate investments. This is why it is so imperative that you analyze and consider what makes the most sense for your financial goals on a continual basis.
Questions to Ask Yourself:
Could the money you’ve invested in your current rental property… be earning you higher returns elsewhere?
As Real Estate Investors, we must remain watchful, and aim to make purposeful, educated estimates regarding the best real estate market(s) to invest in - or to remain invested in.
Staying vigilant and cognizant of the local real estate market cycle, can make the difference between profit and loss.
Experts concur that a 10-12 year cycle is the general rule of thumb for a real estate cycle…
If you’ve noticed:
- Prices settling, stagnating or slowing…
- Properties taking longer to sell…
- Sellers accepting notably less than asking price…
- Property listings “expiring…”
…Then it’s likely time to consider harvesting and re-planting your investment capital.
Smart Tip For Real Estate Investing:
Don’t shy away from different areas, counties or states! Real estate
cycles differ greatly from state to state and region to region. Your investment capital may be better invested in another state.
A real estate cycle may be in a downward trend in one state, while it may be in the growth phase in another state.
Additionally, consider other areas may have... tax codes more favorable to investment income, more “landlord-friendly” laws, or perhaps just better return on investment (ROI).
Other Variables Signaling a Compulsory Investment Move:
- The city’s biggest industry is dying…
- The city’s major employer plans to relocate it’s headquarters…
- There’s talk of Rent Control / other governmental restrictions…
If any of these things are taking place, it’s probable that your rental income from that property will diminish in coming years.
When Should You Hold…?
If your investment is located in a city where some of these scenarios exist:
- Area is gaining popularity…
- New businesses are opening up…
- Established businesses expanding – new job creation…
- Low unemployment (very few homeless people…)
- If claiming “depreciation” on your taxes lowers your tax rate…
Then, it’s likely best to hold the property, and appreciate higher rent prices.
Do you need money right now…
(or will you in the next 1-6 months)?
If you need a cash infusion for a child’s tuition, a major medical procedure, or to invest in a business, it may make fiscal sense to sell a property rather than take on new debt.
Real estate is one of the most illiquid investments to have. Meaning if you know you need actual cash in the near future, it’s best to sell the property and deposit the cash in an easy-to-access investment product, like a money-market account, or a savings account.
Could you realize a significant tax benefit from selling (or buying) a property?
Be aware of a few items in the tax code that could make it more (or less) beneficial to buy, sell or hold, a property:
- Depreciation: The IRS gives us the option of claiming “depreciation benefits” of your rental property, as a way of reducing your tax burden. It may make good sense to hold a property if claiming depreciation benefits lower your effective tax rate.
- 1031 Tax Exchange: This tax code permits investors Capital Gains Tax avoidance on rental property sale profit - as long as you buy another “like-kind” investment property within 180 days of your initial sale.
- Diminished Benefits for Home Ownership: The new tax code offers fewer tax incentives to own a home, which means people undecided about buying may rent for longer. This could make it a great time to buy additional rental properties.
- Hassle of Managing Rental Properties: Don’t feel like managing your properties anymore? It is possible to out-grow real estate investing.. But, before you sell because you’ve had enough of the backend work, consider hiring a reputable licensed Real Estate Broker / Property Manager to handle paperwork details, tenant screenings, rent collection, etc.
In summary… Buy, hold, or sell?
In some situations, you need to sell. While in other situations, you should sell.
Some life circumstances create urgency. In this case, there are few options to review, and the decisions are made for you. While in other situations, you can take your time in deciding whether you buy, hold or sell – despite the possibility of earning higher returns on your investment(s) elsewhere.
Being ready to act, when you should sell, does help make certain that you’re maximizing your investment capital.
For more professional real estate insights, contact:
Temple Callahan, CA Real Estate Broker / Owner
Direct: (805) 208-6024.
Connect Real Estate Services
DRE Lic. 01427063.