Should You Sell That Rental Property?

orange and blue concrete painted house
by Advice Chaser
by Advice Chaser
orange and blue concrete painted house

In 2021, houses are flying off the market as fast as they’re listed. Some sell for far above asking price. If you own a rental property, you might wonder if it’s time to sell. 

Many factors go into the decision to sell or hold. You might consider the tenancy situation and market, the amount of equity you have, and the amount you could earn in other investments.

Is It Earning You Money?

Often real estate owners calculate potential profits too optimistically. They imagine how much they could make if every unit were always occupied, and if repair costs remained low. In reality, that rarely happens.

The number describing how much you actually earn is called the cap rate. This number, expressed as an annual percentage, compares your costs with your expenses. A high number, like 10%, shows that you make 10% returns each year on your initial investment, minus your annual expenses. A low number, like 1%, would show you don’t make much profit each year.

Calculate your cap rate this way. Take your annual rental income and subtract your annual expenses for your net annual income. Divide that net income by the initial purchase price of the property. The answer is your cap rate.

Why does it matter? Well, even if you put that money in the bank, it would have a return. If your cap rate is low, you might compare it with the rate of return on other investments available to you. You could buy another rental property in a hotter rental market or invest the money in a business or mutual fund. The more equity you have in the property, the more you could earn by investing instead.

Is Your Market Hot?

In 2021, thanks to low interest rates, home buying got easier for consumers. Also, due to the pandemic, many families chose to leave multi-family rentals in urban centers to buy a home in the suburbs. Meanwhile, construction costs have soared. The result is low inventory in many areas, resulting in high sale prices and a hot market.

A rental property you bought for $100,000 might be twice that now. Should you sell to realize that appreciation in cash?

No one can say for sure if the increased prices will last. If you’re already thinking about getting out of the rental business, this might be the time. That said, experts don’t believe the current high prices are a bubble, so if you want to buy or hold, it probably won’t hurt you.

How Is Your Tenant Situation?

During the pandemic, many renters stopped paying rent due to unemployment. Some units remained empty, while others were occupied but not earning income. If your tenants got behind on rent, they may soon catch up now that the job market looks more favorable. But if your property is vacant, it might be a convenient time to sell.

You can sell a property with tenants in place to a fellow landlord. In that case, you’ll want to include your tenants in the conversation. What can they tell you about the state of the property? How can you show and sell it with minimal disruption to their lives?

Another option, if the tenants are interested, is to sell directly to them. This gives you your equity back and frees you from the rental market, while giving them a home of their own without moving. If you already want out and they are ready to buy, everyone can win.

Get Help Deciding Whether to Sell a Rental Property

If you’re still unsure about whether to sell your rental property in this market, talk to a financial advisor. The best advisor is one who’s up to date on market trends and knowledgeable about real estate investments. Contact us to be connected with an expert advisor today.

You might also enjoy
gray concrete building with glass windows
Understanding Rental Income

Understand what rental income actually means, how taxes on it work, and how you can get the most money out of your tax write-offs.

Ready to Get Started?

Advice Chaser includes people from all walks of life, committed to helping you find the advisor you need and at no cost to you.

Interested in more?

Your financial plan is as unique as you are. We partner with businesses all over the U.S., so that we can help you connect with the right options, all at no cost to you.