One of the smartest things you can do as a real estate investor is to get into the habit of periodically evaluating your options: buy, hold or sell. This is especially true if you’re building your real estate portfolio as a primary investment vehicle that you’re hoping will fuel your children’s education or your retirement.
There’s rarely a clear “right” answer when it comes to managing an investment, which is why it’s important to consider what makes the most sense for you and your financial goals on an ongoing basis. Here are some questions to consider.
Could the money you’ve invested in your rental property be earning higher returns elsewhere?
While you’d need a crystal ball to answer this one with 100% accuracy, you should be able to make an educated guess. For example, if you own a property in a town whose biggest industry is dying or in a place where a major employer has announced plans to relocate its headquarters, there’s a good chance your ability to earn money from that property will diminish in the coming years.
In that scenario, it may make sense to sell the property and reinvest the proceeds elsewhere.
On the flip side, if you bought a property years ago in an area that’s now gaining popularity, you’re likely well suited to hold the property and enjoy higher rent prices.
Do you need money right now (or will you soon)?
Whether you need a cash infusion to pay for a child’s tuition or a major medical procedure, it may make sense to sell a property rather than take on debt. Real estate is one of the most illiquid investments out there, so if you know you’ll need actual cash in the near future, selling the property and stashing the cash in an easy-to-access investment fund or savings account could prove beneficial for your long-term finances.
Could you realize a significant tax benefit from selling (or buying) a property?
This is especially important to consider in the wake of the tax law that passed last year. It’s also pretty complicated. Briefly, you should 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 you the option of claiming depreciation benefits of your rental property as a way of reducing your tax burden. If claiming depreciation benefits can lower your effective tax rate, it may make sense to hold.
• Section 1031: This section of the tax code, also called a “like-kind exchange,” lets you avoid paying capital gains taxes on income from selling a rental property, as long as you buy another property within 180 days. Note that taking advantage of this benefit requires you to follow a lot of detailed rules. If you’re interested in learning more, get on the phone with your CPA.
• Reduced benefits for homeowners: The new tax code offers fewer tax incentives to own a home, which means people on the fence about buying may choose to rent for longer. This could make it a great time to buy additional rental properties if you’re in a position to do so. Keep in mind, though, that the rental market varies around the country, so the changes may have more impact on renter behavior in some places than others.
Is maintaining the property becoming a drain on your lifestyle?
Whether you’ve retired to travel the world or you just don’t feel like managing your properties anymore, it’s possible to outgrow real estate investing. But before you sell because you’ve had enough of the backend work, consider lightening your load by automating as much as possible with software that handles a lot of the paperwork you’d otherwise have to do.
Unless you really don’t need the income your rental property provides (and you can’t imagine that any of your descendants will, either), it may make be worthwhile to adjust your management style and continue bringing in the monthly rent.
Should Sell Versus Need To Sell
One final thought: In some situations, you need to sell an investment property. These situations are usually not predictable — maybe you lose your day job and you can’t keep up with the mortgage anymore. Not selling the property would create an acute financial lack that would significantly impact your life.
In other situations, you probably should sell the property. Maybe it’s in a town with a dwindling population where property values aren’t rising. In these situations, you won’t notice any day-to-day urgency around whether you hold or sell the property, even though you could be earning greater returns on your money elsewhere. When you absolutely need to sell, you won’t have to go through a list of questions to make your decisions; the decision will be made for you. Being alert to when you should sell, though, can help ensure that you’re making the most of the funds you’ve earmarked for investment.