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Buy and hold real estate is the cornerstone of traditional real estate investments. After all, cash flow is the primary goal of most investors. This means you need to hold onto and continue renting your properties if you wish for them to provide that sweet passive income each month. However, as with any investment, it is important to have a clear exit strategy and learn when it is time to sell a rental property and move on to the next investment opportunity.
There are plenty of good reasons you may decide to sell a rental property. However, there are also plenty of bad reasons and bad times that you can wind up selling your properties. That means it is incredibly important that you take the time to assess your situation and the property you are looking to sell before you commit to a sale. If you do not, you run the risk of missing out on the full value of your investment or worse yet, potentially losing money on the sale.
Now, before you sell a rental property it is always worth it to sit down with a mortgage professional to ensure you are not facing any severe penalties for breaking your term early. So, if you are thinking about selling, click the link below for a free strategy call today.
The Advantage of Buy and Hold Real Estate
Before we can truly understand when it would be a good time to sell your investment properties, it is crucial that we first understand what makes buy and hold real estate such an appealing way to invest in the first place.
The main advantages of buy and hold real estate can be split into two elements. Each of these elements have their own benefits that can contribute to whether it is a good time or a bad time to sell your investment properties.
At its core, cash flow is the difference between the monthly rental income generated by a property and the total value of expenses that go into owning and operating that property. This means that a house with a monthly rental income of $2500 and monthly expenses totalling $1985, can be expected to cash flow a total of $515.
This is the ‘passive income’ that many investors are talking about when discussing their real estate investments. As long as the property remains in good condition, and you have good tenants on the property this cash flow should remain mostly uninterrupted.
Investors are often cautioned against selling properties that produce a healthy cash flow because it will disrupt that income until you are able to make a new cash flowing investment.
Discover How To Analyze a Properties Cash Flow With This Step By Step Guide
Appreciation and Equity
Appreciation and equity are two factors that go hand in hand. Appreciation is the increase in value a property experiences over time and through improvements to both the property and neighbourhood and equity is the value held in the property by the property owner. That means as your property appreciates, you will gain equity in that property on top of the equity you will earn by paying off your mortgage.
Typically, outside of refinancing or HELOCs (home equity line of credit), you will not experience the full value of the equity you have built in your property until you decide to sell.
When Is It a Good Time To Sell?
Regardless of your reason to sell, it is important to make sure that it is also a good time to sell your investment property. This means whenever possible waiting for a ‘seller’s market.’ This is a period where the sale prices on properties are frequently at their highest and properties wind up selling higher than their asking price.
Waiting for this time allows you to ensure that when you do sell, you are getting the highest value for your property – maximizing the return on your investment.
Reasons You May Want to Sell a Rental Property
Sell a Rental Property to Reinvest
One of the best reasons to sell a rental property is when you are selling off a property with the intent to use the profits you’ve made to reinvest in new real estate investments. This can allow you to buy multiple properties off the back of a single investment.
However, before you sell a rental property, it may be worth considering refinancing the property or opening a HELOC (Home Equity Line of Credit) to invest in new properties instead. Weigh your options and choose whichever is best for you.
The Cash Flow is Stagnating
If you are buying real estate with the intention of earning cash flow, watching the cash flow on an investment property stagnate and grind to a halt can be incredibly disheartening. This can be due to a variety of factors such as rising property taxes, increased mortgage rates, or unexpected maintenance costs.
If you find yourself in this position, it may be worth selling the property in favour of making a newer, better investment.
You Are Holding a Property You Did Not Want/Plan For
Sometimes, you may find yourself holding onto a property you did not want or plan to hold. One of the most common causes of this is inheriting a property from a family member or loved one after their passing.
While it can be difficult to let go, it is completely okay to sell a rental property you were not prepared to care for.
Ready to Move On
Another valid reason to sell a rental property is simply the fact that you are ready to move on from that investment. Even if you are not planning to reinvest, or if the property was still profitable, sometimes it is simply time to move on from a particular investment.
This is especially common among retirees who would like to cash out on high-value investments they have made in order to experience the full value of their hard work.
Alternatives to Selling
If you are interested in learning more about some of the alternatives you may be able to try instead of selling your investment property, such as refinancing or a HELOC, let us help you. At LendCity our team is ready to help you weigh your options in order to find the best solution to your real estate investing needs. You can reach us at 519-960-0370 or you can visit us online at LendCity.ca You can also click the link below for a free strategy call with our team today.