Selling your investment property at the right time is what will reap you the highest ROI and a big fat profit margin.
But, if you sell your investment property at the wrong time, be rest assured you will incur a big loss and won’t maximize your revenue from your real estate investments. The housing market is cyclical and ever-changing; what goes up, must come down. Savvy real estate investors understand the market and know exactly when to buy and/or sell investment property, respective to location and overall macro-conditions. If too many condos are up for sale, for example, this puts a downward pressure on the price and hence, it is wise to sell before the price drops even more.
There is no secret recipe to grow and diversify your real estate portfolio; every successful real estate investor stays on a steep learning curve, stays updated with the housing market and trends, and uses the right analytics tools, like Mashvisor, to decipher and find the best profitable investment properties to grow their wealth long term. Whatever you do, you must put in the work and energy into learning and acquiring the right real estate education to separate yourself from the competition and win big.
Stay Up to Date: Is the 2018 US Housing Market a Seller’s Market or a Buyer’s Market?
What Makes a Good Real Estate Investment?
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Your investment property is reaping positive cash flow returns every month
If it is earning you money, why should you sell it? If you are earning a surplus of cash from your rental income and able to save money in your pocket after paying off your rental expenses, then it makes economic sense to keep your real estate investment under your wing. It is not the right time to sell if you are making profit off your investment property.
Related: Why Positive Cash Flow Is a Must with Income Properties
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Your investment property is in a prime location
Location can make or break your investment property; a good neighborhood paves the way for high rental demand and a funnel of potential tenants knocking on your door. If the demand for your investment property is high, there is no reason to consider selling your rental property just yet. Reap the financial benefits of having your rental property in a good location until it makes no sense financially.
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You can easily manage your investment property
If you are near your investment property and have a good eye on your tenants and property condition, then consider holding off the sale for a few more years. A good property in tip-top shape sells for much higher and attracts the right buyers in due time. But for now, as long as your tenants are paying the rent and keeping the property in good shape, you have a good real estate investment that will be worth a lot more in a few years’ time.
When Should You Sell Your Real Estate Investment?
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Cash flow is consistently negative
Capitalizing on positive cash flow properties is the crux of successful real estate investing. If the opposite case is true and you are losing money every month, then maybe it is time to sell your investment property. Your rental income is a key metric when it comes to evaluating the success of your rental property. Income properties reap you a surplus of cash returns every month and allow you to grow your business long term. If this is not the case for you, consider selling it to diversify your real estate portfolio for a bigger ROI.
Related: How to Deal with Negative Cash Flow Properties
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You’re a remote landlord
Real estate is a business and you must treat it as one. Managing a rental property remotely is tedious and a big hassle. As a successful landlord, you must keep an eye on your investment property as well as your tenants. If you are too far, you might skip major repairs that might cost you big down the line. So be warned!
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The cap rate has changed
A good cap rate, short for capitalization rate, falls between 8%-10%. With this said, real estate investors must keep an eye on the cap rate throughout the cycle of the investment property. Did property taxes change? Did the housing market in the area go down? Are maintenance and utilities more expensive? Are your monthly expenses higher than your original estimation? What is your net income every month? Did it change? These are the questions you must answer to assess whether or not the cap rate has drastically changed and whether or not you need to sell as a result. If the cap rate is much lower than your original cap rate, then the time has come to sell most definitely.
Cap Rate = Net Operating Income/ Current Market Value
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When you have a major life event
Sometimes major life events drive us to make necessary changes and make decisions out of necessity rather than choice. This may include a death in the family, job relocation, an accident, unwanted layoff etc. Regardless of the reason, sometimes selling your investment property is imposed on you and you can do little to keep it under your name.
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When there is a large supply of property in the pipeline
As previously mentioned, real estate is an ever-changing market and the fluctuations in the market determine the overall price and demand. Market price is determined by the macro-conditions i.e. employment rate, income, supply, and demand. Too little demand drives down the price and vise versa. The trick is to sell before the market hits a downward pricing spiral.
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When there are major upcoming repairs
If it costs you more to renovate your rental property than what you are making from your rental income, then it is time to sell and not look back. Recurring expenses are a pain and if they pile on and add to your costs, it will affect your bottom line and your profit potential from the investment property. Expenses may include a new roof, new paint, a new water heater, new kitchen etc. To keep your expenses to a minimum, make sure your carrying costs do not increase over time and pile on a hefty price to pay.
Conclusion
A profitable investment property reaps you positive cash flow returns and long term appreciation. If you are losing money from maintaining and managing your investment property, your rental income is not enough to pay off your mortgage payments, or your vacancy rate is too high, then the time has definitely come to sell your investment property. Consult a professional real estate agent or advisor to give you sound advice on the best strategy for your real estate business and bottom line.
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