Many people buy investment properties to generate a source of passive income and add to their wealth. However, all investments mature over time, and eventually, the results they yield may deteriorate. Even if your rental has generated a significant amount of passive income over the years, you may have to sell it at some point.
From an investment point of view though, it is better to sell the property just after its returns have peaked, rather than waiting for it to become old and run down. Of course, there can be other reasons why you are selling it as well. You may be selling it because you got a job transfer, want to pay off a debt, or curb monthly maintenance expenses. Whatever the reason, you need to consider the recent market trends and other crucial factors before you sell the unit.
Here are a few key indicators that may tell you if it is the right time to sell your Sacramento investment property.
1. The Market Conditions Are Right
According to a recent survey, 75% of Californians believe that May 2022 is the right time to sell investment properties. Around 60% of homeowners in the survey think that property values will continue to rise over the next 12 months due to the large influx of buyers.
If you are someone who wants to make a significant profit on your investment, the current housing market presents the right opportunity to sell your property. You can also analyze the market trends in your neighborhood by paying attention to new constructions.
2. Low Cap Rate of Your Sacramento Investment Property
The cap rate determines the profitability of your investment property. A higher cap rate is usually associated with more profitability. Even though a good cap rate falls between 4-10%, it depends on the market cycle, geographic location, and house condition.
Your rental income must increase at a faster rate than the expenses it incurs. Only then can you have a high cap rate. However, if your unit has a low cap rate, it can be a valid reason to sell your property. Ensure that you consider the cost of buying and monthly rental amount to calculate your cap rate and compare it against other investment opportunities.
3. If You Are Moving Out of Sacramento
If you are relocating to a different city or state for work, education, or other personal reasons, selling your Sacramento investment property can be a good option, especially if you are not ready to be a distant landlord. Selling the unit before your move can protect you from sustaining further damages as a landlord. It may also help curb the negative cash flow you generate from your unit. However, if you still wish to rent your property as an out-of-state investor, you can consider hiring an experienced property management Sacramento company to take care of the responsibilities on your behalf.
4. If You Cannot Afford the Monthly Maintenance Expenses
Looking after a rental is an exhausting process and requires spending a significant amount on monthly expenses. These expenses may include insurance, taxes, maintenance, repairs, and property management. Sometimes though, the expenses can outweigh the income generated from the unit.
If you are consistently generating negative cash flow from your rental unit and cannot manage to cover the expenses from your budget, you can consider selling the Sacramento rental.
5. Personal Losses or a Major Life Event
Some key life events may lead you to selling your existing investment property in Sacramento. It may be an event that causes financial strain, like the death of a loved one, an accident, layoffs, or job relocation. Such circumstances may warrant you to sell your house to earn semi-passive income, especially if you cannot work. For example, if you lose your job and have responsibilities towards your family and kids, you may have to sell your investment unit to get the money that you can reinvest later.
6. Being a Landlord is Challenging For You
Being a landlord comes with many responsibilities and duties that you need to handle, sometimes all at once. In your Sacramento rental, you have to keep up with regular maintenance services, pay taxes and insurance, find suitable tenants, charge rent competitively, and cover administration fees.
It can be challenging to manage all of these responsibilities single-handedly. Since these duties are strenuous, not every landlord can efficiently handle them. Therefore, if you think that being a landlord is too much work and that you are not suited for the role, you can consider selling the unit at the right price. Alternatively, if you want to retain the property as a passive source of income, consider hiring a property manager to do the legwork for you.
7. If You Are a Long-Distance Landlord
Being a long-distance landlord comes with its own challenges, making it difficult to look after a rental. Besides, managing the home from afar can be costly. Maximizing your rental revenue in such situations can be difficult. You may also find it challenging to attend to tenants’ calls 24/7, reply to their queries and resolve their issues on time. If it is too much of a hassle to look after the rental from afar, you can consider selling it.
When is the Time you Should Hold on to the Rental Property from Selling?
Deciding when to hold on to a rental property instead of selling it depends on various factors, including the current real estate market, your financial situation, and your long-term investment goals. Here are key considerations to help you determine when to hold on to a rental property:
- Real Estate Market: The current real estate market can play a significant role in determining whether to hold on to a rental property. If the market is strong and property values are increasing, it may be a good time to hold on to the property and wait for its value to appreciate further.
- Cash Flow: Consider the cash flow generated by the rental property. If the property is generating positive cash flow and providing a steady stream of rental income, it may be worth holding on to the property.
- Tax Implications: Selling a rental property can have significant tax implications. If you sell the property, you may be subject to capital gains taxes, which can reduce your profits. Holding on to the property can help you avoid these taxes and maximize your investment returns.
- Long-Term Investment Goals: Consider your long-term investment goals and how the rental property fits into your overall investment strategy. If you aim to build a diversified real estate portfolio, holding on to the property may be a good choice.
- Maintenance and Repairs: Consider the maintenance and repair costs associated with the rental property. If the property requires significant repairs or upgrades, it may be more cost-effective to sell the property and invest in a different property.
- Tenant Stability: Consider the stability of your tenants. If you have good tenants who are paying rent on time and taking care of the property, it may be worth holding on to the property to maintain a stable source of rental income.
Overall, deciding when to hold on to a rental property depends on various factors, including the real estate market, cash flow, tax implications, long-term investment goals, maintenance and repair costs, and tenant stability. By carefully evaluating these factors, you can make an informed decision about whether to hold on to the property or sell it.
Selling your investment property is an important decision for any rental owner. However, do not rush to sell the property right away. Assess the factors mentioned above and see if you fit in any of these categories, to make an informed decision. If it is challenging to sell the rental by yourself, you can always contact a property management company to guide you through the process.
Eagle Property Management is a full-service property management company in Sacramento, serving Stockton, Fresno, Modesto, Greater Sacramento, Elk Grove, Roseville, and Rocklin Areas. Our team can assist you in evaluating all the factors while selling your unit and enable you to make the right decision.
For more information, contact us at Eagle Property Management.