When deciding whether to keep or sell a rental property, we always recommend that investors evaluate both short-term needs and long-term investment strategies. Then, take a look at the market trends in the specific market. There’s no single decision that’s right for every investor. Keeping versus selling depends on financial position, financial goals, and the strength of the current sales and rental markets.
Interest rates have dropped, which means mortgages are likely to become more affordable towards the end of this year and the beginning of next year. That alone might provide some good reasons to sell an investment property or two. However, there’s still a high demand for great rental homes, and that means tenant pools are growing, and rents are rising. That’s a great reason to hold investment properties for a little longer and continue to earn consistent monthly income.
We are always talking to real estate investors in Modesto, Merced, and the surrounding areas in California about when it’s a good time to sell and why it might be better to hold. We’re looking at some of the things that will help smart investors make this decision, especially in an election year which is proving to be impactful for the economy, the real estate markets, and the country as a whole.
Market Factors to Consider when Deciding Whether to Sell or Hold
Understanding the current real estate market is an important part of decision-making. In a seller’s market, where demand is high and supply may be limited, property values are likely higher, making it a potentially attractive time to sell. However, a buyer’s market makes holding onto investment properties potentially more advantageous until conditions improve.
Remember that the inventory of rental homes and homes for sale will impact the market and the competition. If there’s low inventory, prices will go up, and that’s going provide a good reason to sell. As interest rates drop, buyer demand will increase.
Pay attention to local market trends, too. Research what’s happening so you can understand the specific dynamics in your neighborhood.
- Consider Property Appreciation Potential
Consider the property’s potential for appreciation. If the area is undergoing development with new infrastructure, schools, or businesses, property values might increase over time. Economic development matters. If there are new businesses moving into the area and expanding capacity with infrastructure, these economic trends can boost property values. Look at the neighborhood and how well it’s being taken care of. Renovations and improvements in the area can lead to appreciation. Analyze historical price trends, too. Those past property sales will provide insight into future growth.
- Pay Attention to Cash Flow and Rental Yield
Assess the cash flow of any rental property that’s potentially going to be sold. If the rental income significantly exceeds expenses, holding onto the property might be beneficial for continued passive income. Rental demand is pretty high, and that can ensure steady occupancy and rental income. Maintenance costs are a factor, too; consider the cost of upkeep against rental earnings.
- Tax Implications Can Impact Decision-Making
Selling a rental property and holding onto that investment will present different tax implications. Selling might incur capital gains taxes on profits, for example, unless there’s the possibility of a 1031 exchange. There will also be a recapture depreciation at the point of sale. Essentially, there are more tax benefits for investors holding onto a rental property.
Personal Financial Factors
There’s the market. And then, there’s the personal financial situation that each investor needs to evaluate.
- Cash Flow Needs vs. Long-Term Growth
A healthy cash flow is always a good impetus to hold onto a property for longer. It’s smart to allow those investments to appreciate. When there are cash flow issues, it’s tempting to sell and walk away with some cash. On the flip side of that, a comfortable amount of financial liquidity can lead to prioritizing long-term growth and property appreciation.
- Debt Levels and Leverage
High levels of personal debt can impact the decision to sell or keep a property. If carrying costs and mortgage payments on rental properties are straining finances, liquidating a property might be necessary. However, if debt levels are manageable, maintaining rental properties might offer better long-term returns.
- Risk Tolerance and Market Conditions
Determining how comfortable an investor is with risk will always influence whether we recommend selling in a hot market or holding for potential future gains. With a high-risk tolerance, holding is manageable as market fluctuations are endured, while an investor who is more risk-averse may prefer to sell during favorable market conditions.
- Assessing Your Financial Health
Before making any decisions, take stock of the portfolio’s financial health. Consider current income and measure that against your expenses. A positive cash flow can support holding properties, while a negative flow may suggest reassessing a portfolio. Adequate savings are also necessary to cover unexpected expenses. A robust emergency fund can provide the financial buffer needed to survive market downturns or vacancies.
Consider how real estate fits into an overall investment portfolio. If most investments are heavily concentrated in real estate, diversifying by selling a property might reduce risk and improve financial stability.
Reasons to Hold Onto a Rental Property
Here’s why real estate investors are choosing to keep their rental properties:
- Continuous Income
One of the primary benefits of holding onto a rental property is the steady stream of income it provides. Unlike selling, where an owner receive a one-time payout, renting offers ongoing monthly cash flow. This income can help cover mortgage payments, property maintenance, and even provide extra financial security in uncertain times.
- Long-Term Appreciation
Real estate has historically appreciated over time. By holding onto a rental property, the owner stand to benefit from increased property values in the future. Assets continue to grow, potentially increasing net worth significantly over the long term.
- Tax Advantages
Rental properties come with a host of tax benefits. From mortgage interest deductions to depreciation, real estate investors can take advantage of several tax strategies to lower their tax liabilities.
- Hedge Against Inflation
Real estate serves as an excellent hedge against inflation. As the cost of living rises, so does the rental income that’s collected. Holding onto a rental property means income adjusts with inflation, preserving an investor’s purchasing power over time.
- Building Equity
Every mortgage payment on a rental property increases equity stake. Over time, this equity can be leveraged for additional investments or used as a financial cushion. Selling would eliminate this growing resource.
- Portfolio Diversification
Keeping a rental property adds diversification to any investment portfolio. Real estate often behaves differently than stocks or bonds, providing stability and balance. By maintaining a mix of asset types, there’s less risk and more resilience.
- Leveraging Market Cycles
The real estate market experiences cycles of growth and contraction. By holding onto a rental property, it’s easy to leverage these cycles to buy low and hold during market downturns, eventually capitalizing on the next upswing in property values.
Reasons to Sell a Rental Property
While owning rental properties can be profitable, there are times when selling may be the smartest move. Here are some compelling reasons to sell a rental property.
- Market Conditions are Favorable
If property values have significantly increased since the property purchase, it could be an excellent time to cash in on the investment. This strategy allows owners to maximize returns and reallocate capital into new opportunities with higher growth potential.
- Property Maintenance Costs are Rising
Owning a rental property comes with expenses. When maintenance costs are eating away at profits, it might be time to sell. Older properties, in particular, may require extensive repairs which can diminish ROI over time.
- Portfolio Diversification
Diversification is a fundamental principle in investing. Portfolios that are heavily weighted towards real estate have an opportunity to increase liquidity by selling, creating the opportunity into other asset classes. This can help reduce risk and increase overall returns in an investment portfolio.
- Changing Life Circumstances
Life happens, and sometimes personal or financial circumstances change, necessitating the sale of a rental property. Whether it’s to pay for a significant life event, reduce debt, or capitalize on newfound opportunities, selling can provide the financial flexibility an investor needs from time to time.
- High Vacancy Rates
A property that consistently struggles with high vacancy rates can become a financial drain. Persistent vacancies not only reduce rental income but can also increase expenses due to marketing and tenant turnover. If solutions have proven ineffective, selling may be the best course of action.
Elections and Economies and How to Evaluate the Benefits of Holding or Selling
Election years often lead to significant shifts in social and political dynamics that can impact various sectors of the economy, including real estate. For real estate investors, understanding how these changes influence market conditions is crucial, particularly when deciding whether to sell or hold onto rental properties. Watch potential policy changes that could affect property values, financing options, and rental demand, especially:
- Tax policies
- Interest rates
- Regulation
Election years can shift public sentiment and consumer confidence, impacting rental demand and property values. Depending on results, there may be a shift in consumer confidence, demographics, and market strength that will impact the decision to sell or hold a rental investment.
Let’s talk about the decision that’s best for you. If you have any questions about what you’ve read or you’d like to talk more about the value of professional management, please contact us at New Bridge Management. We serve Modesto, Turlock, Merced, Stockton, and the surrounding Stanislaus, Merced, and San Joaquin Counties.
