Market fluctuations and continued uncertainty created by the COVID-19 pandemic have left many investors wondering whether now is the right time to sell their investment property. Supply and demand certainly point to it being a seller’s market, but that’s not the only consideration. If you’re on the fence about selling your investment property, you’ll want to carefully consider your motivations before deciding. Here’s a look at five of the most compelling reasons to let your investment property go.
1. You’re Dealing with a Major Life Change
Sometimes, selling an investment property has nothing to do with the property itself and everything to do with your personal circumstances. A major life change – like gaining or losing a family member, a lay-off, or a major accident or illness, or relocating for a job – may force you to re-evaluate your investment strategy.
If you’ve found that you’re suddenly strapped for cash or don’t have the time to deal with your property any longer, then selling might be the right move for you. On the other hand, if your circumstances have left you unable to work or earn as much as you had previously, the passive income from an investment property could help get your finances back on track. In this case, holding on to the property may be a smarter move.
2. You Want to Invest in a Different Market
There are many reasons to reallocate your property investments to another market. Perhaps you’ve found an opportunity in an up-and-coming neighborhood, or you feel like the area you’re currently in has neared its peak.
Many of our clients are currently selling their California rental properties due to concerns over growing rent control and tenants’ rights trends in the state and are relocating their investment equity into more landlord friendly states.
When opportunities arise, timing is critical. You’ll want to make sure you put your property up for sale fast enough, so you don’t miss the ideal window for your new investment.
3. You’re Not Seeing Enough Return on Your Investment
If your rental property is underperforming, it may be time to consider getting out. Take a hard look at your annual after-tax net cash flow divided by the amount of current equity in your property e.g., likely sales price less any loan and sales expenses. If your annual net returns are under 3%, trading-up your property may give you new opportunities to earn a better rate of return.
Many of our clients have owned properties long enough to have used up their allowed depreciation which has caused their after-tax income to decline due to the loss of the healthy deprecation tax deduction afforded to real estate investors.
If you’re consistently earning less than you should, it’s time to take a closer look at the pros and cons of selling.
4. You Need to Diversify
Do you have a high percentage of investment funds tied up in too few properties? If so, you’ll want to think about diversifying to minimize risks associated with having too many eggs in a single basket.
Geographic diversification may also be a desirable objective. If your primary residence, rental property, and job are all in the same location, you may want to consider reallocating your investment dollars into areas that may be more attractive and complimentary to your current portfolio.
5. You Inherited an Investment Property
Perhaps you never intended to be a real estate investor in the first place. If you’ve inherited an investment property that you have no interest in managing, you’ll need to make some decisions. In this case, you’ll typically either want to hire a property manager or sell the property and use the proceeds for another type of investment.
Other Important Considerations
If you’ve decided it’s the right time for you to sell your investment property, it pays to look at your tax obligations. Many owners of rental properties are surprised to learn that their tax obligations upon sale could eat up as much as 40% of their gain. Engaging in a 1031 exchange can help you save a significant amount in taxes, which will allow you to keep more of your investment money working for you.
We would be pleased to assist rental property owners to analyze the performance of their current properties and explore options that may be more suitable to their overall investment objectives.
To learn more and explore whether this is the right solution for you, give us a call! We’re happy to schedule a no-obligation consultation.
You can reach us at 866 398-1031 or info@FirstGuardianGroup.com.
Please feel free to download our FREE ebook to learn more about real estate tax deferral strategies!
Help Save 1031 Exchanges
*The Tax Cuts and Jobs Act of 2017 allows real estate investors to fully write-off the cost of select new and used equipment, furniture, fixtures, and most land improvements in the year when the investment was made rather than requiring that the improvements be depreciated over time. This can be a powerful tool for lowering taxable income. Please consult your tax advisor to learn how you may benefit.
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