When is it time to sell your rental property?

The only thing harder than deciding when to buy into the rental market is deciding when to sell off property and deal with the costs that go along with it
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The only thing harder than deciding when to buy into the rental market is deciding when to sell off property and deal with the costs that go along with it. Getting in and out of the market at the right times can make the difference between a lucrative investment and just breaking even—or worse.

But the truth is, there’s no one-size-fits-all answer to this question. The best time to sell will be determined by a mixture of your personal circumstances and the local market dynamics.

That being said, the Colorado market is showing signs right now of being an extremely strong seller’s market. Let’s break down some of those numbers and talk about how long this situation might last before going over a few general principles that will help you decide if now is the right time to cash in on your rentals.

Denver Is an Unprecedented Seller’s Market

If you own property in Colorado, you’re probably aware that the Denver market is red hot—but do you know exactly how hot it is?

After breaking through the $600,000 ceiling for the first time in July, the average sale price for a single family home hit $625,100 in October, a staggering 18% year-over-year increase. Attached properties, i.e. condos and townhomes, also hit a record high of $393,733, good for a gain of almost 8% year-over-year.

This is all the more remarkable considering that it’s happening against the backdrop of a pandemic-induced recession. A couple of unforeseen factors have made the housing market a bright spot in an otherwise dreary economy; intervention by the Federal Reserve has driven down mortgage rates, and cooped-up workers, tired of working from home, are after more space. The result? A 25% increase in home sales after experts at the beginning of the pandemic predicted a 15% market slump.

On top of all that, consider that housing supply in Denver has all but dried up; the number of active listings in the metro area are down 44% year-over-year, so a huge amount of buyers are competing for a tiny sliver of properties. That’s led agents to counsel buyers targeting homes under $500,000 to plan on bidding tens of thousands above the asking price.

You can see where this is going. If you have a Colorado property that you’re thinking of selling now or in the near future, now is a good time. When the pandemic ends—and it will end—it’s reasonable to assume that more listings will hit the market and that a lot of this housing demand will become less urgent. Will prices plummet? Probably not. But they won’t climb like this, either.

Still, predicting the market is more art than science. Let’s look at some personal circumstances that might make you want to sell your rental, even in a hot market like Colorado’s.

You’re Losing Money

Experienced investors know that even in a red-hot market, you can still lose money, especially when it comes to rentals. Maybe you have high tenant turnover, an unexpectedly high vacancy rate due to a lot of apartments for rent nearby, or maybe you’ve just hit some unforeseen adversity. The pandemic has been especially hard on renters—more than a fifth of Americans who have missed a payment in 2020 because of financial stress have missed a rent payment.

In a hot market, you should try to determine if you can correct your course. Huddle with your property manager, and reevaluate your fundamentals to see if you can improve your ROI. In a market like Colorado’s, where demand far outstrips inventory, there will always be strong demand for rentals.

But in the end, you’re in this to make money, and if you’re not doing that, it might be time to get out. Sometimes, it really is that simple.

You’ve Found a Better Investment

Even if your investment is providing good returns, maybe you’ve found a different investment that could give you even better ones. Continually upgrading their portfolios is how small investors become big investors. Selling now in an extremely strong seller’s market is a perfect opportunity to liquidate and upgrade.

A tip: If this is your plan, you might want to consider using a 1031 exchange. The 1031 exchange is a tax strategy that essentially allows you to trade one investment for another while deferring your capital gains. The best part? You can use a 1031 exchange over and over again, as you repeatedly upgrade your investments. You’re deferring those capital gains taxes, not eliminating them, so you will have to pay eventually—but if you’re in buy-and-hold real estate for the long haul, who knows when that will be?

Another tip: if you’re selling to free up cash for a subsequent investment, make sure you figure out exactly how much you stand to clear from the sale; nothing puts a damper on an impending investment like realizing you’re $5,000 short.

You Want to Invest in a Different Market

You know who’s the happiest about Colorado’s booming market? The people who invested in it 15 years ago. Nothing makes an investment like getting in on the ground floor, and while Colorado’s market is looking about as healthy as a market can look, you’re not doubling or tripling your money in the next decade if you buy in today.

But maybe you have a hunch about what the “next” Denver is going to be. If you really believe in your instincts, maybe it’s time to cash in on some of the appreciation you’ve reaped over the past few years, and flip your money into that other market.

Should You Sell Your Rental Property?

The Colorado market is a white hot seller’s market right now, with constricted supply and sky-high demand. If you’re looking to sell, you couldn’t ask for a better market.

That said, don’t sell just to sell. If you want to flip that money into a bigger, better investment or a different market or your investments aren’t performing well, then it might make sense to seize this moment. But don’t cash out and put the money under your mattress. The market’s strong, and all the indicators point to a continuing boom. If there’s nothing pushing you toward a sale, sit tight and ride it out — you’ll be glad you did.

 

Categories: Industry Trends, Real Estate