When to Sell?

Rental property investing is a financial truth for the worker to build wealth. My wife and I firmly believe this with every ounce of our being! This financial truth has proved itself out time and again for our family. We are truly blessed to have achieved success with rental properties and we feel very fortunate to have made more wise decisions than dumb ones. But now a new question we’ve just begun to ponder. How long do you hold on to a real estate investment? When should an investor sell?

I’d like to share our decision-making process as we look to put one of our properties on the market, a first for us!  First and foremost, even though we are selling an investment property, in reality we are simply reallocating our investment dollars. If you’ve read any of my blogs or especially my books, you know selling an investment and blowing the proceeds on short term wants is completely against our DNA. There will be a time and place for divesting of investments and blowing the proceeds, but not today!  

I blogged last year about considering a change in our retirement strategy which can be summed up simply as buy low and sell high. Well, our real estate is high right now and the market is low. We plan to cautiously reallocate a portion of the proceeds from the sale of this real estate asset into our retirement investment accounts attempting to catch some bargains in a bear market.

Second, we are in the market to buy a new home. More on this next week, but you are probably already thinking what a terrible time to buy! Prices have skyrocketed and mortgage interest rates are up. True enough, but life isn’t a dressed rehearsal. Just means we have to work the math harder. For example, putting down $50,000 more on a home mortgage principle at 6% will save $300 on the monthly payment. We will use the proceeds from the sale of our investment property to help mitigate the high interest rates. With any luck, rates will go back down in a few years and we can refinance.

As a result, with a portion of the proceeds reinvested into a retirement account, growing at a conservatively estimated average of 4% over the next decade, and using the rest of the proceeds to buy down the mortgage principle for our new primary residence, we will in fact realize a greater monthly net profit than we are currently earning from rental income on the unit!

But what about appreciation of property value? Doesn’t selling it now throw away any potential growth? The answer is a little nuanced. We purchased this particular asset, a single-family condo, seven years ago and the value has grown tremendously; in fact, some would say it’s at a peak for the foreseeable future.  While it’s a nice home in a good community that is easily rented, the buildings and property are going to need some repairs (read special assessment) in the coming years. As we weighed everything out, the risk of getting hit with an assessment or declining property value wasn’t worth waiting to see if the value may eek up a little more. Take the money and run is sometimes the name of the game in real estate!

How about tax burden? This is something we are learning as we go along. Of course, the best way to delay the inevitable tax bill is a 1031 exchange or pass along the property to an heir. But that’s not a direction we want to go in for this particular asset. Perhaps down the road with some of our other properties! As I’ve said time and again, we believe you’ve got to give unto Caesar what is Caesar’s.

That being said, I believe there is a “sweet spot” time to sell, especially with regards to depreciation recapture tax. While I absolutely love taking the depreciation tax benefit each year, when stretched over 27.5 years, this could stack up to a pretty hefty recapture bill since the tax is calculated at the earners tax bracket. At seven years of ownership, we will have to pay some recapture tax, but not too onerous. I believe an investor has to consider the value of the property, benefit of depreciating, and the potential recapture burden to determine the optimal time to sell.

Finally, this is just one asset in our portfolio of properties. Real estate will be a truth in our personal finance journey for many years to come. Maybe we’ll pass some properties on to our heirs or maybe we’ll divest with all of them over the course of the next 20 years. Regardless, knowing when to sell is probably as important as knowing when to buy. I don’t think selling is quite as exciting as making an offer and buying a new asset, but it’s pretty close! On that note, anyone looking to invest in the North Alabama rental market, please let me know!

Interested in rental property investing? Look for “Collect Rent, Don’t Pay It: A Beginner’s Guide to Rental Property Investing” on Amazon to learn how our family turned rental property investing into a successful side hustle!

Looking for a good how-to on wealth building? Check out my book, Millionaire on a Worker’s Budget: Five Financial Truth’s to Build Wealth on sale now at Amazon!

The commentary provided in this blog is for informational purposes only and is not intended to be a source of financial or investing advice.

Use the links in the about section below to follow on social media or subscribe for emails to receive updates on the latest weekly blog at www.normspivey.com!