While it’s always a good time to invest in real estate, deciding when to sell off your real estate investments may be a more difficult decision.
Liquidating a real estate investment often takes time and money. You need to consider factors like:
The time it will take a real estate agent to find a buyer.
The time it takes to process real estate transactions once you have the property under contract (typically 30-60 days).
Expenses like real estate agent fees (usually 5-6% of the sale price), prorated property tax, and other closing costs.
Capital gains tax on the profit (which can potentially be mitigated through a 1031 exchange).
But there are many sound reasons to sell an investment. And there are ways to utilize your proceeds from the sale of your investment property to continue growing your wealth over the short term and the long term.
In this article, we’re going to explain when to sell real estate investments based on personal circumstances, market conditions, and better financial opportunities.
Selling Physical Properties vs. Selling Real Estate-Backed Securities
One quick note before we dive into our main topic. With so many different real estate investment options, it’s entirely possible to invest in real estate without buying property. And selling off real estate-backed securities on the stock market is very different from selling off a physical property.
For example, if you own shares in a publicly-traded REIT (Real Estate Investment Trust), you can quickly and easily sell your shares with very little hassle and nominal expense. In this article, we are focusing on when to sell the investment properties you own.
With that distinction made, here are eight signs that it’s time to sell your real estate investments.
1. Being a Landlord has Become a Hassle
Owning and managing your own property isn’t easy. And it isn’t a good fit for everyone. Between finding qualified renters, collecting rents, making necessary repairs, completing regular maintenance, and handling lease renewals, being a landlord can be extremely time-consuming. It also requires a level of skill, knowledge, and experience that many real estate investors simply don’t care to acquire.
Of course, you have the option to hire a professional property manager. But the property management fees will take a substantial share of your profits.
If you find that you’re not interested in managing the day-to-day operations of your property, or hiring a property management company to do it for you, it might be time to sell.
2. You Have Hit Your Appreciation Target
Many investors enter an investment with a clearly-defined exit strategy. Once a property meets its target ROI or target appreciation, the investor sells the asset to free up their original capital and realize their gains.
If your investment has served its purpose, you may be ready to sell it and move on to your next investment project.
3. Your Property is No Longer Providing Positive Cash Flow
In some real estate markets, under certain market conditions, carrying costs can increase faster than the rental income for some properties. And this can cause your cash flow to dry up or even go negative.
If your monthly property tax expense or maintenance costs are consuming too much of your monthly rent, you may want to sell this asset and use the proceeds to purchase a property with better cash flows.
4. A Major Life Event Has Made Real Estate Ownership Less Practical
Major life events, like moving out of the area, retiring, or starting a family, can impact your ability to properly manage your income properties.
And, while property management services are available for hire, holding the asset might not be worth the added expense.
5. You Want to Take Advantage of Peak Seller’s Market Conditions
Perfectly timing the real estate market is purely a matter of luck. No one can say with any certainty when a market has peaked or hit bottom until months after the fact when we’ve had time to see a conclusive trend.
But, we all generally know if we’re in a seller’s market or a buyer’s market. And seller’s market conditions can help you sell more quickly, at a higher price point, than you would be able to in a buyer’s market.
6. Rental Demand is Expected to Decrease
While some rental markets are seeing enough demand to justify rental increases of around 20% or more, others are shrinking. In Philadelphia, PA, for example, the median rent for a two-bedroom apartment plummeted by 22.47% in 2021.
Pay attention to your local rental demand projections. If unemployment is growing or residents are relocating away from the area, now might be the best time to get out of that investment property. You don’t want to wait until the declining rental rates have dragged your property value down.
7. You Need to Diversify Your Investment Portfolio
If your investments are largely held in a single asset class, you risk potentially heavy losses if that asset class declines in value. For example, real estate investors with a large percentage of their wealth tied up in commercial real estate were hit hard when the pandemic caused businesses to close. But investors with a more balanced portfolio that included residential real estate typically weathered the economic storm with less damage.
But it’s not just about mitigating risk. A diversified portfolio also gives you space to take on investments with higher risk and higher rewards. If, for example, your portfolio is mostly comprised of publicly-traded REIT holdings, you might not be seeing the returns you could be getting from an opportunistic investment like multi-family development.
If too much of your investment portfolio is in a single asset class, you may want to sell off a property to free up funds to invest in a different asset class.
8. You Have a Better Passive Income Opportunity
If you can earn better returns with less time and/or effort spent on your investment, why wouldn’t you switch investments? That’s where many real estate investors find themselves today. With the availability of new investment strategies like real estate syndication, it makes less sense for investors to manage individual properties on their own.
If you’re not familiar with real estate syndication, it’s similar to real estate crowdfunding. Investors pool funds together to purchase a property, which is professionally managed by a project sponsor. By pooling your capital with funds from other investors, you can access larger deals that may be beyond your reach as an individual investor.
One of the many benefits of syndication is that you can leverage your sponsor’s time, knowledge, experience, skill, and industry connections to get better returns than you may be able to get on your own. And since the sponsor is taking care of every detail for you, your gains are purely passive! For many investors, switching from self-managed properties to syndication is a no-brainer.
Continue Investing in Real Estate with Gatsby Investment
Selling a property doesn’t mean you need to leave the real estate investment market entirely. In fact, using some (or all) of the proceeds from your property sale to invest in a passive income opportunity, like real estate syndication, allows you to continue growing your net worth without spending time on your portfolio.
Gatsby Investment is a renowned real estate syndication company, specializing in the in-demand Los Angeles housing market. Gatsby offers a wide range of real estate investing strategies to serve short-term and long-term investors, including:
Plus, with our innovative build-to-rent strategy, you can get in on the ground floor of a new development to take advantage of the quick gains from the new build, then carry your investment into the rental phase for ongoing cash flows, long-term appreciation, and tax benefits!
