I had to make a tough decision. Was it time to sell my investment property?
As I’m writing this, my condo—and very first real estate investment—just went on the market. I had to say bye to that memory-filled investment to say hello to a new investment: one that is actually profitable. (Who buys a property in a real estate bubble? Me.)
What made me make the decision? How did I choose to say so-long to my always-rented property? The process started when I became a writer for Landlordology. I realized that while my condo’s always rented, and someone else was making the mortgage payments, the property wasn’t checking all the boxes for a good real estate investment.
What makes a good real estate investment?
While it’s easy to get carried away in the fun of starting a real estate business, it is important to pay close attention to know that your investment is a good one. Sometimes the signs are not so obvious that the property is a bad fit. So, what makes a good investment?
1. Your rental property is cash positive each month.
The first thing you want to do when choosing a rental property is to determine the potential cash flow. To do this, use sites like Apartment.com, Redfin, WalkScore, and—of course—Cozy, to research the rental price. Now, look at the principal, interest, property tax, and insurance (PITI) per month. Subtract your rental estimate from your PITI. Is there positive cash flow? This is the first factor in a good investment.
2. It’s in a high-demand rental community.
Location, location, location. We’ve all heard it, and it’s true. Renters flock to areas that are desirable. Look for properties that are walkable, have public transportation, shopping, beach, or are near popular destinations. For example, my rental properties are near Northwestern University with public transit to Chicago, the beach, and shopping. Universities with a high graduate population have great potential for rental properties. While the tenant turnover will be higher than other areas, there is always demand. Last, look at areas that will be hot soon. Certain areas price people out of the market, so renters move to another location that is nearby.
3. You can easily manage the property.
If you are a Dave Ramsey fan, you know he always says to stay close to your rental properties. This makes managing your rental property easy. However, if your property is not so close, it gets tricky. A good real estate investment is close to where you live, low maintenance, and offers an easy system for managing your property and tenants. For example, let’s say you have a single-family home you rent out that is 10 years old and 10 miles from your home. The property management can be simple. Hire a lawn care service, a maintenance person, and use Cozy for collecting rent online and communicating with your tenants about maintenance requests. Now, if the property is high maintenance or hard to rent—that’s another story.
Related: When to sell your rental property
When should I sell my real estate investment?
While you should think of real estate investments like the stock market (buy and hold), sometimes the signs are there that it’s time to sell and reinvest or get out of the real estate game completely. Whatever makes you happy. Here are the surefire signs that it’s time to sell.
1. Cash flow is consistently negative.
The No. 1 reason to choose a property to invest in is positive cash flow each month. When it’s negative, it’s time to sell. My first rental property was an accident. We bought a new house and couldn’t sell the old one. Because of this, checking the cap rate and PITI was not part of our “strategy” (read: there was no strategy) for choosing an investment property. We fell into it, and from that first month, August of 2011, it has had negative cash flow. Negative cash flow is the first sign your rental property may not be meant to be. Consider moving back into it or selling it.
2. You’re a remote landlord.
When I began my landlord journey, I was only a few blocks from one rental property and lived in the other (a three-flat). Managing my property was easy. However, I sold the property I lived in, and now live 35 miles from my other property. I no longer had a relationship with my tenants. Showings were impossible. I felt panicked about maintenance requests. It wasn’t easy. If you’re moving away from your rental property, think about selling it and buying local. The property will be easier to manage, and you’ll have more control over your investment.
3. The cap rate has changed.
A cap rate is the income-expenses/value. The goal is to keep the cap rate between 5% and 10%. Generally, property investors determine the cap rate when choosing an investment property. However, if you are on the fence about whether to keep or sell a rental property, you should revisit this equation. Several changes can occur during the life of ownership that can turn a good cap rate bad. Did property taxes go up? Did the rental market in the area go down? Is maintenance more than expected? Are the utilities higher than you originally thought? Add up your monthly expenses over the year, and subtract that from your annual income from the property. Divide this number by the current value. If the percentage is less than 5%, you may want to consider selling.
Real estate investing can be lucrative, and the buy-and-hold strategy is typically best. However, sometimes you need to take a hard look at your investments and ask yourself, “Does this investment still make sense?” That’s what I did, and in the end, it didn’t make sense for me own my property anymore. Once you let go of a property that isn’t working for you, you can move onto the next property investment!