You own rental property, but now what?
What’s your exit strategy?
How are you going to make money?
Some real estate investors buy rental properties with the goal to fix them up and flip them. Others buy so they’ll have a nice income stream for retirement. And some people buy rental property with the intention of selling when they need the money, such as to pay for a large expense.
So which is the best way?
The answer is that they all are.
The key is to know which type of investor you want to be. Let’s consider some options.
Investment Strategies for Landlords
1. Hold For 5 Years or Less: Flip It
Flipping houses was huge in the early 2000s. And flipping houses is not a dead strategy today, even after the real estate crash. It just involves more patience this time around.
Traditionally, flippers would buy a property, make some improvements and then sell it within a few months. Today, conservative or part-time real estate investors who like the idea of flipping often have a five-year plan. They slowly make improvements while renting the place out. Then, when they (hopefully) see an appreciation in the house value, they sell.
2. Hold it Indefinitely: Retirement and Beyond
You don’t ever have to sell your rental property, even in a red-hot real estate market.
As long as you have a positive cash flow, you might never want to sell. Then, you can keep earning passive income well into your retirement years.
Keep in mind that you can depreciate the house (not the land it sits on) for 27.5 years to lower your taxes. Some people hold property until they can no longer write off the depreciation, and some keep it anyway.
3. Holding as Long as It Makes Sense
This third strategy is one you go into knowing you’ll sell when something happens to trigger the sale.
For example, you might have a plan to sell when it’s time for your child to go to college so that you don’t need to take out student loans. Instead of filling out the FAFSA, you sell.
Or you might want to sell when you’re ready to move to your dream destination.
Some people sell before the property starts needing major repairs, such as a new roof or a new HVAC system. However, you probably won’t get as much for a house that needs repairs when you sell, but if it appreciated in the time that you held it and if you made money during the time you used it for a rental, all is good.
What If You’re Losing Money?
If you’re losing money on a property, you’ll probably want to sell at that point. Maybe your market changed and you can’t get the same rent anymore, or maybe HOA dues, insurance or taxes have become too high for you to make a profit.
But even if you’re losing money, you still might want to hold the property. Maybe an attractive new retail or sporting development is coming to the area that should make the property appreciate again. There is a lot to consider here. Weigh the variables, such as how much you’re losing each month and whether there’s reason to believe the situation will change for the better to help you decide.
No Need to Stress
Let’s say you’re in this business to get the best return-on-investment (ROI) you can (and most of us are). You have the property for five years, and it has appreciated quite a bit. You decide to hold it five more years, hoping it will appreciate at the same pace. If so, you would be very happy.
But what happens if it doesn’t appreciate much or at all in the second five years? Before you kick yourself for not selling five years ago, consider that you’ve probably been collecting rent for those second five years. Your ROI isn’t as great, but you still (hopefully) received rental income.
And here’s another time you shouldn’t necessarily stress: if you have negative equity in your rental property. If you don’t need to sell now and you have a positive cash flow, you’re still good. In this case, as long as you’re making money each month, hold the property. In the future, it will be worth more (usually). Meanwhile, you’re collecting rental income – as long as you choose great tenants.
Tools like Cozy will help you weed out the bad tenants from the good ones, and help you keep your costs down.
Stick with Your Goal
As you can see, there is no one answer as to how long to hold rental property, but if you have a plan and stick with it, you won’t be stressed by market fluctuations or even by a bad day with a tenant.