You have bought your rental property for the income stream and perhaps even in hope of future appreciation. While you may plan to own the property for a long, long time, a wise investor will have an endgame for your real estate. How long should you hold your real estate investment? When is a good time to sell the rental?
What is your exit strategy?
A real estate exit strategy should be pre-planned based on your investment portfolio, future needs and financial goals. Circumstances in life can change quickly; economic conditions can turn with little warning; and business strategies can shift. Having a well-designed endgame will help you to prepare for these changes. Setting up trigger points to indicate when it is time to sell can help you to maximize your profits and turn an investment at the peak time.
Financial Trigger Points
Only hold on to an income producing real estate investment if it is actually producing income. If you are noticing that expenses are increasing, rental rates are not rising or that your cash flow is steadily decreasing and there is little you can do about it, perhaps it is time to cut your losses while there is still income and reinvest in a more profitable property. Do not wait until you have a negative cash flow. Not only will you be losing money, but you will need to dramatically slash the listing price to motivate another investor to buy your money pit.
On the other hand, if market values have spiked and there are other more lucrative investments on the horizon, why not consider cashing out. Reinvesting a property that can earn a higher NOI off the sale of a property with a lower NOI but at a higher capital gain is a smart move.
Economic Trigger Points
Rental properties can be a secure investment even if market values plummet. Take the last Great Recession (2007 – 2010) for example. Home values dropped dramatically in most markets. Meanwhile, the demand for rental properties skyrocketed as homeowners were foreclosed upon. Vacancy was at an all-time low. Even if the investment property lost significant market value, the income stream stabilized the investment and created good profits for a buy and hold investor.
So while a loss in market value should not be an economic trigger point, a change in economic and market conditions could be. Are you noticing a higher than average vacancy rate or decreasing rents? What is the cause? An oversupply of rentals? A loss of a major job supplier? A decrease in population? All of these may indicate that it is time to sell out and reinvest in a stronger market area.
Personal and Business Trigger Points
Changes in personal circumstances are usually the most common trigger point that turns on the exit strategy. A change in marital circumstances, such as a divorce, could trigger the sale of the investment property – even if it was not part of a planned endgame. A retirement strategy could be to sell some or all of the rental properties and either reinvest or cash out. Gifting or deeding real estate to their heirs is another trigger point.
Business partnerships will also need to plan for a well-designed real estate exit strategy. What if one partner plans to leave and they want their share of the business? What if the partnerships splits, who gets which properties? How will the portfolio be balanced as new properties are purchased? All of this should be decided before the event occurs and made a part of the partnership agreement.
Plan, Do Not Wait
Waiting until a situation arises and then deciding how to sell, disperse or deed your income property is not an exit strategy, it is stop-gap maneuver. It could mean that you will not receive the highest price or the best results. Rather, work with your family, business partners, property manager, tax advisor and business consultants to design the best exit strategy and end game plan.
In a future series of articles, we will discuss different ways you can hand over ownership in real estate – whether it is through wills, gift, land contract or a direct sell. Meanwhile, we hope that you will benefit from the income stream for many years to come.
Be sure to check out our other articles in this series!v