In our East Valley Real Estate Investor article, we talk about a fictional man named Carl who has owned four homes since 1999. The homes were built in the 1970’s and the mortgage on each home is $650. Carl charges tenants $750 per month, well below the $1300-1800 market rate for rental homes in the area. When the air conditioner in one home needs to be replaced, Carl has no choice but to finance it. This creates more debt on what should be a cash flow investment. He is in a real bind and his family is asking him if it is time to sell the investment property. While fictional, this scenario represents a lot of investors who haven’t managed their properties and end up in a different financial position than they had likely intended.
When is it time to sell the investment property?
The reality for Carl is that it may make sense to sell at least one of the four homes. Because the homes have not been renovated, he may not get market rate on the sale but will still likely have equity because of the timing and original cost of the homes; his real estate agent will be able to price the home to sell while protecting the equity. He can then take equity from the sale to make improvements on his three remaining homes as the tenants vacate. While he may have a few months without tenants as he makes improvements, afterward he will be able to charge a market rate of $1300-1800 rather than the $750 he had been charging, while still only paying $650 per month for each mortgage. In other words, he is creating the cash flow he wanted when he became an investor. For Carl, it makes sense to sell one home in favor of being able to make improvements to the other homes.
What can we learn about managing investment property?
The key errors Carl made as an investor were that he didn’t increase rent for new tenants as the market changed and because of that, he didn’t have cash flow to make home improvements. The result was outdated homes that aren’t yielding the financial rewards he had planned. Don’t be a Carl.
Treat your investment properties as a business. Understand what it costs for upkeep of the home(s) including renovations, general upkeep, and cost of renters.
Renters may not treat your home as their own so you may (sadly) have to make repairs that you weren’t expecting.
Wear and tear of a home is a reality. Carpets wear out. Tiles come loose. Faucets leak. No matter how well a renter treats the home, there will be work needed when they move out.
As you’re thinking about whether or not to sell your investment property, consider:
What’s your goal as an investor? Maybe you want to sell in order to buy a new home or make improvements to an existing rental property. Maybe you want to sell because of capital gains tax reasons like reinvesting or exiting the market.
What are the numbers telling you? The real estate market changes over time; working with Beery Realty, we can determine if now is the best time to sell your investment property. We can also refer you to our loan officers and other financial professionals who can determine if it makes sense for your overall investment portfolio.
Is there a special circumstance? Life changes like divorce or death of a spouse may facilitate the need to sell an investment property. You may have bought the homes with the intention of selling to your children when they are ready to buy and now may be that time.
Whatever the reason, Beery Realty can help you navigate the decision making process of choosing to sell your investment property.