Rentals and real estate are a secret sauce to building long-lasting wealth. But no one ever talks about the other side of buying real estate. Selling it. The selling process has a special place in the whole real estate equation, and it goes a little beyond just the closing fees.
So if you’re wondering “Should I sell my rental house now?” here are some rules that guide my decisions.
How to Get into Real Estate Investing – Expert’s 6-Step Plan
Mr. FIREescape’s Guide to Buying Houses
Why Mr.FIREescape Is Selling.
Yep. I’m jumping off. Over the past two years, I’ve been actively selling off my properties. This is NOT due to some doom and gloom future that I’ve concocted from watching cable news. Actually quite the opposite – I see real estate as very important for fighting off the decades of inflation that I see in front of us.
Actually, I’m selling off my real estate to buy even more real estate. Many of the lower-priced homes I own are free and clear because I either bought them in cash or paid off the tiny mortgages they came with.
And yeah, it’s nice to have a couple of homes mortgage free. Definitely easy mentally, and they provide a ton of cashflow. But sometimes they don’t. Sometimes they’re annoying. And sometimes I don’t want to spend my early retirement dealing with the nitty gritty of a bunch of rentals.
So I decided to sell them off and move onto greener pastures in the form of more expensive houses.
- In 2018 I sold a house that was giving me massive headaches.
- In 2021 I sold a house that had a pile of repairs on the horizon.
- In 2022 I’m planning to sell off a house with my least-favorite property manager.
- In 2023, I’ll sell another. I just don’t know why yet.
There are several factors that answer the question “should I sell my rental house now” and here are the questions and the rules that help me decide.
4 Questions To Ask Before Deciding To Sell.
Selling any investment can be hard to decide upon. These questions will point you toward your answer. It’s important to make an objective decision and not an emotional one. (That’s actually one of the reasons I like index funds for my equity holdings. There’s much less emotion in the mix, and no false belief that I can accurately predict the future.)
But sometimes you have to read the writing on the wall too. For example, maybe the investment has run its course and there’s no value in keeping holding on to it. On the other hand, maybe your property will appreciate like crazy or yield more rental income. If there’s a historic building being renovated on the street (or a Starbucks “coming soon” sign) you might want to try and ride the tide.
In any case, when being rational and objective, it’s a good idea to be guided by rational and objective rules and questions. Here’s what I ask myself before selling:
1 – Is This My Personal House And Is It Worth It?
If you’re reading this to try to decide on selling your personal home, the equation is totally different. A lot of people make up some exotic reasons about why they should “upgrade”. I can’t speak for anyone else, but I know that I’d be much happier staying put in the long run.
Especially, considering all the fees and work that’s involved in selling and buying… there would have to be a BOGO home sale for me to consider a move at this point in my life.
My wife and I went light on the house and that allowed us to have enough cashflow to retire early. Comparing a bigger bathroom or basement to early retirement? We definitely made the right call.
The flip side of this is if you’re considering a downgrade. Moving to a smaller and cheaper home for decreased payments and increased cashflow. In that case – yes, I totally approve!
Read more: Home ownership is NOT real estate investing. You’ve been sold a lie.
2 – Is There A Better Place I Can Put My Money?
Let’s face it, there are always “opportunities” vying for your cash. Some bad, some good, and some that are amazing but you couldn’t jump on in time. It’s possible that the rental you bought was the best deal you could get at the time and now you’re in shape for something even better.
Last year I had a great deal in front of me for a local house, but I couldn’t get the downpayment together in time. It could have easily given me 20% annual returns and I still reminisce about the one that got away. Longingly.
If I had been proactive about selling my other rentals, I would have been the first one to swoop in with an offer. Like the nerd who accidentally got the hot date who was on a rebound. But I wasn’t proactive and all I have is a lesson learned. (Which is just fine, because I can pass it on to you.)
If you know the appreciation rate of your house and the annual profit, it should be easy to compare and contrast to other investments. I work my ROI out every year at tax time so I can be on top of it.
Keep in mind, that you should make those calculations with the present value of your home, not the price you bought it for. You want to compare apples to apples, and not the house your parents bought for under $5K before you were born to the million-dollar sale price next door.
Be objective. Whether or not you should sell the house is not related to how much money you’ve already made from it.
Best Crowdfunded Real Estate – Expert Comparison of Top eREITs
AcreTrader Review – Everything You Need To Know About The Best Farmland Investing Platform
3 – Is Selling The House Worth The Effort Right Now?
Selling a house is a lot of work, and it’s even more work if you’re planning to buy another place right after. From repairs to showings, the process takes time and money. Not to mention that you won’t be earning anything while the house is vacant.
Sometimes “the greener grass” is not really worth the effort. I’ve seen competing investments that were only slightly better than what I’m currently getting. Yeah, it would be nice to have a better deal, but not nice enough to have to jump through the hoops that are involved. My time is worth a lot to me, so in that situation – I have to pass.
4 – Should I Scale Up?
Real estate is a long-term game, and part of playing it is growing your portfolio when it makes sense.
I’ve never intended to own more than 10 houses. I’m obviously not against the income, but even though I’m pretty hands-off and use property managers – I don’t think I have the mental space for it. So as you grow your portfolio, you should eventually grow the types of properties you own to avoid having a bunch of little ones.
It’s kind of like a hermit crab getting a new shell.
Currently, I’m selling off two small properties that have been paid off to buy one large, mortgaged multiplex in a pricier city. Eventually, these quads will be paid off so I guess I’ll start upgrading to apartment buildings. But I’m not there yet. My monopoly board still has space to be filled up.
(Note, 1031 exchanges are made for keeping the tax implications of quad-buying limited… And sadly there’s no equivalent for Canadians.)
4 Rules to Selling Your Rental House
After thinking about the questions above, I’ve developed a set of rules. It works for me, but feel free to make them your own.
- It’s not my primary residence, because “upgrading” is likely not worth it. (At least I’d have to give some heavy thinking.)
- The money I’d get from the transaction has a better place to go.
- The returns I get justify the time, effort, and money that was involved.
- I am reducing my overall load by reducing the total number of houses.
What About All The Crazy Stuff That’s Going On?
You’ll notice that none of my rules or questions included social issues, political issues, or even interest rates. The reason is simple. Real estate investing is a SUPER long-term game. No interest rate hike or world event will have much of a LONG TERM impact to throw us off our game. That’s why the crazy stuff probably shouldn’t guide your answer to “should I sell my rental house now?”
Even inflation. The current word-du-jour. If inflation causes rates to rise, it will also likely cause your rental income to rise too. It all comes out in the wash. If anything I see homeownership as the easiest way to avoid future financial issues as homes are basically inflation-correcting.
Also read: Real Estate Investing This Year – How To Stay Afloat When The World Going Down The Toilet
What Time Of Year Should I Sell?
Okay, so there is one short-term consideration. Season. If you’ve decided to go through with selling your house, try to sell it in the spring or early summer. That way you can cash in on the “Gotta move before school starts” crowd who are in a rush and tend to drive up prices. Kaching.
This crowd typically drives prices up to the tune of 6%, and if you’re planning to buy another property, you can start looking in the fall and winter – the best time to buy! November and December are actually the best time to buy because there’s minimal competition. Everyone else is out gift-shopping and turkey-cooking, NOT house-buying.
TL;DR – Should I sell my rental house now?
Selling your rentals is an important part of the whole real estate equation that goes beyond just the closing costs. I try to follow hard rules when deciding whether or not I should sell (which I’m actually in the middle of right now.)
- I’m not just looking for a senseless vanity upgrade.
- My money will actually go into something better.
- The returns I make from the sale will justify the time and effort involved.
- I’m easing my mental load by consolidating several smaller rentals into one bigger one.