When to sell vs when to hold as a rental?

[Julieanne Zenz]

What parameters do you use when deciding if you should continue to hold a property as a rental in your portfolio vs if you should sell it?  Here is my scenario and I would appreciate any insight/suggestions:

I have a property that I've owned for 2 years.  All in cost is $170k.  Current rental rate is $2000/m, less $4,500 property taxes, this yields a net of $19,500/year (I do not have any other holding costs) and a return of 11.4% return on investment.  If I were to sell it there is a potential for earning a net profit of $90k.  This means it would take 4.6 years of rental income (assuming no major expenses) to yield the equivalent profit of the sale.  My question is what is the magic number to determine when one should continue to hold an asset vs when one should sell?  

In the past I have used 3 years as my determining factor (meaning, if the rental income in 3 years would be equal to or greater than the profit of the sale I should continue to hold the property) but have no hard data to justify this parameter?  If anyone can explain to me what the optimum ratio of rental income to sale profit is I would appreciate the insight.  Thank you in advance.  Julieanne

[Terry Lao]

@Julieanne Zenz

@Jeff B.

Interesting 7 year target. My counter point would be if appreciation continues 3-4% growth each year, then you would just need the depreciation to be under appreciation to make it worthwhile to continue holding?

overall, I think it depends on your goal. if you goal is to reach 100% ROI, then when your cashflows and net gain on sale add up to 100% ROI, then sell. you can add long term capital gain or 1031 exchange into the equation.

personally, I have a 4plex in las vegas, and my goal is long term cashflow or highest market value, whichever comes first. I'm getting about 14% ROI on cashflows, so longer I keep, the rents will go up. To determine the highest market value, I am looking at the median home prices from a historical value going back to 1990. The high was Mar'06 at $403k. The low was Feb'12 at $135k. The current is Apr'17 at $249k. Of course, past results are not indicative of future returns, but I'm using as a gauge. If median home prices continue upward trend, then I will hold. If median prices changes to downward trend, need to consider selling. If plateau evenly, then will probably hold due to still good cash flows. At each month, look at the jobs situation locally and as a whole in state or nation. Look at external metrics like stock market, interest rates, supply and demand of homes, I'm basically looking to avoid the crash as in 2008.

Also, if you sell, then need to think about where to put gains? When in doubt, just leave alone.

Just my two cents.

Terry Lao