When to sell vs when to hold as a rental?

Question

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 · Answer

@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

Julieanne Zenz · Answer

Jeff, thank you for sharing the 7 year figure. Can you show me the math? Why is it that 7 years is the sweet spot for resale? I've heard that before but have not seen the acutual calculations and would love to understand the data behind that strategy.

Jeff B. · Answer

The classical sell point for RE is ~7yrs in. At this point the Depreciation Recapture will eat the profits and you'll walk away with very little. You beat this problem using a 1031 anytime your criteria is triggered for the sell.

Brian Garrett · Answer

I think it really all boils down to what your goals are. Are you looking to build a big portfolio and scale up? Are you just looking to buy a different investment property to replace this one if you sold it? If you're looking to build overall wealth and a portfolio, I would suggest you keep it as a rental. If you are looking to build working capital or just liquid net worth, I would suggest you sell it.

Matt Faix · Answer

@Julieanne Zenz If you're looking for a calculated method to determine the number of years to hold, you'll want to figure out your Internal Rate of Return on the property and take into account the time value of money. Cash flow received today is worth it's face value, however you would need to discount the cashflow at a certain rate for future years plus the proceeds from the sale.

Once you do this, you can model different scenarios for selling in different years (taking into consideration rent increases, expense increases, capex, appreciation, and debt paydown) to determine when you have the best IRR.

When to sell vs when to hold as a rental?

When to sell vs when to hold as a rental?

Most Popular Reply

5 Replies