During the last twenty years of teaching investors about the benefits of investing in real estate it still amazes me how often Im asked when is the best time to sell rental property? My answer is simple..It depends. What does it depends on, you ask? It depends on the reason the investor bought the rental in the first place. Here are my thoughts about when you should sell. If your goal of buying rental property were to provide you with income, I would tell you that you should NEVER SELL. Why would you ever sell an asset that somebody else is paying for (your renters) and when it becomes paid will provide an income for the rest of your life. Well, here are the reasons that most people would sell. Reason number 1: They are old and sick and tired of the hassles of dealing with the tenants and the toilets. All they want is a nice income so they can do the things they want. If thats what they want, they dont need to sell. You see, once the property is paid for, they should have enough income from the property to hire someone or a management company to deal with the tenants and the toilets. Now they can sit home and just collect the checks. The other way you can approach the problem of dealing with tenants is to be smart about it and set up a system when you buy the property so that the management becomes an automatic process that anyone can do. To do this you need to have stepby-step policies and procedures for all aspects of managing rental property. All you have to do is to take the time up front to think about all aspects of management and lay out the steps that need to be done. Once you done this, you could hire personal assistant for a few dollars an hour to follow the steps you have laid out. If you dont want to do this work, there is a great system that is set up to make property management automatic and that anyone can do. Its called The Complete Property Management System and Manual and you can get it at Landlord-Tools.com. The cost of the complete system is less than $400.00 and all the steps, policies, procedures and forms are included in the system. Reason number 2: The second reason that people want to sell is to get the money to buy something else (car, boat, house, another rental, etc.). Again, if thats what you want, I still dont see any reason to sell. Why? Because if you have enough equity in the property, you could borrow against the equity to buy the things you want. One of the things that I like to do is set up an equity line of credit with a bank on properties that no longer have loans and mortgages on them. Most lenders will set up an equity line of credit to loan 60-70% of the value of the property. You dont have to pay any interest on the credit line unless you decide to borrow the money and you can borrow at anytime by simply writing a check against your credit line. The best thing about this is that whenever I need large amounts of money, I write a check. I never worry about how am I going to pay the loan back because the rent that I receive from the property will be used to pay back the loan. What if you goal of selling is to buy another (perhaps larger) rental property? Dont sell. Borrow against your current properties. Besides, think about this, the most expensive part about real estate is buying (because of the time your spend and the financing costs) and selling (because of the commissions, closing costs and taxes you must pay). You would be better off using your properties that you already have to buy more properties. There is, of course, an exception to the idea of never selling. If you think the property will have little or no value in the future or its in an area where you no longer want to own, go ahead and sell. Also, if you goal was to create cash by buying it and doing a quick sell to make a profit, thats OK too, however keep in mind, in this case you really not building any assets to provide you with lifetime income. Copyright 2006 David Schneider |
