I was recently chatting with my friend, Shane, who was about to embark on a new chapter in his life. He was in the process of moving across the country to start a new job. But, that meant he needed to decide whether he should sell his investment property or keep it as a hold property. He wanted advice from a seasoned real estate investing professional he could trust. So, he came to me. Upon hearing his dilemma, I suggested we sit down for coffee to sort through his options.
With coffees in hand, we got down to it. In short, I told my friend, “it depends,” and that making good real estate investment decisions sometimes requires some analysis. Let me share some of the factors that I told him to consider.
Considerations When Deciding to Sell or Keep an Investment Property
I like to stick to my predetermined exit strategy, unless, of course, exceptional circumstances arise–like relocating across the country–dictate otherwise. When faced with the decision of whether to sell an investment property or keep it, some of the biggest factors I consider are the local real estate market, the economy, and my own financial standing.
Local real estate trends and statistics vary from region to region—even across neighborhoods—so it’s important to understand what’s going on where your property is located. Pay particular attention to the absorption rate, which is a good indicator of whether you’re in a buyer’s or a seller’s market. A market’s absorption rate tells you how fast homes are selling. For example, if 10 homes sold in December and there are 100 homes for sale by the end of that same month, the absorption rate is 10%.
Number of Homes Sold / Number of Homes for Sale = Absorption Rate
Now, a 10% absorption rate may be good or bad, depending. You’ll want to understand any large fluctuations in the market. If the absorption rate goes down over a period of months, for instance, it means that either houses are selling faster or there are less coming on the market. That suggests you could get a good price when selling. If the absorption rate goes up, however, it’s a buyer’s market.
Favorable conditions for selling will depend, at least in part, on whether an area is experiencing a boost in job growth, or overall low unemployment, which typically makes people feel more confident about spending money—including on a new home. Areas with strong economies tend to attract newcomers to an area as well. This can increase homebuyer competition and, as a result, home sales prices, making it a great time to sell. However, if the local economy is stagnating for any reason, you might want to hang on to your investment property until things turn around.
Regardless of market highs and lows, your most important consideration when deciding whether to hold or sell an investment property will be your own financial standing and goals. For example, if you need to relocate for work, like Shane, and decide to keep your property, you’ll want to hire a property management company because managing an out-of-state rental is just a plain hassle otherwise. This will, of course, increase your holding costs and put a dent in your cap rate. But, having to deal with the year-round responsibilities of being a landlord can be both an emotional and financial drain when dealing with constant repairs, vacancies, or problem tenants—even if you stay local. You’ll also be tying up cash in the property if you keep it, which could be used toward a potentially better investment opportunity. And, you could have a higher debt-to-income ratio as a result of financing the rental property, which might make it more difficult to finance other professional assets or personal responsibilities.
Selling, on the other hand, can provide you with the necessary capital to buy additional investment properties if you’re thinking about taking your part-time career in real estate investing and making it a full-time gig. Of course, the potential profit on the investment property you already own will depend on the equity you have in the property and how it has appreciated over time. That said, assuming your property has been performing well, you will lose a source of passive income when you sell it. You’ll also lose the opportunity to build up additional equity, see future gains in appreciation, and take certain tax deductions on your investment property.
Consider Keeping Your Investing Options Open
Because Shane was relocating across the country, his first instinct was to sell his investment property. But, after we reviewed the local market conditions, he wasn’t so sure. He was in pretty good financial shape, which meant he didn’t have to sell unless he wanted to. But, ultimately, he liked the idea of investing in real estate near his new home.
Shane’s only concern was finding leads on distressed homeowners in an area he wasn’t familiar with. That, I told him, was an easy problem to solve. As an independently owned and operated HomeVestors® franchisee, like me, he would have access to all of the marketing tools and resources he needed to hit the ground running as a real estate investor in a new hometown. HomeVestors®’ nationally-known and trusted “We Buy Ugly Houses®” ad campaign attracts distressed homeowners who need to sell fast. That option really got him thinking. So, he sold his investment property and made a move—to call HomeVestors about opening a part-time franchise.
If you’re considering your real estate investing options, contact HomeVestors to learn about the full-time or part-time franchise opportunities in your area today.
Each franchise office is independently owned and operated.