Why would I talk to my investors about knowing when to sell an investment property when I’m in the business of finding great properties to purchase for investment? If you’re like me, you invested in your rental properties with a long-term objective – you intend to never sell, but rather, plan to hold on to your investment property and have the tenants pay off the mortgage and cover the routine expenses.
The ultimate goal is to have your investment property portfolio provide you with a passive income to fund your retirement years and/or supplement other investments. Even though you might buy your investment properties to “hold on to them” and maybe even pass them along as part of your estate, it’s always prudent to have a clear exit strategy and key to that is knowing when to sell.
You never know when life may throw you an unexpected curve ball and you need extra cash. Refinancing your investment property may be an excellent option for you, but these days refinancing isn’t as easy as it used to be and may not be possible depending on your situation. Exploring all options, including potentially selling your investment property is a worthwhile exercise. With this in mind, let’s look at what to consider when determining whether or not selling is the best or wisest option.
As an investor in Canadian residential rental real estate, in general I believe there are three major circumstances when it may be practical to consider selling your investment property:
- Property has reached a maximum value: When a property has reached maximum value, there is little value to be gained by holding onto it for longer. This is a circumstance that is generally considered the optimum time to sell.
- Property is consistently under-performing or not performing: Having cash or equity tied up in an investment that isn’t performing as expected (over a reasonable time period) can prevent you from reaching your financial goals.
- Redeploying your investment dollars due to better opportunity elsewhere: As an investor, it is key to know how each of your properties is performing relative to a) others in your portfolio and b) those in the market place. If another opportunity presents itself with greater investment prospects then it should be considered.
Property has Reached a Maximum Value
How do you know when your property value has been maximized for the present and foreseeable future, and it may be the optimum time to sell?
It is essential to know where the market sits in relation to the real estate cycle and how your investment property could be affected. Is the market at a peak? Is the market starting to correct? If so why? Is the market likely to remain flat, increase or drop? Working closely with an experienced real estate agent who knows that particular market is invaluable. Good agents will provide you with information regarding the current real estate market, such as: current selling prices for similar properties to yours; the number of like properties on the market and their asking prices; how your property stacks up against the competition; what price you should expect; how long you could expect your property to be on the market; and how many days on the market is the average like listing and listings in general. It’s always best to sell into a rising market where you’re more likely to realize your asking price and maybe more, your property should sell promptly, and you’re less likely to have to drop your asking price in order to achieve the sale.
It’s also vital to understand seasonality with respect to the real estate market. Generally, real estate listings are higher and more active in the warmer spring, summer and fall months and slower in the winter. However, “winter” buyers are more often serious buyers rather than “looky-loos”, so it’s not necessarily bad to sell in the winter. Your realtor should be able to provide you with good information with respect to the seasonality of your investment property’s real estate market. If they don’t offer this information to you, ask for it.
However, there are other considerations that have a greater impact than the normal cyclic nature of real estate. It is wise to regularly monitor and be aware of these considerations with respect to your investment property. Especially in smaller communities, things like the loss of a major employer can significantly impact the real estate market for that area – this might be an opportunity if you’re looking to purchase a property, but it can be problematic if you’re looking to sell your investment property.
It’s good to be aware of the amount of available real estate and expected developments within your property’s community. In building booms, the development of properties may result in overbuilding in relation to market absorption and this can impact the price you may expect for your property and can dictate whether it is a good time to put it on the market. Overbuilding can occur in any community, but the impact on the local real estate market may be far more impactful in a smaller town or neighbourhood.
Once again, it’s sensible to be aware of what’s happening in the community in which your investment property is located as a matter of routine and as part of being prepared with an exit strategy (should it be needed).
Property is Consistently Under-Performing or Not Performing
Over time the expectation is to realize a return on your investment property with respect to the equity you gain in the property and the net rental income you generate from it. Not every property performs well over all months of the year and from year to year, so it’s important to pay attention to how your investment is performing – on average, are you realizing enough rental income to cover your expenses. Remember expenses include not only month over month costs such as mortgage payments, strata/condo fees and property management fees, but also the cost of repairs and maintenance, upcoming renovation or remediation projects, etc.
Look beyond the monthly income/expenses at your property’s income and potential and actual equity gain vs. the property costs. If the balance isn’t in your favour or not at the level that you reasonably expect it to be, and this situation isn’t likely to change, then it might be time to consider selling if the market conditions are favourable for selling.
Sometimes there are circumstances beyond your control that can impact your investment property and change a property that performs well to an under-performing property. Being aware of such changes and understanding the reasons behind the change should help you make an effective decision and sell while you can still realize some gain in your property.
For example, an acute problem such as a major and disruptive construction project beside or even near your investment property is a time-limited situation which can or will impact the quality of life for your renters and lower the desirability, but will resolve when the construction is complete.
A more chronic situation, like a decrease in the population of renters in the area of your property due to the loss of a major employer will likely have a more significant and long-lasting impact on the performance of your property. Understanding the difference between these types of situations and whether or not they can be resolved such that the property will perform as you need/or desire is very important.
Once again, being aware on an ongoing basis of what’s going on with your investment property, its local real estate market, and the community in which it is located is crucial to protecting your investment.
Redeploying your Investment Dollars Due to Better Opportunities Elsewhere
Another compelling reason for selling an investment property, and closely related to the two previous reasons, is in order to redeploy your investment dollars. Redeployment is a good option when your property meets the positive conditions outlined above, and you wish to purchase a more lucrative property or one that suits your current situation better.
It’s prudent to be sure that the new opportunity is indeed a better opportunity – that it provides a better return on your investment and that it suits your circumstances. Don’t get caught chasing “greener pastures” and selling and buying just for the sake of doing so. It’s also prudent to be aware of the tax implications of flipping properties vs. owning investment property for the longer-term income and appreciation.
When selling in order to reinvest, there are some considerations in addition to the usual things you look at when deciding to purchase an investment property. Pay attention to the selling costs you’ll incur and how they might impact your return on the investment from the property you’re selling. Common costs beyond realtor and legal fees are those to do with your mortgage and potential peripheral expense. The fees for breaking a mortgage can be substantial, so know what they are and if you can port your existing mortgage over to your new property.
Do some analysis to determine if the overall costs of disposing of one property and acquiring a new one will ultimately provide you a better overall return. If you’re buying a brand-new property in Canada don’t forget the GST! Once again, an experienced real estate agent should be able to give you the information you need to make the best decision for your investment.
If your property has appreciated well, reached a maximum value and the local market is ripe for selling, then there may be less benefit in holding on to the property, i.e. diminishing returns. This is particularly true if your month over month income is small after expenses. If you do have significant equity in the property, you may be able to refinance that property and realize the equity that way. However, if you’re not able to refinance or if the cost of that refinancing is not covered by your rental income from the property, then it may well be wiser to sell and realize the equity in that manner.
Ultimately, what is important is paying attention to your property, its return on investment, being aware of its local real estate market and community, and being clear about your investment goals. Having and maintaining an exit strategy, or investing with the end in mind is always wise. It will stand you in good stead if life changes and you need to sell, and will help you make wise decisions at the right time for the right reasons! Before selling, which can be a last resort, investigate if there are other ways to access the desired cash or improve the situation that has you contemplating selling the property.