When it Makes Sense to Hold onto a Property

If you are fortunate enough to own an investment property, never sell it.

End of story.

Next question.

Ok, now that I’ve said that, if you find yourself saying, “But, Erin…” then this newsletter is for you.

There is nothing wrong with asking yourself from time to time, “Should I sell?” (I know I have/do!) This is such an important question, and the fact that you are asking it is a great sign – it means that you are not just chilling on autopilot. You are auditing your portfolio and possessions to be sure your present circumstances and current trajectory align with your goals. (Yay, you!)

It may not be simple to make the right call and I can’t tell anyone what is best for their situation. But I can give you some points of discussion and some food for thought to shed some light on whether you should hold or fold.

How is the Property Performing Financially?

• What is the current/projected cash flow?

• Is your property netting a decent amount in real estate market that is stagnant?

There is no use selling if the market value is “meh” and you’re profiting. If you’re barely (or not even) net positive and the resale value is good, it may be time to move on. Unfortunately, it’s not always an either/or situation here: profits and market value are correlated. Real estate values and the cost of rent often rise and fall together.

• How much does it cost to maintain the property? 

• Are you paying a property manager?

• Do you cover yard maintenance and or trash service?

• How are your property taxes these days?

The cost of services and labor is always going up and it is wise to crunch the numbers regularly to be sure those costs are keeping up with rents. Whether you own your property outright or you are making payments to a lender, the cost to maintain a property may become prohibitive. And if you have any big-ticket repairs or matters of upkeep in the next few years, now might be an opportune time to step away…especially if you haven’t been saving for those repairs.

I think it is also important to evaluate how much time your property costs. Your time is a limited resource. If you have good margins, but are very “hands-on” with property management and you want your time for something different, there is no shame in selling. That said, if you enjoy the time you spend on your property—power to you! We should all be so lucky as to spend our time in a way that we enjoy. Bottom line? If it’s negligible time/money on your part to maintain your property, set it and forget it. 

Tax Considerations

If your property has increased in value over time (or even if it has not — hello, excise tax), you’re going to pay taxes when you sell. Your tax burden depends on a lot of variables. Meet with your trusted tax professional to discuss capital gains and what a sale in a particular timeframe would mean for your tax liabilities. Planning ahead can help you time a sale for optimal tax savings, reduce the amount of taxes you pay (through a 1031 exchange), or can at least help you avoid any unpleasant tax surprises in the future.

Opportunity Cost

• Would the capital you have invested be better spent elsewhere?

• What about the amount of time you spend tending to the property – could it be better spent as well? 

If you own a single family home as an investment, maybe it’s time to reinvest in a multifamily. If you own a piece of property, but want to enjoy investing in a low/no maintenance ETF that is making the same (or better!) gains as the real estate market, perhaps your money really would be better invested elsewhere. I am not suggesting you run out and start a restaurant or invest in your crazy cousin’s biomedical start-up, but there are an infinite number of investment opportunities out there. Don’t keep your money tied up in a rental because you are nervous to make a move; keep it tied up because you have considered the alternatives and it’s still your best bet.

Market Conditions

• What is the property’s market value compared to the purchase price?

In a strong selling market, you might be able to capture a decent amount of appreciation before shelling out too much over time for maintenance and upkeep. In a lukewarm to chilly selling market, you might as well hang on to a property that is producing a steady income in a location where long-term prospects are solid.

Personal Preferences

• Is your proximity to retiring changing your priorities or your risk tolerance? 

• Have your income needs changed?

• Are you just kind of tired maintain a the property or paying someone else, too? (Because that matters, too.)

  
  

I am not a financial advisor, but I know that the volatility of my investments need to match my reliance on that capital. The closer I get to retirement age, the less willing am to stomach big swings in value in the name of a windfall, and the more I crave slow and steady growth.

If you recently made a change to your career — let’s say you were an employee with benefits and now you’re an independent contractor, your investment property may be a good way to secure your retirement when you no longer have an employer looking out for your golden years.

No matter how you do it, maintaining a property can range from occasionally demanding to full time job. You may be able to invest elsewhere where your money can grow, but less maintenance is required. 

Decisions are the Worst

At the end of the day, this is how I decide:

I think back to when I purchased the property. What would I have hoped the value of that property would someday reach?

Is the property worth that or more now?

What is my sentiment about the property – am I just kind of “over it?”

Is my property currently occupied by a tenant? (It’s easier to prep and market a property that is not occupied.)

The beauty of this scenario is that there is no wrong answer: there are simply decisions and consequences. And the very fact that you are asking denotes a certain amount of privilege – you are not being forced to sell, you have the luxury of entertaining the notion of selling. You can sell, or you can do nothing and you win either way.