Never Sell Your Rental Property

Well, maybe not never sell your rental property, but hardly ever sell your rental property.

So much work goes into buying rental property, that I would strongly encourage you to really consider another alternative to selling your rental property provided they meet the following minimum criteria.

First, does it have positive cash flow?

Now, my definition of positive cash flow may be slightly different than your definition, so I want to be clear here.

Positive cash flow, as defined by me, is what you get when you take your gross rent that you are supposed to collect each month, then subtract out 5 to 10% (depending on your current market) for vacancies. This is your net rent.

Then, from your net rent you subtract out property management fees, an estimated monthly budget for maintenance requests, any utilities that you are responsible for, your monthly property and other taxes, your monthly insurance and any other fees like an HOA, lawn care or snow removal.

What remains is your Net Operating Income.

If your mortgage payment (principal and interest) is less than or equal to your Net Operating Income, I consider that to be a break-even or positive cash flow property.

So, if the property has positive cash flow AND the market outlook is acceptable, then I would suggest never selling the property.

But wait! What if I need money? I would suggest that you look just about everywhere else before you look at liquidating your real estate.

The fees for selling real estate are very high. It is not unusual to spend 10% of the value of the house in fees, concessions, fix up, real estate commissions and so on when selling a property.

That’s usually much higher than the fees you’d pay borrowing the money from somewhere else, plus you’d lose the rental property asset.

By selling, you no longer get all the benefits of owning that rental property like income from the rent and increases to rent over time.

You also miss out on the tax benefits of depreciation from the house when you sell it.

And if you still have a mortgage on the property, then each month you are paying down that mortgage with the tenant’s rent payment and building up more equity.

Usually the biggest benefit of all is appreciation. House prices tend to go up in value over time. With a $200,000 property appreciating at 5% per year, you’d be losing out on at least $10,000 per year in appreciation by selling.

The last thing to consider is the time it took you to find the property, fix up the property and get a good tenant in the property. If you keep the property then you are leveraging that time. If you sell it, you need to start over and find a new property.

So, if you can avoid it, I suggest not selling your rental property.

Until my next post,

James

P.S. Download over 100 real estate courses plus much, much more with our Real Estate Investor Bronze Membership.

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