Is it time to sell your income property? It’s a tough question to answer. Unfortunately, I don’t have an easy answer for you but I hope to provide some fresh perspective that may help.
The question of when to sell is one property owners wrestle with all the time. There is so much to consider: Is now the best price? Will you do better if you wait? How do you replace the rental income? Etc.
Not surprisingly, when I’m faced with a difficult decision, I always look to see if math can help.
I have a good friend who has been a rental property owner for several years. His plan was to buy some properties, rent to good tenants, allow the proceeds to pay down the mortgage, and eventually sell or enjoy the monthly income.
Real estate prices have increased significantly over the past several months so I asked him whether he was going to sell or continue to wait.
His answer was immediate – “No, I’m going to keep collecting the rent”. He answered so quickly, he seemed to surprise himself and upon reflection asked, “Why should I sell”?
I said I have no idea. I don’t know whether prices will continue to rise or if this is near a peak. He didn’t either and I don’t believe anyone else knows for sure either. So we tried to look at it another way…
I asked if he had any idea the current value of his property and the profit if he and his partner were to sell in the current market. The answer was $250,000. I asked how much he was receiving in rent. The answer was $750/month.
We tried to put some perspective around selling vs. collecting the rent so we did a little more math and in 2 minutes determined that, assuming the property was rented 100% of the time, and there were no property maintenance expenses, new roof, furnace, etc… it would take a little over 27 years for the rent to equal the amount he could get for selling now. That added a little perspective.
We did the math on the golf course so we simplified a little and didn’t consider tax consequences or inflation, but Rental income is 100% taxable while the $250,000 of profit would have been 50% tax-free as a capital gain. Over the 27 years, inflation would reduce how much he can buy with his $750 so that comes out better for selling now as well.
Assuming my friend chose to sell, he would get a lump sum but would give up the monthly rental income and future growth of value in the property. He would also give up the responsibility of being a landlord and risk of dealing with difficult tenants, property maintenance, or vacancy.
How does he replace the rental income? A $250,000 investment portfolio would need to earn a return of 3.6% to replace the $750 monthly rental income. A 4% return would actually increase the monthly income to $1,000.
Beyond the math, there are other things to consider as well. You may enjoy the work that goes into it maintaining the property. It gives you something to do and helps you stay busy. While an investment portfolio can replace the income and growth of a rental property, it is pretty much hands-off. It doesn’t give the owner something to do on a daily basis.
Ultimately, the decision to sell a rental property is complex. Hopefully, you find the math helpful so you can decide with confidence!