When the market is hot and on the rise, many people think it’s time to sell their rental investment. But there are better options to consider before you go ahead and place it on the market.
Start by reviewing your investment goals. If this property no longer fits into your strategy as a Phoenix real estate investor, it may be time to sell. But, before you put it on the market and pay a sales commission and selling costs, find out if there’s still more money to be made from the property. You can invest in upgrades or refinance the property for better terms. Also, consider a 1031 exchange, where you can sell what you have, and buy a different investment property while deferring the capital gains you’d pay on the asset you sold.
Regardless of where you are on your investment journey and what you’re planning, we’re here to help as your Phoenix property management resource. We can have a conversation about where you are and where you want to go. That may help us frame a good discussion on whether or not it’s the right time to sell your property.
Analyze Your Numbers and Cash Flow
You may be earning more on your rental property than you realize.
The idea of selling right now to make a profit may seem attractive, but take an objective look at your numbers. Compare what you are earning now on your property and what return you would be earning on the new investment you are considering to take its place.
Selling when your return on investment has slipped makes sense, but you may be surprised at the money you’re really making. We like to go over the cash flow with our owners, then look at appreciation on an annual basis and calculate the tax savings that property owners enjoy. Many times, the total return on equity that a rental property provides supersedes other investment strategies. Even better is the fact that your property will continue to provide an increasing cash flow as rent rates increase while debt service stays the same. So do not sell if you do not have a better place for your money.
Numbers talk, so look at the return on all the equity you’re building.
There may come a time when the equity has increased so much in the property that the same return on that increased equity is now much lower on a percentage basis and calls for you to reposition that equity. This means that you have too much money locked in the property because the price increased, and you can find other ways to make that money work better for you.
Selling Without Leaving the Market: A 1031 Exchange is Better
You can sell, you can do a 1031 exchange, or pull out some of the equity through a refinance and use that cash for a down payment on another home. This is an excellent way to keep growing your portfolio.
Another reason to consider selling your property is because its location is no longer working for you. There could be some commercial sprawl in the area, making it difficult to attract and retain long term tenants. Maybe your maintenance costs are outpacing what you’re able to earn.
That doesn’t mean you have to cash out.
Consider a 1031 exchange. With a 1031 exchange, you don’t have to sacrifice the money you’ve earned on your property. It serves a more effective long-term investment strategy than selling.
Here’s an overview of how it works:
- When you sell an income-producing property, you need to pay taxes on the money that you earn from the sale.
- If you buy a new investment property – or several properties – that are similar to the one you’re selling, you can defer the payment of those taxes.
This is especially beneficial to investors who would face a large tax bill by selling a property. Let’s say you bought your rental home 10 years ago for $85,000, and you just sold it for $250,000. That’s a huge profit margin, and the money you earn will be taxed.
With a 1031 exchange, you can get rid of a rental property that’s no longer serving your investment goals, but you’re gaining a property (or properties) that can provide better returns.
Contact us at Service Star Realty if you’re thinking about selling or looking for additional ways to earn more on your Phoenix rental properties.