"Should I sell or hold onto my rental property?"
How to determine whether downsizing is the right move.
Rental properties can be a great investment, and when properly managed, can deliver consistent profits for many years. However, the time comes for some rental property owners to decide whether they have reached the end of the real estate investment life cycle. Many factors come into play, but it mainly has to do with your objectives as the investor, and whether or not the investment was a good one to begin with.
Beginning with the investor, it is important to understand objectives. If you have owned a rental property for many years but are deciding to retire and do not wish to continue having to manage or oversee the management of your property, then the time value of freeing up your schedule becomes a personal matter. Is your free time worth more to you? If so, that would be perfectly understandable. After all, we can always use our time to get money but we can never buy back our time with that money. Maybe time is not so much the concern, but having liquidity to pursue a hobby or dream goal like buying a sailboat in your golden years. Also perfectly understandable, since retirement is a common time for downsizing on investments like rental properties to allow extra cash for such pursuits. If not in retirement, then when, right? Last of all, and this is not the final possibility but another solid one: do you still want to be tied down to the location of your investment property, if that is the case (or maybe you're fortunate enough to have a great local property management company to handle daily affairs with your rentals, and you do not need to live in the same place but you are still tied to the location of the property to a degree). Not feeling like you're stuck can have a tremendous psychological value to it, so even if it is a less tangible benefit to downsizing, it is just as valid. As you can see, the investor mainly needs to consider their time, money for life outside of the investment, and their freedom to do other things and not be tied down to one location, when figuring out whether downsizing is the option to pursue.
The investment itself, the rental property, is the area where you do not want to make such personal and emotional decisions. When dealing with the actual asset you are considering liquidating, it is crucial to look at the numbers. If your current pro forma still shows that your rental property is generating sufficient cash flow to make sense as an investment (meaning the cost of having the property is less than the money the investment is earning after all taxes and expenses are paid for), it makes the investor's objectives even more important to consider. Remember: you are thinking of getting out of a position in which your time and effort are providing a return on your investment, and if you give that up you could have trouble finding a replacement for that income and tax structuring. In other words: if you have a profitable investment but still want to get rid of it, you'd better be sure that your objectives are more important than the argument to hold the investment which is presented by that profitability! Whether the property is not generating a solid return or you value non-financial reasons like some of what we looked at already, then the next thing to consider is what selling the property could cost you. If the investment property is highly-leveraged, then you will need to be able to pay off the debt if selling off the property outright, otherwise you could owe money in selling the property. Then consider the depreciation of the property: has it lost value due to any damages from tenants, or simply functional or other forms of obsolescence? How about the market at the moment? Is the market doing well, or is the property value at or below what was paid for it originally (and regarding debt again, is the property "under water" or owing more on the mortgage than the property's current market value)? If the property is not under water and would maybe even make some profit on the sale because it appreciated in value since you bought it, you must consider the capital gains and income tax ramifications. Taxes are vital to consider in selling any type of investment at the time, because they can be the difference between selling at a sufficient profit level to cover taxes and still walk away with some extra cash, or breaking even because the taxes ate up the profit margin. To ensure that market timing is working toward your benefit and you are selling at the right time, your Premier Midtown Realtor (or your Wagner Property Management consultant) can help you figure out what the current market value of your rental property is, and how much the sale would cost. Sometimes it is better to hold the property and wait to see if the property value climbs (and to that effect, climbs enough to make it worth the associated rising property taxes - can't get away from taxes no matter what!) The summary: look at the numbers to make sure selling is a wise decision, even if it might be what you want to do, regardless of other considerations, because it could cost you dearly to sell at the wrong time.
Do you want to get a little extra cash out of your investment, but don't mind remaining tied to operating the rental property? Consider refinancing instead, because despite the cost to get a new loan and start paying more for a new loan, you could realize some liquidity that way and still keep your investment. Plus there would be no taxes or other selling fees, and if you were able to lock in a decent mortgage rate you might even come out on top with a better mortgage that was for a larger principal amount now, yes, but a cheaper mortgage rate. If you are an investor simply stuck with a rental property that you would like to be free of, whether or not the financial considerations of downsizing made sense, you could also consider transferring the mortgage to another party. This would require that your mortgage had an assumability clause, which means that the mortgage could be assumed (transferred) to another qualified borrower. Assumption comes with it's own risks, like escalation clauses that allow the lender to increase the mortgage interest rate for the new borrower, and most importantly: the former borrower (considered the seller in a loan assumption) remains liable for the loan if the new borrower (considered the buyer) defaults on the loan at any time. This is where a good "subject to" clause can make a world of difference, and your Realtor at Premier Midtown can help with navigating such options. If you as the investor were at the point where you were considering any of these options, it would also be important to know that for a reasonable cost you could set up a living trust and transfer the investment property into the trust. Then designate your trustees who will eventually have stake in the investment property, and could take on some or all of the responsibilities that you were hoping to not have any more - all while keeping the investment property. Let's not forget the option to create a business entity so that you could transfer the property to the S-Corp, LLC, LP, or other entity you founded (according to your taxation and liability preferences) and allow any principals you've designated to help with managing the property (for a percentage, of course). This could be a more costly approach, but your investment would live on under professional oversight - a bit of extra comfort if you'd had the property for a long time and it held sentimental value to know the rental property would continue to operate.
Premier Midtown Realty (or our parent company, Wagner Property Management, Inc.) can help you with these difficult decisions regarding your investment properties, in order to help you reach the right conclusion about what to do and when. Premier Midtown Broker-Owner Ryan Wagner has nearly a decade of experience of effective property management and handling his own portfolio of investment properties in the Sacramento area. Feel free to call us for a quick consultation if you have any questions. Our goal is to advise you toward making the best possible decision within the time frame you have to work with. Whether our suggestion is to downsize it, hold onto it, or pursue other options, we'll give you the straight answers you need.
Premier Midtown Realty: "Your Partners in Midtown Sacramento & Central Valley Real Estate!"
Ryan Wagner, California Real Estate Broker. CA BRE license # 01968073.
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