Should You Sell Your Rental Property, or Keep Holding On?

What makes a good rental property?

When deciding whether to sell now or wait, it’s important to first understand what qualifies as a “good” rental unit. We asked the experts to identify some of the key characteristics that indicate a high-performing property. If several of these ring true, you might want to hold onto your rental for the time being.

You have positive cash flow.

Brian Davis, a real estate investor and co-founder at SparkRental.com, says good rental properties have positive cash flow after all of the bills are paid. Cash flow is the amount of money that is left over after all of your expenses are covered.

Shea Adair, a real estate investor in Raleigh, North Carolina, says a good rental property can survive on its own without any money from the owner. “That means the rent payments can cover the MITI [mortgage, insurance, taxes, and insurance] and also pay you at least $300 per month of income,” he explains.

Davis says new rental investors often underestimate their expenses. “Landlords incur far more expenses than the average person realizes,” he says. “In particular, rental investors need to accurately average out irregular expenses, like repairs and vacancy rate, and account for them in their monthly cash flow numbers.”

He suggests using a free rental cash flow calculator to run these numbers.

The property is in an up-and-coming neighborhood.

Riley Adams, a licensed CPA in Louisiana who also runs a personal finance website, owns two rental properties in New Orleans. When looking for new investments, he targets properties in areas that might have been a bit neglected and are starting to be developed and improved.

“This allows me to renovate for an immediate improvement in what I can expect to earn in rent compared to what I paid for the property,” he explains. “That way, I can expect rents to increase over time as the area improves and becomes a desirable location to live.”

The rent-to-price ratio is favorable.

For each of his properties, Adams’ goal is to rent it for at least 1% per month of the final price paid.

“For example, if I bought a property for $100,000, I’d want my monthly rent to be at least $1,000,” he says. “From there, because my underlying costs are largely fixed as the rent increases, I have an improvement in my cash flow from the properties.”

You have good tenants.

Good tenants are like gold to a landlord. If tenants have been living in your property for a prolonged period of time, pay their rent by the due date, take good care of the home, and respect your rules and policies, that could help you save on the costs of vacancy and turnover, says Nathan Claire, real estate investor and founder of Buying Jax Homes.

But that doesn’t necessarily mean high tenant turnover is bad. Leonard Ang, CEO at iProperty Management, points out that a sign of a good rental property investment is when things are running smoothly even after numerous tenants have come and gone. “It’s a good sign that even if a tenant moves out, there is always a new one ready to take their place,” he says.

The property has appreciated in value.

A rental property typically starts to appreciate in value after it’s been owned for several years, explains Claire.

“The housing market where your rental property is located may have gone up in value, causing your property to be worth more now than when you first bought it,” he says. “This is a good sign that your rental is located in a favorable area that should continue to appreciate through market cycles.”

You can look at the comps in your area to determine whether your property has appreciated.

It’s not fancy or complex.

Robert Taylor, owner of The Real Estate Solutions Guy in Sacramento, California, has had the best luck with rental properties that are simple and on the smaller side.

“These homes are much easier to keep rented than larger properties,” he says. “Additionally, they will cost less to maintain and will likely need fewer repairs.”

Taylor points out that some investors even prefer one-bedroom, one-bath properties because their primary occupants are older tenants who often remain in the property for the rest of their lives.

Owen Dashner, a real estate investor and partner with Red Ladder Property Solutions, says that three-bedroom, two-bathroom starter homes located within desirable school districts offer the highest ROI in terms of combined cash flow and appreciation.

Signs that it could be time to sell your rental property

Every property owner’s situation is unique, but there are some common scenarios that can signal that it’s time to consider selling a rental home.

The property needs extensive work.

It’s easy to keep rolling with a rental property when everything is stable and the money is flowing in just one direction: toward you. But if the roof is ready to be replaced, the HVAC system is on its last legs, or the flooring is woefully outdated — and if you’re unlikely to see the return on a major investment within a reasonable amount of time — it might be wise to cash out, says Adair.

Your age might also factor into this decision: As Adair explains, if you’re close to retirement, it might not be a smart financial decision to invest another $200,000 into a rental home when the return on investment would take years to materialize.

The neighborhood is starting to deteriorate.

If you’ve noticed that the area surrounding your rental property is starting to go downhill — for instance, if crime is on the rise and the condition of other buildings is beginning to decline, says Dashner — that can cause rents to become lower, which could impact your profitability.

The property is too far away to maintain.

Cheryl Coleman, a top real estate agent in Huntington Beach, California, invests in rental properties herself. She has a rule that she will only own properties that are no more than an hour away, or two hours by plane. Otherwise, she feels they are too far away to check on them herself.

You have non-paying tenants.

Although this may not be a deal-breaker for all owners, some may not want to deal with the headache of addressing non-paying tenants. “Evictions aren’t fun for anyone and can be very stressful, prolonged, and costly,” says Claire. “A landlord may elect to sell the property and have the new buyer deal with getting the tenants out rather than dealing with them him/herself.”

You’re an “accidental landlord.”

If you just happened to stumble into the landlord life, perhaps by an impulse purchase of a single property or via an inheritance, you might realize it’s not something you want to continue as a long-term pursuit.

“Owning and operating rental properties is a business, not a hobby,” says Dashner. “Many ‘accidental landlords’ are just not good at operating a rental property, and the day-to-day property management tasks can be a drain on an owner’s available time and relationships. You should either own none or several; otherwise, it’s probably not worth it.”

The property is losing or gaining value.

Depreciation is another sign that it may be time to explore selling.

“This means that your property has lost value since you bought it, making it not so desirable to keep hanging onto it,” Claire explains.

But on the other hand, if your rental property has significantly increased in value, you may want to cash out to liquidate the equity and use that to make new investments or do a “like-kind” 1031 exchange.

Investor Riley Adams is currently selling one of his rental condos. “This is not based on a desire to get out of the property because of poor economic or real estate market conditions, but rather to take the equity and purchase a home where my wife and I live in California,” he says.

Regulations are getting too tight.

Taylor says that it might make sense to consider selling if the local or state government is becoming too intrusive.

One area where stricter regulations can squeeze out profitability is in short-term rentals, such as vacation homes or Airbnbs. If the area has pending legislation that could cause short-term rentals to be outlawed or heavily taxed, those properties might not be as desirable to own.

Dashner points out that smaller towns in particular can change local legislation almost on a whim.

“I live in a small town close to a larger city, where short-term rentals were recently banned,” Taylor says. “There were only a small handful of them here, but the owners were forced to sell because of the change in policy. Being in a position where you are forced to sell is never a good spot.”

You’ve moved into a new phase of life.

Coleman has seen a lot of clients selling their rental properties as they get older and closer to retirement age, and want to spend more time traveling or being with family. “If you’ve gotten to a point where you need time more than you need money, it may be time to think about selling,” she advises.

Ultimately, every investor and every property is different. The key is to pinpoint your specific goals — both short- and long-term — and then ask yourself if selling the property would help you get closer to those objectives.

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