Is now the time to get out of the landlord business and sell your rentals? Maybe.
I received a call from a very dear lady recently with that question on her mind. She owned a nice little house and had good tenants. Still, she wondered if it wasn’t time to sell.
The renters were indeed good people. But she was getting market rent and that was just barely enough to cover the mortgage. The house wasn’t appreciating yet it required maintenance and that was the problem.
In her case, the house was worth $190,000 at market prices. She had a mortgage of $170,000 on the place and was looking at spending $20,000 just to keep the place in repair. In other words, the cost of the work that needed to be done ate up all her equity.
When she looked at the numbers this way, it was clear that it was time to sell even though she had renters in the home. She received no real income or appreciation. All she had was a potential problem to deal with.
Is It Time For You To Sell Your Rental?
The case above really illustrates what you should consider in making this decision:
- Is the property appreciating?
- What does it really cost you to own the property? How much are you really earning after all your expenses?
- What is your rate of return?
- What are the alternative investments and how much are they offering?
- How diversified are you?
- How much time is it taking you to manage the real estate?
Let’s go through these questions using a different example. Assume a hypothetical Nancy owns a highly desirable rental property in a fast-growing part of town. Nancy figures it will continue to appreciate at 3% for the next several years.
The property brings in $3200 a month in rent. From that she pays her mortgage, taxes and insurance. The average monthly expense is $2,000 so her net so far is $1,200.
Of course she also has to consider repair and maintenance expenses which aren’t predictable. Nancy went back and reviewed her records over several years. When she did that she realized that on average, she spent about $12,000 a year keeping the place in good order. That works out to an additional $1,000 in monthly expenses. So her net income is really $200 a month.
Assume that Nancy’s equity in this property is $100,000 so her rate of return is made up of the cash flow ($200 a month or $2400 a year) plus appreciation. The cash flow works out to 2.4% on equity. Her appreciation is 3%. But that growth is on the entire property which we’ll assume is worth $200,000. In other words, the property will appreciate about $6, 0000 a year. That $6,000 is money she’ll “earn” on her $100,000 equity so that works out to be about 6% a year.
Now, if we take 6% appreciation benefit plus the 2.4% cash flow, we see that Nancy’s return on investment is about 8.4% on her investment – not bad. Of course, she can’t really spend that appreciation. So if cash flow is what she’s after, selling might make sense after all.
Alternative investments (the stock market) might pay 8.4% or more over the long-run, but those investments have risk too. This isn’t an easy decision. If Nancy has most of her assets in real estate and it’s a pain in the neck for her to manage this property, she might sell and put the equity in the stock market. If on the other hand the property is easy to manage and she already has enough money in the market, she might want to hold on.
Bottom line? Figure out what your real rate of return is on your rentals and consider the alternatives before you decide to sell your rentals. The “pain in the neck” factor is also important but it’s easier to put that in perspective once you run your actual numbers.
Are you selling your rentals now? Why or why not?
Leave a Reply