Should You Sell or Keep Rental Property Upon Purchase?

‘Should I keep my rental property or sell it?’ This is a common question asked by both beginner and experienced real estate investors. Choosing between flipping a rental property or becoming a landlord is not easy. There are many factors you need to consider before making a final decision on your real estate investment strategy.

Keep in mind that this decision about renting out or selling investment property should be made before buying rental property. Knowing this, here is how to decide what to do with a rental property.

How to Determine If I Should Sell or Keep My Rental Property

Sales Price vs Capital Gains

The sales price of a rental property will depend on many factors, including whether it is a buyer’s market or seller’s market in your area. For example, you may have bought an investment property in a buyer’s market. But that may mean that it is not a good time to sell a house in that real estate market. You might even end up experiencing a loss on the sale of rental property if you try to flip it right away.

If you are not happy with the current value of an investment property, renting it out allows you to make some passive income while waiting for the property to appreciate in value. So, if properties in your neighborhood are forecast to experience real estate appreciation, it would be wise to use a buy and hold real estate investment strategy and benefit from capital gains down the line.

Related: When Is the Best Time to Sell a House?

Costs of Renting Out a House

Rental expenses are a very important consideration when deciding whether to sell or keep rental property. Renting out a house comes with holding costs such as:

• Property taxes – You will be required to pay up to 2% of your property’s value every year.
• Landlord insurance – This protects you in case someone is injured on your rental property. It also covers the damage to rental property by tenants.
• HOA fees – You will be required to make these payments if your condo or house belongs to an association.
• Repair and maintenance – Roofs, walls, carpeting, doors, windows, and other parts of your rental house will require regular repair or maintenance.
• Advertising and screening – You might need to run paid ads occasionally in order to attract tenants. Screening of potential tenants could further add to your expenses.
• Property management fees – A professional property manager or property management company will charge you about 10% of your rental income.

Add up all the rental costs to decide whether you should sell or keep rental property. You can usually get rental property expense estimates if you use an online sell or keep rental property calculator.

Related: The 6 Hidden Costs of Owning Rental Property

Rental Profitability

A sell or keep rental property calculator provides real estate investors with the important numbers they need to make a decision. One of the best tools for calculating rental profitability is Mashvisor’s rental property calculator. Because it can tell you how profitable an income property is as a rental property, you can use it as a kind of sell vs rent calculator. Investors use a sell or keep rental property calculator to estimate the expected rental income, expenses, and profit using the following metrics:

• Cash flow – This is simply the difference between the monthly expenses and the monthly rental income of an investment property. A negative cash flow rental property shows that the expenses exceed the profits. Holding onto an investment property in this case would not make sense. However, a positive cash flow rental property should be kept.
• Capitalization rate – This is calculated by dividing the net operating income (NOI) by the rental’s value. For instance, if the NOI of a rental property is $20,000, and its value is $200,000, the cap rate would be 10%. Generally, it is advisable to buy and hold rentals with a cap rate higher than 10%. Anything else should be sold.
• Cash on cash return – The CoC return is the ratio of the net operating income over the total cash investment. The cash on cash return will, therefore, show real estate investors the profits to expect when they pay using a mortgage or in cash. Generally, investment properties with a cash on cash return of 8% or more are considered good for renting out.

Landlord Tenant Laws

Every city and state has its own unique landlord tenant laws. These laws determine how much you can increase rent, when you can enter your rental property, when and how you can evict tenants, and when you must return security deposits. You can find these rules and regulations on your state or municipal website.

Landlord tenant laws can have a major impact on your rental property’s return on investment. While some laws are landlord friendly, others favor tenants. For instance, some states have a rent control law that forbids landlords from raising rents more than 2% per year. This is why it is important to get familiar with the landlord tenant laws in your area before deciding whether making money with rental properties is a viable option.

Related: Landlord Tenant Law: Basics Every Real Estate Investor Should Know

Distance Considerations   

If you live in the same country or city, it would be relatively easy to manage a rental property. However, managing a rental remotely can be very stressful and expensive. Even if you hire a property manager, you will want to travel occasionally to check on your real estate investment. This will mean incurring costs such as plane tickets, accommodation, cab fare, and meals, which will eat into your rental profits. In such a case, house flipping may be the ideal option if you don’t have the budget for long distance real estate investing.

Future Prospects

When deciding whether to sell or keep rental property, take time to think about the future. What do the next twenty, ten or five years look like for your investment property’s location? Are things likely to improve? Are businesses moving into the area? Will the neighborhood decline or increase in value? Though you cannot be totally sure about the future, analyzing current real estate market trends will help you make an informed choice about whether to sell now or hold.

So, Should I Sell My Rental Property or Keep It?

So, should you sell or keep rental property? This is a decision you can make after considering all the options. Re-read the points listed above and do the math using a sell or keep rental property calculator. Make a choice that works best for you and your financial future.

To learn more about how Mashvisor can help you find profitable investment properties, schedule a demo.