Ep. 35: How to Know When to Sell Out as a Landlord

Rental properties are long-term investments. So how do landlords know when to throw in the towel and cash out?

Deni and Brian break down several strategies for deciding when to call it quits as a landlord and sell your rental properties.

Video Broadcast Version

Audio Podcast Version

Also available on iTunes, Stitcher, and wherever else you listen 🙂

Resources Mentioned in This Podcast & Video:

Deni Supplee:
Who is that lady? Hi, everyone. Welcome. Sorry. I’m distracted right now because babies do that for me. Welcome to Spark Rental’s Facebook live and podcast and say hi to Millie.
Brian Davis:
Hi everybody. Hi, this is going to be a very informal podcast and Facebook live. Not that they’re normally formal, but this is going to be exceptionally informal. I am just out of quarantine from having COVID. I’m still working home on one last day and smelly in my lap., now we’re keeping this one pretty, friendly, and informal.
Deni Supplee:
Millie might even have some suggestions and you let us know where you’re coming in from ironically talking about how relaxed things are that last week Brian was not on because he was sick, and technology took me away. I froze up in the middle of the whole thing with my mouth open.
Brian Davis:
The freeze-frame is always like the most awkward expression possible.
Deni Supplee:
It is.
Last week we’ll probably do it again at another time, but this week we’re going to go over, and we get this question a lot and a lot of Facebook groups and other social media, which is how do we know when we should sell a property? And Brian is going to take us through that and please know, there’s no exact science. You know, a lot of this is based on circumstances and speculation. With that, Brian, let’s talk about timing the market.
Brian Davis:
Well, right? There’s one thing you need to know about timing in the market and that’s, don’t do it. I mean, it’s that simple, like don’t try to time. The market goes for stocks. It goes too for real estate, goes for bonds. It goes for anything that is sold on market pricing, do not try to time the market. It leads to irrational and emotional investing decisions, which is never how you want to operate as an investor. And look, how markets are unpredictable? Stock markets are unpredictable. You don’t know whether tomorrow’s price is going to be lower or higher than today.
Deni Supplee:
In my area anyway, COVID is, we have a housing shortage. There are not enough homes. And they’re going for crazy ridiculous prices. Who would have thought that during this time?
Brian Davis:
During the beginning of the pandemic, people were worried that housing was going to crash and value, right? I mean, everyone was worried about ramping unemployment rates, and for low, while unemployment was just like skyrocketing every week and it didn’t happen. You know, our prices are up almost 10% year over year, around the country. And in some markets, they’re up like 40%. I mean, you know we did an interactive map on our website a month or so back about the fastest appreciating home market or property markets in the US and they were like between 25 and 40% year over year jumps in home prices.

Deni Supplee:
It’s crazy. It is.

Brian Davis:
The point being, you just don’t know what’s going to happen tomorrow with housing markets or with any market. Don’t try to time the market.
Deni Supplee:
Millie can time the market. She’s very smart.
Brian Davis:
Millie thinks she can do anything, but, economists can’t predict recessions corrections you know, vast unemployment, you know, even they can’t predict that very accurately. And if they can’t do it, you can’t do it. That’s rule number one, don’t try to time the market
Deni Supplee:
There are some other factors in all of this.
Brian Davis:
Well, one factor that’s worth considering is your age and not just your age, but you’re, would we call it retirement horizon, which is the amount of time between now and when you plan to retire because the closer you get to retirement, and once you retire, your risk tolerance gets lower and lower. , you know, that could go either way with your rental properties, right? I mean, depending on your experience as a landlord and your property performance your properties could be extremely low risk, or they could be much higher risk, but what your goal needs to be as you approach retirement is reducing risk. That could mean selling your rental properties and going into bonds, or it could mean moving money from your stock portfolio into rental properties, into paying off your mortgages, right? There is no exact right answer for what you should do other than the correct goal of reducing your risk as you approach retirement.
Brian Davis:
Speaking of which your asset allocation should be changing, right? As part of reducing your risk exposure as you near retirement. You want to think about how would changing, how it’s selling a property, change your asset allocation. If you sold a property, would you get closer or further away from your target asset allocation? And by asset allocation, we simply mean the percentages of your portfolio that are made up of different asset types. Stocks, Real Estate bonds, Crypto, even that nowadays and then within each of those umbrella categories, within stocks, how much of that is in large-cap stocks, US stocks, International stocks, Emerging market stocks, right?
Deni Supplee:
Do you think that overall real estate investors tend to stay in real estate and not diversify as they should?
Brian Davis:
I see that all the time on Bigger Pockets. And over there, people are gone how about real estate investing. Many of them say, why should I bother investing in stocks? You know, when I earn such reliably high returns real estate, and there are a lot of answers to that question, I don’t want to stray too far off-topic here, but one of those reasons is liquidity. You can liquidate stocks instantly. You cannot liquidate real estate instantly. If you need no other reason than that one, that’s simple and he’s but, if you’re thinking of selling a property, you do need to think about how it will impact your asset allocation. And is it going to take you further away from your target asset allocation or closer to it?
Brian Davis:
Keep that in mind, there’s nothing that says you can’t sell one property and buy another, right? You can do something like a 10,31 exchange to move your profits from one property into another. And if you’re new to the idea of 10,31 exchanges, we’ll send you a quick link to where you can learn more about that, but you avoid capital gains taxes on selling that at one property. Now, another factor to consider in this decision is inflation. And whether you’re worried about inflation or not, rentals are a great hedge against inflation because rents rise along with inflation. Not only do they rise along with inflation, but rents are one of the primary drivers of inflation.
Deni Supplee:
And make sure that you are increasing rents because so, often people don’t do that.
Brian Davis:
Every year. Like clockwork, you need to increase your rents, even if it’s just 2%, but you have to, you want to set expectations for your tenants. That rents will go up and you want to keep pace with market rents. But the point here is that if you are worried about inflation, if it’s keeping you up at night, then you may not want to sell your rooms. You may want to keep your money in the rentals because they are a good hedge against inflation. Now you should keep in mind that this is an emotional factor. This is not a mathematical factor, because again, you can’t predict inflation, right? You don’t know when, or if inflation will work. You don’t know how inflation is going, how high it’s going to be, how fast it’s going to go. This is not an exact science of predicting inflation because you can’t predict it. But if you’re worried about inflation, then keep your money in rentals.
Brian Davis:
All right. Here’s another quick and easy one. Is your cash flow positive and growing? If you have negative cash flow property, get rid of it. I mean, it’s that simple. You don’t want to hold something if it loses money every month. It’s a liability, not an asset, don’t keep it. You also want to look at whether your cash flow is growing. Your cash flow may not be very strong right now, but if it’s growing very quickly, then maybe it is worth keeping. But if you have low cash flow and it’s not growing fast, then let it go.
And, if your cash flow is not performing for you the way that you need it to then sell the property. Either put the money in stocks, buy another property, or do a 10,31 exchange. But you want your money to be performing for you. And on that note, you need to look at the opportunity cost of not selling, or leaving your money tied up in rental properties that are not performing.
Deni Supplee:
And what about maybe taking a long-term rental into short-term? I know we just discussed that not long ago with Al and I’m wondering if that’s something that somebody could look into, just to see if they can make a negative cash flow into a positive.

Brian Davis:
Absolutely! You can change the use of your property and potentially earn higher returns that way. Convert it to a vacation rental on Airbnb or a corporate rental. That is one way to change your cash flow. You can also you can raise the rent, right? You can improve your cash flow that way. If your cash flow is not where you want it to be, you can potentially raise it without selling the property. But you do have money tied up in this property, right? That means, there’s an opportunity cost of leaving that money there rather than investing it to a higher-yielding investment. This is when you’re not earning very good cash flow on your rental.
Brian Davis:
Here’s a quick example of that. The average historical return on the S & P 500 is around 10% going back to the twenties. By the way, that includes both growths in prices and dividends. It includes both the ongoing income and the appreciation. If your rental property is not producing 10% in combined yields and income yield and annual appreciation, then maybe it’s not a very good investment. You are good at earning 7% cash on cash return as far as your cash flow, your yield, earning around 3% annual appreciation, then that puts you at around 10% total returns annually for that property, which is fine. It’s great. If you’re earning 3% combined returns every year on that property, you should probably put your money somewhere else because there’s an opportunity cost of leaving.
Brian Davis:
Now, as one final note here taxes are a factor too. Real estate does come with many tax advantages, but that by itself is not a good enough reason to sell or hold onto a property. But depreciation can help you reduce your taxable rental income and help you pay less money in taxes on that income. Real estate comes with all kinds of other tax advantages as well. It’s not just appreciation. But most of those other tax advantages are just the costs. They’re just business operating expenses.
Deni Supplee:
It’s not definitely the reason to hold on or, sell a property.
Brian Davis:
It’s something to keep in mind, but too many real estate investors overstate the value of the tax benefits of real estate. They exist, but they’re not the be-all-end-all. And they certainly shouldn’t be the reason that you hold or sell a property.
Brian Davis:
That’s right. On that note, if you are interested in some further reading or interested in selling a property, we do have a couple of resources here. One is an overview of capital gains taxes for when you sell rental properties and how to avoid them. When you sell properties. Christina Cohen says cute, baby. I appreciate that, Christina.

Deni Supplee:
She’s talking about Millie, not you.
Brian Davis:
The other issue here is if you don’t know your exact cash flow, run the numbers so you know. If you want to see how your property is performing yield wise you know, cash on cash return, run it through our free rental cashflow calculator. We’ll put a link to that in the comments as well.
Deni Supplee:
And it takes like a few minutes.
Brian Davis:
You can do it in seconds. Deni, is there anything else you want to go over before we call this episode complete?

Deni Supplee:
No, I think you covered it pretty well.
Brian Davis:
Remember, this is a quick summary. If you’re thinking about selling a rental property, few things to consider, don’t try to time the market. It never works out the way you want it to. Keep in mind your retirement horizon, because the closer you get to retirement, the lower your risk tolerance, right? Keep in mind how selling a property would affect your asset allocation. If you were to sell the property, would you get further away or closer to your target asset allocation? Are you worried about inflation? Is it keeping you up at night? If so, consider keeping your property because rentals are a good hedge against inflation. Cash flow, is it positive? Is it growing? Do you feel good about it? If not, maybe it’s time to sell the property. And then there’s the opportunity cost of not selling the property. You know, the money you have tied up in that property could be earning you a higher return somewhere else, maybe, or maybe not. Maybe you’re earning a way better return with your rental property than you would in other investments. And then finally the tax implications. There are tax advantages to holding rental properties. And then there are, of course, capital gains taxes due when you go to sell a property. Right? On that note, we’re going to call it an episode and we’ll see you guys next Tuesday at 2:00 PM, Eastern 11:00 AM.
Deni Supplee:
If you have any subjects, you want to be covered, send them our way. We are ready.
Brian Davis:
And as we always say, this is about you guys. It’s not about us. We want to talk about what you would want to hear about. Otherwise. It’s just the two of us sitting up here and talking to each other. All right, guys, have a wonderful week and stay in touch. Let us know what we can do to help.
Deni Supplee:
Bye-Bye

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