How do you know when to sell investment property? Do you check the market trends or follow your instincts? If you don’t know how to go about it, this article is for you.
First, let us explore how investment properties work. An investment property could be any real estate investment property bought to earn a return on investment. The return on investment could be income from rental fees, leases, or property sales at a profit in the future.
If you bought an investment property intending to sell it at a profit, you need to know when to sell it to ensure the best return on investment. So, when is the best time to sell investment property?
When to sell an investment property
Technically, there is no right or wrong timing when it comes to selling an investment property because the market dynamics keep changing. However, you can predict the best time to sell any investment property based on a number of parameters.
The recommended time to sell investment properties is mainly guided by market trends and the expected rate of returns. Therefore, you have to be strategic and able to precisely predict price movements in the real estate market if you want to make a good profit.
There are several indicators that will help you predict the best time to sell your property. These indicators act as the “writing on the wall” or the “signs” that tell you it is the right time to sell your investment property.
Here is a list of the best signs and indicators you should check before selling your investment property.
Signs and indicators you should check when selling an investment property
1. Economic indicators
Economic performance is a good sale indicator for investment property owners. Remember that economic performance determines the employment rates, disposable income levels, and prices of goods. Therefore, if the economy is performing well, your property will likely have a high tenant occupancy ratio.
However, if the economy is performing poorly, unemployment will be high. As a result, some of your tenants will have problems paying rent. Additionally, your property will have a low tenant occupancy ratio because consumers have less disposable income.
Therefore, the best time to sell your investment property is when the economy is performing poorly, and you expect the situation to remain the same for a long time. In so doing, you will eliminate the burden of holding on to the property that does not generate adequate revenue.
2. Financial goals
Serious investors have financial goals they hope to achieve within a specified timeline. You could also have financial goals you hope to achieve with your investment property. Therefore, if you have achieved those goals already, you can dispose of the property.
However, you should not sell your property if you have not achieved your financial goals. Instead, you should wait to achieve the goals before selling your investment property. Therefore, financial goals can be a good indicator of when to sell an investment property.
3. Property-specific indicators
You should sell your investment property only when you know its value is more than the price you bought it. If your property is located in a fast-growing neighborhood, its value could appreciate very fast.
When you buy a property, you expect that its value will appreciate over time. You can know that your property has appreciated in value if the land value in that area has appreciated. Land appreciation will be a good indicator of selling your property.
4. Market conditions
The real estate market is dynamic because it is affected by the direction the nation’s economy is taking. Therefore, you need to analyze the current market conditions and forecast what will likely change in the future.
If the current market conditions are favorable, it would be a sign for you to sell your investment property. Similarly, if you predict that the real estate market will decline in the future, you should also sell your investment property today to avoid incurring losses in the future.
5. Government policies
The government collects capital gains tax when properties are sold. Capital gains tax ranges from 0% to 20% for most properties owned for over one year. However, the tax rate is higher if you sell your property within one year after purchase. Therefore, you should not sell your property within one year of ownership.
The government charges capital gains tax at the rate corresponding to the ordinary income tax brackets when you sell a property within one year of ownership. This means you can end up paying as high as 37% tax rate when you sell the property.
If you want to pay the lowest tax rate when you sell your property, wait for at least one year from the date you purchased the property. If you sell your investment property at that time, you will incur lower tax rates because it will fall under the long-term capital gains tax category.
6. Property performance
Is the property generating reasonable income? Is the maintenance and repair costs too high compared to the income? These are some of the questions you should ask yourself before you sell your investment property.
If the property is not generating reasonable income, it is not financially viable to keep holding on to it. Similarly, the property should be disposed of if the repairs and maintenance costs are too high. Therefore, high repairs and maintenance costs and unreasonable income are good indicators that you should sell the property.
Should I sell my investment if it is a rental property?
Sometimes, it is challenging to sell a rental investment property because there may be problems with the tenants. There are rules and regulations governing landlord-tenant agreements that may hinder you from terminating their tenancy.
Some tenants could be on long-term leases and unwilling to vacate. However, those are issues that can be resolved amicably. For instance, you can arrange to have the tenants retained by the new owner. You could also help the tenants relocate to another property.
In short, tenant issues should not stop you from selling your property. Such issues can be solved if you inform the tenants that you intend to sell your property early. You can also seek legal advice from an experienced advocate before selling leased property to avoid lawsuits from tenants.
The bottom line
There is no absolute perfect time to sell investment property. However, there are powerful indicators and signs that can help you make a good guess of the best time to sell the property. The above indicators will help you determine the best time to sell investment properties and avoid making losses.
The key thing is ensuring that you have at least two indicators that favor your sale decision. In so doing, you will be confident that you are making the correct move by selling your valued investment property.