What to do When a Buyer Wants Your Investment/Rental Property
You’ll want to weigh the pros and cons of selling a home that you view as a long-term rental or investment property. One of the best ways to build long-term wealth while still earning monthly income on an investment is to build a portfolio of rental properties. If that’s the route you have chosen, it can be disruptive to your long-range planning to consider selling a home. You’ll want to build equity in every home, while at the same time maximizing the monthly income. Assuming you have made wise choices, it probably makes a lot of sense to hold onto properties that are still “earning.”
Under certain conditions, however, selling a property might make better financial sense. Whether you plan to sell or not, it is a helpful exercise to evaluate market conditions on a regular basis. The conditions under which it’s advisable to sell vary depending on the local market, the current financing climate, changing neighborhood aspects and the length of time you have actually held title to each property.
If, after analyzing the pros and cons, you decide the time is right, then by all means consider an offer that comes your way. Here are the issues to look at:
No matter how long you hold property, ROI gives an indication of its value. But simply dividing the annual return by the amount of initial investment does not give you the total picture, especially if you have owned the property for a number of years. If, on the other hand, you have bought into a property that returns a good monthly income for little cash down, you might want to hold onto it even with mediocre appreciation, because of the high ROI.
Need for Repairs and/or Improvements
Real estate, rental property in particular, requires ongoing attention and regular maintenance. If your repair costs spiral out of control at any point, it might be time to consider selling. By budgeting for necessary improvements over time — a new roof, updated appliances, replacement carpet or a new driveway, the expenditures won’t be cause for concern. Instead, they fall into the column of operating expense. But factor in ongoing costs of maintenance as you weigh your options to hold or sell. If the buyer is willing to take the home without an inspection, that may change your approach as well.
Changes in the Market or Neighborhood
A number of factors affect a rental property’s desirability, both in positive and negative terms. By keeping a watchful eye on the market and on changing local conditions you should be able to anticipate growth and development trends, and time your buy-sell strategy to your benefit.
Are your rents keeping up with market value? And are your rental properties providing you the income you expect? How would the sale of a rental property affect your monthly income, both immediately and over the long term? How would you plan to rebuild needed income? Answers to these specific questions will help you determine basic directions for your next move.
Investment property should appreciate over time, so you also have to look at the total value of the property. Consult with qualified legal and financial advisers, be aware of the tax ramifications of selling, and have a plan for any expected profit. Whether you reinvest funds in additional rental property or move to other forms of investment depends on your individual goals. But don’t be swayed by an offer that sounds tempting without doing your due diligence and analyzing the pros and cons of each potential decision.
Reinvestment Opportunities and Other Uses for the Money
Chances are you had a plan when you first decided to invest in real estate rental homes. But plans exist to be altered, and should be revised as circumstances change. Whether your initial goals detailed the number of rental properties you wanted to own, the total dollar value of investment property, or a specific income per month, you can always revise your projections based on current conditions. And you should do just that.
As your requirements change, be willing to change your strategies, but always have a strategy in mind.
Dealing with an Unexpected Offer
Occasionally, you might be presented with an offer to buy when you had not considered selling. That can be a nice surprise. If a long-term tenant makes an offer to buy, take the necessary preliminary steps to determine actual property value before you set a price. Then, proceed with caution, especially if the offer requests that you carry the note. Always consider all the variables of any potential deal.
Remember that your rental property is, more than anything else, an investment in your future and your personal business enterprise. Treat it as such.