In the business of rental properties, there comes a time when every landlord must ask themselves an important question: is it time to sell the property? This can be a difficult decision to make, as there are many factors to consider. At Dwela, we have extensive experience purchasing rental properties and can guide you through the process of determining whether it’s time to sell or not.
How To Determine How Much Income Your Rental Property Generates
As a landlord or property manager, it’s essential to understand how much income your rental property generates each month. This information will help you make informed decisions about when to sell the property. Here are some key calculations to help you determine your rental income:
- Gross rental income: This is the total amount of rent you receive from tenants each month before any expenses are deducted. To calculate your gross rental income, multiply the monthly rent by the number of units in your property. For example, if you have a multi-family home that rents for $1,500 a month, with four units your gross rental income would be ($1,500 x 4) = $6,000
- Vacancy rate: The vacancy rate is the percentage of time your rental property is unoccupied. To calculate the vacancy rate, divide the number of days your property was unoccupied during the year by 365 days. For example, if your property was unoccupied for 30 days, your vacancy rate would be 8.2% (30 / 365 = 0.082).
- Net operating income: This is your gross rental income minus your operating expenses, such as property management fees, maintenance costs, insurance, and property taxes. To calculate your net operating income, subtract your operating expenses from your gross rental income. For example, if your gross rental income is $1,500 and your operating expenses are $600, your net operating income would be $900.
- Capitalization rate: The capitalization rate, also known as the cap rate, is the rate of return on your investment property. To calculate the cap rate, divide your net operating income by the property’s market value. For example, if your net operating income is $900 and the market value of your property is $100,000, your cap rate would be 0.009 (900 / 100,000 = 0.009).
By understanding how much income your rental property generates each month, you can make informed decisions about when to sell the property. A high gross rental income, low vacancy rate, and high net operating income are all indicators of a successful rental property. A high cap rate is also a positive indicator, as it shows a higher return on investment.
3 Reasons to Sell a Rental Property
1. Financial Distress
One of the many reasons landlords may consider selling their rental property is if they can no longer keep up with the mortgage payments or property taxes. Falling behind on these payments can have serious consequences, including the risk of foreclosure. If you find yourself in this situation, it’s important to take action to protect your financial interests.
By selling, you can pay off any outstanding mortgage or tax debts and free yourself from the burden of maintaining the property. This will also allow you to explore other investment opportunities that may be more aligned with your financial goals and capabilities.
Before you put your property on the market, it’s important to understand the current market conditions and how they may impact the sale of your property. It may be helpful to work with a real estate partner like Dwela who can provide valuable insights and guidance throughout the process.
2. Retirement and Downsizing
Retirement and downsizing are two common reasons why landlords may consider selling their rental property. If you’re approaching retirement or are looking to downsize your investment portfolio, selling your rental property may be a smart financial decision.
One of the key benefits of selling your rental property in retirement is that it can provide a source of income to supplement your retirement savings and help you maintain your desired lifestyle. Additionally, downsizing your investment portfolio can reduce your financial responsibilities and provide more flexibility and peace of mind.
It’s also important to consider any tax implications of selling your rental property. For example, if you’ve owned the property for a lengthy period of time, you may face capital gains taxes on the sale. Consulting with a financial advisor or tax professional can help you understand the tax implications and make informed decisions.
3. Moving To a New City or State
Moving to a new city or state can be an exciting opportunity, but it can also present challenges for landlords who own rental properties. If you’re moving to a new location and are considering selling your rental property, there are several factors to consider.
One of the key benefits of selling your rental property when you’re moving is that it can provide you with the financial resources to cover the costs of your move and start fresh in your new location. Letting go of the property before the new move will save you from encountering any potential long-distance management issues. Additionally, selling your rental property free’s you from the responsibilities of being a landlord and allows you to focus on your new home and community.
The Bottom Line
If any of these challenges resonate with you, it might be time to consider selling your rental property. At Dwela, we will buy your home in as-is condition so that you can move on to the next phase of your life stress-free.
If you’re thinking it may be time to let go of your rental property, contact Dwela first to discover its true value.