If you are like many rental property owners today—especially on the West Coast—some part of you may be asking yourself the same question… is it finally time to sell my property?
To help you answer that question, try using this basic three-part litmus test. If at least two of three categories provide a similar result, you may want to consider selling or exchanging your current rental property.
I. PERSONAL LIFESTYLE
First, on a scale of 1 to 10, rate the personal burden of being a landlord at two points in time: when you bought the property, and today. (A “10” would be easy and wonderful, while a “1” would be difficult and horrible.)
Considerations include maintenance hassles, tenant problems, general stress and demands on your personal time. If your score has declined, this is an indication that your rental property is impacting the quality of your life.
II. LEGAL/REGULATORY IMPACT
Next, on a scale of 1 to 10, rate the legal and regulatory burden of being a landlord at the same two points in time described above. In other words, in your area, have there been substantive changes in eviction rules, screening limitations, security deposits, rent control, premises liability, mold abatement or taxes?
Put another way, has your state/local government recently declared war on landlords? If so, you would not be faulted for seeking a less cumbersome market in which to invest.
III. FINANCIAL PERFORMANCE
Scoring the financial performance of your rental property requires examining two metrics: 1) property value and 2) rent growth. For example, if your property value doubled in the last ten years, but your rents increased by only 25%, then your current yield on equity has declined significantly. A low yield on equity suggests you are no longer being paid adequately for the risk and hassle of owning real estate.
Could you relocate your equity to another market where yields are higher? Perhaps. But you may not want to invest elsewhere if you believe your current rental will enjoy the same appreciation in the next decade as the last. Therefore, you must also consider whether the demographic and economic forces that drove your property value in the past will continue. In some markets, it seems clear that rental owners are facing a potential plateau in values.
Selling or exchanging rental property is no easy decision. Motivations can range from purely emotional to purely financial. If you would like help in analyzing your rental property (beyond this simple test), please visit our website at 1031capitalsolutions.com or give us a call at 1-800-445-5908.
Numerical example is for illustration purposes only. Individual results will vary.