When Should You Sell Your Investment Property?

Written by Posted On Thursday, 10 March 2005 16:00

The ultimate purpose of investing in real estate is to make money. I make this statement with no apologies, though it may sound greedy; however, real estate is just like any other investment -- whose primary purpose (at least should be) is to build wealth. Thus -- there should be a time in the future that the investor plans to sell.

With the Prime Directive of "buy low, sell high" laid aside, most investors grapple with when to sell. There are several sell points real estate investors should have in their business plans. Looking to the future, investors may want to sell after having reached one of the following benchmarks: the property has maximized its profit, you've located a better investment opportunity, the tax depreciation limit has been reached, or you've realized your wealth-building goals.

Maximized Profit

In most markets, there's a time when the profit is maximized and your rate of return drops. If an investor fails to monitor the local economy, he may miss the optimum time to sell a house and lose profit. If you've tracked the cost of housing across the country, you'll find that it has rarely dropped from one year to another. However, real estate is sold and held locally, thus the value of real estate may slide up and down more in a local market than when you look at it on a national scale.

I purchased my first investment property as a primary dwelling. Soon after the purchase, it dropped in value over the next several years by nearly 26 percent and lingered there for about six years. It finally recovered and I sold for a very small profit. To add insult to injury, the condos in that area have nearly tripled in value since then and are still growing. Was my selling choice good timing? It depends. Looking at the next benchmark demonstrates how to overcome bad timed choices.

Find Another Great Opportunity

Once I sold the condo, I moved into a property that was worth three times the value as the condo -- and in the same time period, has more than doubled in value. Thus, my equity in the new property is much higher than the equity in the condo today -- fortunately, my timing worked out. If various properties appreciate at the same rate and you have an opportunity to purchase the more expensive house -- your rate of return will be increased by the value of the more expensive home.

Example: A condo at $100,000 appreciates by 15 percent per year for four years, resulting in a gain of $74,900. A single-family dwelling valued at $250,000 with the same appreciation rate, however, ends up with a gain of $187,251. Do I even need to ask which was the better investment?

Maximized Depreciation

Real estate investors are allowed to depreciate their properties for 27.5 years while they have the house as a rental. Depreciation can add losses to your income on paper and thus, reduce your tax burden. Only the improvements (house, sheds, etc.) are depreciable, not the land. The IRS allows depreciation for up to 27.5 years for most investors, according to IRS Publication 946 - How to Depreciate Property . Once you've hit the maximum depreciation, some of your tax benefits disappear and it may be time to find another investment property. When you purchase another property, the 27.5-year timeline begins anew.

Cash Out

Finally -- the ultimate reason for all of this investing, collecting rents, fixing leaky roofs, and broken hot water heaters, is to create wealth. At some point, you're going to want to cash out the house so that you can send your kids to college, buy a retirement home with cash, take that round-the-world cruise, or whatever you want or need, to take care of.

As you approach investing, be sure to begin with the end in mind -- thus understanding when you need, and should sell to maximize profit.

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