Many investors ask us this question – when should I sell my rental property and upgrade to a larger building or a property with multiple units? This usually happens when a client inherits a property or there’s a period of appreciation and you have a lot of equity but your cash flow hasn’t changed.
When Should I Sell My Rental Property? Use Equity as a Metric
The metric you want to look for is equity. The more equity you have, the lower your return is going to be. So at some point you will reach that point where your equity is so great and your cash flow is so low, you can roll that equity into a bigger property, additional units, or sell one property and buy three, or sell two properties and buy five. Then you can take the cash you have in equity and buy bigger or additional properties. This improves your cash flow and makes for a better investment.
Increasing Cash Flow
Last year we had a client with roughly half a million dollars in equity, but he was only making about $200 a month in cash flow. Earning $2,400 a year with all that equity isn’t a great return. He was able to sell those properties and buy a bigger building without adding any additional cash. In the end, he went from $200 a month to over $1,000 a month in cash flow. This represents a much better return on that investment.
So that’s the metric to use when you’re deciding when to sell and what to buy. Examine your portfolio and figure out if it’s time to sell and upgrade your properties. Doing this periodically helps investors maximize return on investment.