Real estate offers the rare opportunity to invest in a major asset almost guaranteed to rise in value and buy that investment on credit. However, we find many first-time property investors aren’t sure when they should cash in on their property. No worries! We’re here to answer your questions so you can make an informed decision based on the market, your needs, and your potential earnings.
What are common reasons investors sell their property?
If the real estate market is favourable, and housing prices have risen enough to turn a good profit, investors are more likely to sell. However, there are several other reasons investors might sell their properties, including:
A change of strategy
It’s not uncommon for investors to change their investment strategy. Because real estate is usually a long-term investment, they might need the money to take advantage of a faster profit generator, for example. On the other hand, they might have all their eggs in one basket and decide to sell their major asset and use the profits to diversify their portfolio.
Whether it’s a tax advantage or disadvantage, taxes can definitely sway an investor’s decision to sell. For example, when Toronto introduced the vacant property tax, investors weren’t too keen on the 1% tax levied on the Current Value Assessment (CVA) of vacant homes. A vacant home worth $1 million sitting vacant for more than six months now costs the owner $10,000 a year. There are some exemptions for vacant home taxes including:
- Death of the owner
- Long-term illness
- Transfer of ownership
Also, if the municipality increases property taxes, some investors might want to avoid taking on that extra expense as it gobbles up more of their net operating income.
At the same time, there might be a tax advantage for investors. For example, experiencing a particularly low-income year, investors can reduce the amount of capital gains tax paid by selling their investment property that year.
The end of the mortgage term
If the mortgage term is ending, and renewing the mortgage comes with a hefty interest rate, many investors might choose to sell.
When the rental market isn’t doing so well, investors can’t always demand the level of rent required to cover their costs. Also, good tenants are harder to come by if plenty of rental units are available.
Long-term tenants don’t renew
Some investors have lived with the same tenant since they owned the building. If that tenant leaves, the hassle and risks associated with finding and dealing with a new tenant might be too much of a pain. When profits are looking good, it’s easier to sell.
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- How to Sell My Tenanted Property
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What does “timing the market” mean, and why is it unsafe?
Timing the market is an unsafe strategy for any investment. Because it’s difficult to predict how much the market will fluctuate up or down, timing the market and waiting for prices to hit the ultimate bottom to buy only means you risk paying more. Although the market might slow down, it historically tends to increase.
Housing prices are more likely to adjust during a recession with a drop in houses for sale, balanced by a decrease in buyers—even Steven. So, a better buying strategy is watching the market for flat prices and longer days on the market and selling when prices increase, and inventory is low.
However, the safest strategy is finding a real estate agent who can tell you when the market is primed for making a profit.
What are the most important stats to help determine if it’s time to sell an investment property?
All kinds of stats help tell the story about the real estate market. However, for investment properties, you’re concerned about housing prices AND the rental market in most cases. Here are the most important stats to help determine when it’s time to sell:
Internal Rate of Return (IRR)
IRR estimates the interest earned per dollar for a rental property you own. It considers how much cash flow the property will likely produce each year, allowing you to gauge ROI. Your IRR should be 18% to 20% to make your investment worth holding on to. It’s a complicated formula involving how long you own the property, your cash flow, and the net present value of the property. It’s also part speculation based on semi-fact, but it still gives you a feel for your ROI.
Cash flow tells you how much your rental property is earning each month, based on rent less your expenses. Obviously, negative cash flow is a red flag you should sell, as it’s costing you money instead of making you money. This includes issues such as a vacant rental property, a rotten tenant not paying rent, or the rental market rates not covering your mortgage costs.
Cash on Cash Return
Cash on cash return is how much money you earn from the cash you invested in your property. This is more accurate than IRR because it includes your debt and mortgage based on your net cash flow after debt service, divided by your total cash in. Total cash in, is how much you paid for the property, including your closing costs, minus your mortgage balance. That number is added to capital expenditures if you have any. This number is essential if you plan to invest in renovations to increase your profits via a “flip.”
Operating Expense Ratio (OER)
OER measures your profitability based on your operating expenses, less depreciation, divided by operating income. This number includes depreciation. You want a lower OER as it tells you you’re controlling your expenses compared to the cash earned via rent or appreciation. High OER is bad and is often the result of lower rent and increasing expenses, such as increasing repairs, lost income due to a lack of tenants, higher interest when you renew your mortgage, etc.
Average Days on Market
How long most homes sit on the market tells a story about current buyer sentiment. The higher the average, the less demand there is from buyers, and the less likely they’ll be willing to pay top dollar for your property.
This is an obvious number indicating whether you’ll profit when you sell.
The number of homes on the market tells you how much competition you’ll face if you sell at any given time. When inventory is high, competition is also very high, which means, in most cases, you won’t sell at top dollar.
Sales to New Listings Ratio
The higher the sales-to-listings ratio, the more of a seller’s market it is. When ratios are high, you stand to make more when you sell. A balanced market sits between 40% to 60%, so the closer it is to 60 or the higher it is above 60, the better it is for selling.
Months of Inventory
Combined with average listings, this stat gives you a better idea about the competition. A balanced market should have at least four months of inventory. If you see the months of inventory below four months, inventory is tightening, which could help increase profits.
List to Sell Ratio
The list-to-sell ratio tells you whether homes are selling above, below, or at asking prices. When homes are selling above asking, you’ll likely also get more when you sell. The higher the percentage, the more desperate buyers are, the more likely you’ll see a bidding war, and the more profit you’ll likely earn.
Still have questions? Read these posts next:
- Real Estate Investing and Capital Gains: Everything You Need to Know
- 10 Tips for Finding the Best Toronto Real Estate Team For You
What are the pros and cons of selling now or waiting?
Selling now is not as relevant as how long you’ve owned your investment property. In most cases, properties tend to rise in value each year. So, what you want to ask is not if you should sell now or wait, but more what your profits look like.
A general rule of thumb is to wait at least five years before selling. Why? Because you spend the first few years of your mortgage paying interest and all the fees you forked out when you bought the property. As a result, if you sell before the five-year mark, you stand to lose money unless your property has seen a major increase in price.
You must also consider the closing costs and commissions that eat into profits on top of the previous closing costs and interest. So, the bottom line is that you need to do the math to ensure you’re making a worthwhile profit based on equity, costs, and what you’ll get once your capital gains tax is paid.
That said, there are so many other factors that impact timing, including:
- Interest rates impacting a fixed-rate mortgage
- Speculation housing prices will drop in your area, possibly leading to losses if you wait
- Your current financial situation and reasons you’re considering selling now
- Current market conditions
With so many factors impacting timing, it’s best to discuss selling with a knowledgeable real estate agent who understands all the profit and loss implications of selling or waiting.
What is the best season to sell an investment property?
Most sellers put their homes on the market in the spring or fall when price surges tend to occur. So, while you want to buy an investment property between December and February to find a good deal, you don’t want to sell at this time as your home is more likely to sit on the market longer.
The Bottom Line
It all boils down to your situation. Of course, the best time to sell is when you’re ready, but it pays to discuss your options with an experienced real estate agent first.
If you’re looking for the best Toronto real estate team to guide you on making wise property investment decisions, call The Christine Cowern Team at 416.291.7372 or email us at firstname.lastname@example.org. We’d love to work with you!