Don’t Sell Your Rental Property If You Don’t Have To

0
22


If you own a rental property and are thinking of selling, don’t do it unless you absolutely have to. To build great wealth, aim to own your rental property for as long as possible.

As fate would have it, my great tenants of two years and two months gave me their 30-day notice while I was returning from a vacation in Honolulu, Hawaii. Initially, I was dismayed because they always paid on time and took good care of the property. I thought they’d stay until their daughter graduated from high school in five years, but no such luck.

After getting over my disappointment, I got excited because this was my opportunity to sell one of many properties we own in San Francisco. We want to eventually lighten our responsibilities and raise capital to buy a new place in Honolulu in 2030.

Unsure whether to sell or continue renting out the property, I created a race, as I have in the past with other rental properties I considered selling. In one lane, I listed the property for rent and looked for suitable tenants. In another lane, I interviewed real estate agents to potentially list the house. I would ultimately go with whichever option succeeded first.

Why You Shouldn’t Sell Your Rental Property

Here’s what I learned and why I’ve decided to keep renting out my rental property until I absolutely need to sell.

1) Stubbornly high commission rates

I was hopeful real estate agents would lower their commissions after the collusion verdict against the National Association of Realtors. Paying a 5% commission is high in this age of lowered costs due to technology.

Additionally, it’s illogical for the seller to pay the buyer’s agent’s 2.5% commission, given the buyer’s agent should aim to get the best price for their buyer. Instead, the potential buyer should pay the buyer’s agent, and the seller should pay the seller’s agent.

I remember selling a property in 2017, paying a 4.5% commission in total, and wondering why I was paying the buyer’s agent 2.5% to negotiate a $25,000 reduction in price. It made no sense.

Real estate agents insisted that sellers need to pay the buyer’s agent a 2.5% commission to convince their clients to buy. When I questioned whether a buyer’s agent wouldn’t show a property for less than 2%, they indicated it would be harder.

Only one agent was willing to lower their commission to 4.75% because he had represented me as a dual agent previously. It seems there might be a secret pact among agents to maintain the 5% commission rate, ostracizing those who break it.

Despite the judge’s verdict on real estate price fixing, change takes time. Therefore, it’s best to hold onto your rental property until commission rates drop significantly.

2) Selling creates economic waste

The ideal duration to hold a rental property or any risk asset is forever. By holding forever, you avoid commissions, transfer taxes, staging fees, capital gains taxes, and painting and other preparation costs.

Instead, if you need money, consider borrowing against your assets like billionaires do. This method avoids fees and taxes while maximizing returns.

You should only sell your rental property if the economic waste it produces is less than the benefits of selling. Benefits might include more time, less hassle, increased liquidity, peace of mind, reduced stress, and a better investment opportunity.

3) Avoid the ordeal of reinvesting the proceeds

Real estate transactions usually involve larger amounts than average stock or bond sales. Selling a rental property means having a significant amount of capital to reinvest, which can be stressful if you don’t have a specific purchase in mind. You might end up losing money compared to holding the property.

In my post about the difficulty of having too much cash, I highlighted the effort I went through to reinvest $106,000 from a private real estate fund capital distribution. The stock market was at an all-time high, so I invested in various stocks in small amounts to avoid losing too much money in a sudden downturn.

If I sell my rental property, I will face even greater pressure to reinvest a larger amount wisely. The most compelling investments for me are in commercial real estate and private AI companies. With public AI companies and big tech doing well, it seems likely private AI companies will be revalued higher during their next round of fundraising. Therefore, I want to be investing in them now.

But my investment framework limits allocation to 10% per alternative asset class, leaving 80% to figure out. Perhaps 10% will get into the stock market at all-time highs, while 50% will get invested in Treasuries yield 5%. I’m not sure.

By holding onto your rental property, you avoid the stress of reinvesting the proceeds and can focus on cash flow generation, which is often more important than net worth growth. You also aren’t tempted to blow the proceeds and things you don’t need.

4) Hold onto a valuable asset for your children

Whenever I consider selling a rental property, I imagine what my children will think 20 years from now. Inflation makes real estate more valuable over time. By owning rental property long-term, you benefit from appreciating property values and rents.

During your ownership, you can teach your children about finding tenants and managing the property. By the time they are adults, you can hand over the keys for them to manage or rent the property at an affordable price.

Instead of giving money to your children, give them the gift of managing a rental property that requires effort. When there is more effort put in for creating wealth, there is more appreciation for the wealth that is received as a result.

If you don’t want to give your children rental properties to manage and earn from, keep them for yourself to pay for retirement. Today, roughly 50% of my passive investment income comes from rental income.

5) Gives you something meaningful to do in retirement

In retirement, if you’re not careful, you might feel empty due to a lack of purpose. Your kids might be out of the house, and you no longer have your work identity, which is a downside of retiring early.

However, owning a rental property portfolio gives you tasks to do every year. Whether it’s finding new tenants or fixing a broken fence, owning rental property provides a sense of purpose.

Just the other day, I noticed an exterior pipe leading to the sewage was disconnected from the gutter drain and filled with mud. I had a plumber rooter the pipe and install a new one. Although it cost $730, I felt satisfied taking care of it so quickly. The plumber recommended rootering the pipe annually, which I hadn’t done in five years of ownership. The previous owner likely hadn’t done so either.

Don’t underestimate the importance of having something meaningful to do in retirement. Many retirees “tinker around the house” for a reason.

You Could Make More Money Elsewhere If You Sell Your Rental

As you grow wealthier, segment your assets by risk level. Ideally, sell your rental property and reinvest the proceeds into similar assets through a 1031 exchange. If managing tenants is tiresome, consider reinvesting in public REITs or private real estate funds.

Yes, you could sell your rental property and invest in the next big stock, but this changes your net worth risk profile, which could be detrimental if new investments fail.

Holding onto your rental property brings peace with the asset class. You can manage it, let it generate income, and appreciate according to the market. If you want to invest in another asset class, save for it instead.

The more money you have, the more you want your investments in the background so you can enjoy life. Of course, if your rental property is difficult to manage with high turnover and low yields, sell it. I’ve written a post highlighting indicators to consider before selling.

For the most part, I encourage you to hold onto your rental property for as long as possible. Think of it as a war of attrition—if you persist, you’ll likely grow much wealthier as a result.

Reader Questions And Suggestion

Have you ever sold a rental property and regretted it? Why did you sell and what did you do with the proceeds? Do you believe the best time to own a rental property is forever?

To invest in real estate passively without the stress or hassle of dealing with tenants and maintenance issues, check out Fundrise. Managing over $3.3 billion, Fundrise focuses on the Sunbelt region where valuations are lower and yields are higher. As mortgage rates finally decline, the demand for real estate should increase.

Opportunity in commercial real estate as rates decline

As always, past performance is no guarantee of future results. Invest only what you can afford to lose and won’t need. Fundrise is a sponsor of Financial Samurai, and Financial Samurai is an investor in Fundrise.



Source link

LEAVE A REPLY

Please enter your comment!
Please enter your name here