Learning When to Let Go of a Rental Property

Posted by Chris Clothier on Fri, Jan 2, 2015

rentalproperty saleWe all have regrets in life. Some of us have real estate investment regrets. If you’re stuck with a rental property that’s weighing you down, you may find yourself wondering if you should just cut your losses and move on. Maybe you want to stick it out and hope for things to get better down the line. There are several options to weigh if you’ve found yourself at a crossroads with a property you own.

At the same time, understanding the big picture is just as important and learning that fluctuations in the way a property performs and the way a property fits into your portfolio are important too.  A down year is not always a reason to let a property go.  It takes careful and thoughtful evaluation before deciding to let got of a long-term investment property.  

Ideally, you’ll be in a situation that will get better. You can buckle down, ride out the tough spot and soon be back to positive cash flows and relatively smooth sailing.  At the same time, maybe there is an issue you can address yourself or with your property management if the property is a passive investment and that issue can help your property perform better.  The answer is not always to sell the property and rarely is that the first answer.  Often, as investors we need to step back and consider our long-term plan.

 

When, on the other hand, should you decide to let a rental property go? Where is the breaking point? While it can greatly depend on how many assets you can put into turning your situation around (and what you can risk losing), there are some situations in which it doesn't make sense to keep moving forward.

When to Cut Real Estate Investment Losses

Deep Negative Cash Flow

Positive cash flow is the most important element to a successful investment. While most investors understand dips and can handle a few months here and there with a little dip into the neutral or negative, it's a different situation if your property is steadily draining you by a thousand dollars every month. If the rental property continues to lose money month after month, look into getting rid of it. It isn’t worth the headache and drain on your resources. You’ll only do more damage to your finances by holding onto a property that offers nothing but a consistent negative cash flow.

Now notice, I said steadily and month after month and I specifically used a high dollar amount of loss.  I have always viewed my long-term portfolio as just that - a long-term investment.  So I choose to measure in terms of yearly returns and not necessarily the monthly fluctuation.  I can have down months, even multiple down months in a row and still earn a positive return for the year.  It may not be my best year, but as long as it is in the positive, I am not going to go off the deep end.  

That is why I emphasize to keep a long-term outlook in mind and remember what the point of long-term investments are...to build wealth through accumulation and holding of assets.  We are letting time do its work with our dollars.  The tenants are providing us with either a retirement of debt or a return on our dollars.  Eventually, we are earning an income based on both and if we have purchased properly, we have an asset that has retained its value at a minimum and gone up in value as a bonus!  Small fluctuations, even negative ones, should not scare us as long as at the end of the year we earned in the positive.

Extreme Property Problems

Sometimes a property simply has too many problems. Necessary renovations and maintenance are one thing, but issues such as serious mold or foundation problems? Do the math on what kind of investment it would take to fix these problems and what financial hit you would take by walking away.  Usually, major problems are addressed in the renovation and are covered by a warranty.  If they continue to be problem after problem after problem and especially if the renovation company will not stand behind their work...then it may be time to rethink the strategy.

If you are considering buying a property that needs a major overhaul, think very carefully before you commit. While these decisions also depend on your personal risk/reward tolerance, it is usually not worth it to invest in a property where you have to perform repair after repair - on vital elements that don't offer any real added value to your property.  Same thing goes with the above paragraph.  If you are dealing with a company like Memphis Invest where major repairs are warrantied and renovations are documented in a scope of work, you are going to be ok.  The issues will be covered and mitigated...if there ever are any.  

When to Hold On

This depends on you. You can look to advice from others all day long (and it is helpful to seek the counsel of others you trust), but the decision to keep or kill an investment property is ultimately in your hands. Do you see evidence that things will turn around soon? Do you wake up every morning dreading dealing with your negative cash flow?

Real estate investment is not always easy. There will be rough patches and dark times.  All investors (that includes us) have had issues with properties and had nights of worry.  It is natural, especially when you invest far from home and with a property management company.  If you have serious concerns, be sure to address them with your property management company.  A quality company will be able to seriously address and alleviate your concerns.

If you can still see the light... don't give up!  Remember, this is investing for the long-term and positive properties, even those that are having a down year, can be great investments.

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Topics: real estate investment, rental property