Just because you intend for an investment to be a good one doesn’t mean it will be. Sometimes, even though a property stays consistently rented and someone else is paying the mortgage, it’s not always an investment worth keeping. Let’s take a look at what makes a good investment in the first place, and when it makes sense to get rid of one.
What is a Good Investment?
Starting a real estate business can be exciting, but it’s important to understand and pay close attention to the factors that make a good investment. It’s not always obvious whether an investment property is a good one or not, so here are a few signs to look for.
1. The rental property has a positive cash flow each month.
The first sign that your investment property is a good one is the fact that it has a positive cash flow each month. To figure this number, add up the expenses for the property – mortgage payment, property taxes, and insurance – then subtract the monthly rental payment you receive. If the number is positive, you have a positive cash flow.
2. The property is in a high-demand location.
People prefer to live in areas where entertainment, transportation, and other amenities are convenient. If your investment property is close to (or within walking distance of) these types of attractions, it will be more desirable to potential tenants. While turnover may be higher in areas like these, there is always a high demand for rental properties and vacancies will be minimal.
3. The property is easy to manage.
A good investment property is one that’s close by and easy to manage. For example, if you own a single-family rental property just 10 miles from your home, you can hire lawn care and maintenance and collect rent online to make managing the property simple. The less you have to do to manage a rental property, the better the investment is.
When You Should Sell an Investment property
While many real estate investors purchase rental properties and hold onto them for years, sometimes there are signs the property isn’t a good fit. Below are three ways to know you should sell your investment property.
1. The rental property has a negative cash flow.
The main reason anyone gets into real estate investing is to make a profit. If your rental property has a consistently negative cash flow, it’s time to sell it, plain and simple. There’s no reason to hold onto something that costs you money each month.
2. You live too far away from your rental property.
The farther away from your rental property you live, the harder it is to manage it. Showing the place is difficult and tending to maintenance requests is even harder if you live too far from your investment property. If managing the property seems like a hassle or it sends you into a panic when tenants make maintenance requests, it’s probably time to sell it.
3. The cap rate is different.
Real estate investors typically figure cap rate when they are considering buying an investment property, but if you’re trying to decide whether to sell yours or not, you can revisit this number. The cap rate (income-expenses/value) should fall somewhere between 5 and 10 percent. Several things happen while owning an investment property that can affect the cap rate such as an increase in property taxes, a decrease in the rental market in the area, higher than expected maintenance costs, and high utility costs. Figure out all your expenses for the year and subtract them from the annual income from the property. Divide that number by the value of the property. If the number is below 5 percent, you might want to think about selling.