When should you let an investment property go?

With the property market currently experiencing a downturn after years of robust growth and rising prices, there are likely a few investors out there who are wondering whether it’s time to cut their losses and sell.

When should you let an investment property go?

The answer to this question depends on your circumstances and financial situation. Three indicators tell you whether to sell an investment property: the rental yield is too low, capital growth is slow or non-existent, or there are expensive repairs on the horizon.

Generally, if you feel like selling could give you more money than keeping an asset, it may be worth doing so if possible. If not, then consider waiting until things improve before selling off any investments for them not only to retain value but also to continue growing over time (and increase returns).

#1: The rental yield is too low

If you are considering selling your investment property and have been paying close attention to the rent it generates, there is one important factor that might not be obvious: the rental yield.

The rental yield is the percentage of rental income that covers the mortgage, maintenance and other costs of owning a property. In other words, it’s what you will get paid each month after paying all expenses (mortgage payments + taxes + insurance etc).

The lower your rental yield is compared to others in the area (or market) can mean two things: either you’re getting such low returns from renting out these apartments because no one else wants them anymore, or your tenants aren’t willing to pay enough money for these apartments because they aren’t worth much more than $1,000/month on average.

#2: Capital growth is slow or non-existent

If you’re lucky enough to own an investment property that has started to earn a profit, it can be tempting to hang on to it until your rental income catches up with your mortgage. However, if there are no signs of growth in both rental income and capital growth (the rate at which rents increase), it may be time to sell the property.

Property prices have fallen over the past few years and may take a while for a property to reach its peak value. This means unless there is some kind of shock, such as an unexpected economic recession, you won’t see any further increases in value for many years yet — if ever.

If you plan on staying in this house for decades, like most people do when they buy a property, this could mean big financial losses down the line.

#3: There are expensive repairs on the horizon

If your investment property is old and needs a lot of work, it may be time to sell. If you can’t afford repairs, this may be an indicator that it’s time for you to let go of your investment property and move on with other properties in your portfolio.

Letting go of negative cash flow properties

Immediately cutting losses or letting go of a property that is generating negative cash flow can be tempting. You may have worked hard to make the property attractive, but it’s not generating enough income to cover the mortgage payments and expenses.

You could make some money on your investment with better management or renovation work, but even then, there would still be losses in the short term — and possibly long term.

Letting go of negative cash flow properties isn’t always easy because they often hold sentimental value. If you’re unable to turn around this situation without significant additional effort on your part, selling might be the best option.

Think about what you originally wanted out of your investment and consider your current financial situation before making a decision.

Also think about your original investment goals. Did you intend to use this property as an investment or for holiday accommodation? If so, how many people do you think will visit each year? How long will they stay?

Consider the current market conditions. Do they match up with what was promised when purchasing it (e.g. rents were low but prices went up)? What could happen in future that could affect its value (e.g. a major retail centre opening nearby)?

Conclusion

Before cutting losses, consider some ways you can improve the market value of an investment property via renovations. If the property has become more of a burden and has the potential to affect your portfolio, it’s an indication to let it go.

If it has a positive cash flow despite a downturn in the market, then you should hold on to that property. Let your property do its job of earning some passive income.

It’s important to understand that many factors go into deciding when to sell your investment property, and it ultimately depends on your financial goals.