Buy low, sell high. Quit while you’re ahead. Know when to walk away. Know when to run.
Investments are often made with the expectation that, eventually, you’ll need to sell in order to “cash out.” And, of course, timing is everything.
Because home prices in Waterloo Region have risen so much this year, many investors may be wondering if now is the right time to sell their income properties.
Depending on their situation and their needs, this may make sense. However, cashing out may not be the best and/or most cost-effective short and long-term move.
If this is something you’re considering, here are some basic questions you should ask yourself before pulling the trigger:
Do I need ALL the equity from my home right now?
Paying for your child’s university tuition, buying that Tesla you’ve long coveted, installing an in-ground pool in your backyard: there are so many reasons why you may want or need some cash.
But, do you need to cash in your rental to get the funds you need? Maybe not!
Depending on how long you’ve held your property — especially if longer than five years in Southern Ontario — you’ve likely amassed enough equity where you could either refinance your mortgage or borrow from your home equity line of credit (HELOC) to satisfy your immediate financial needs. With this approach, your tenants continue to cover your costs of borrowing — just as they have this whole time — and you get to keep your investment.
Am I willing to give up future earnings?
Simply put, when you sell, you miss out on future appreciation, equity gained by mortgage paydown, and monthly cash flow: the reasons you invested in the first place.
Sure, there’s no crystal ball and you can’t 100% guarantee your home’s value will skyrocket, but you can evaluate your property’s future profitability based on known indicators such as:
- Location: Is your home located in a growing city to which people are moving?
- Maintenance Costs: Is your property easy to maintain? Or will it require significant updates?
- Cash Flow: Are you making a net profit every month?
Cross-reference your property’s characteristics against the key performance indicators we’ve discussed here. Doing so may entice you to hold for future gains.
Should I consider property management?
Sometimes, the decision to sell isn’t all about money. It may be that you’re tired of being a landlord, dealing with tenants, and handling maintenance. Fair enough.
But, for a relatively low (and tax-deductible) monthly fee, you can get a property management company to handle every aspect of your home’s day-to-day operations, from rent collection to midnight phone calls. It’s an affordable “easy button” that could change your view of income property ownership.
What will I pay in closing costs and taxes?
This, perhaps, should be the first question you ask.
People often accept that they’ll need to pay Realtor fees when selling, but they forget about capital gains.
Depending on the size of your profit, you could be facing a hefty bill at tax time — potentially MORE than the funds you wanted to pull out in the first place!
Here’s a link to calculate your potential tax burden. Of course, speak with your accountant about how your sale would impact your taxes.
Am I forfeiting an opportunity to create generational wealth?
Parents often worry about what they’ll pass down to their children. And, often, we think of “inheritance” in terms of large sums of money.
But what if you could give your children an asset that provides the stability of monthly cash flow AND equity they can use to perhaps reinvest for their children?
Of course, you’ll need to discuss with your accountants and lawyers – but this approach has been used by many to create financial stability for subsequent generations.
For example, here’s an interesting article about two billionaire families, the Rockefellers and the Vanderbilts, and how one family ensured generational wealth through real estate (while the other’s fortune dissipated).
It’s personal to everyone
Again, everyone’s situation is unique and, after careful evaluation, you may legitimately need to sell your income property.
But, with homes becoming more difficult to acquire due to rising prices, we feel it’s important to seek expert advice, explore alternatives, and attempt to balance current needs with future goals prior to selling.
By answering the questions above, you’re taking the first step toward a more confident decision that will set you up for short and long-term success.