Real estate investment isn’t always as simple as it seems. And, if you’ve found yourself with a rental property that’s turning out to be more hassle than it’s worth, it may be time to say goodbye.
On the other hand, markets shift, and some careful management can often turn your investment around. Maybe you should ride out the storm and hope that things will get better.
How do you determine whether to hold on or let go of your investment? Here are several factors to consider before cutting your losses and moving on to the next opportunity.
1. Continual Negative Cash Flow
Remember that property investments are long-term. The only way to build wealth is through holding of assets and accumulation over time. If you choose your rental property wisely in the begging, not only will you see steady positive cash flow, but an increase in cash flow as the property’s value increases. Small fluctuations, negative or positive, shouldn’t be a huge concern if you make it out on top at the end of the year.
Most investors understand dips in cash flow and can withstand a few negative or neutral income months here and there. But it’s a different situation if your rental property is steadily draining you of thousands each month. If your investment continues to lose money for months on end, it may be time to look into letting it go. Hold on too long, and you’ll risk emptying your savings — and missing out on new future investments.
2. Excessive Maintenance
Investment properties take a lot of time, effort and money to maintain. But, sometimes, pouring your precious resources into maintenance problems is just not worth it. Necessary renovations and small fixes are one thing, but cracks in the foundation, serious mold or insect infestation problems are another.
Decide whether to fix it or forget it by comparing the cost of solving these problemswith the loss you would take walking away. What’s the ROI of your hard work? Often, it’s not worth it to invest in a property that constantly needs fixing.
3. You’re a Remote Landlord
The further away you live from your investment property, the harder it is to maintain and manage. So, it’s important to consider how hands-on of an investor you are. Do you engage directly with your tenants? Are you there to fix maintenance requests and oversee day-to-day operations?
Many real estate investors may consider hiring a property management companyto take care of investments. If you’re used to maintaining the property yourself and are considering moving away from it, however, it may make more sense for you to sell your property and invest nearby. This is largely a personal decision that depends on your preference for management.
4. The Cap Rate Changes
Cap rate is your total expenses subtracted from your total income, divided by the current value — or market rental rate. The cap rate should typically remain between five and 10 percent, although investors should consider it among a variety of financial factors.
Several changes can occur during your ownership that can negatively impact cap rate. If property taxes increased, the area rental market decreased or the utilities are adding up to be more costly than planned, your cap rate may have taken a hit. Re-evaluating your cap rate each year will help you determine whether it may be time to sell or auction off your investment property.
When Should You Hold On?
Well, it depends on you. Real estate investment is kind of a gamble, even more so if you don’t know what you’re getting yourself into. There will be rough patches as well as extremely lucrative ones. And you have to constantly evaluate market trends and changes to measure your cost and profit ratios.
If you’re experiencing some negative cash flow but can see the light at the end of the tunnel, don’t give up yet! Remember, property investment is long-term, so you must be patient.
However, if those months of running in the negative turn into a year, it may be time to let go. It may be difficult to admit your investment’s failure or ending, but, once you let go, you can move on to bigger and better opportunities.
Holly Welles is the editor behind The Estate Update, where she shares real estate tips and ideas for home fixes.
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