With today’s record high real estate prices coupled with low interest rates for buyers, a lot of clients are asking whether this is the right time to sell rental property. Investors are reviewing their real estate holdings with a view to decreasing their exposure or locking in the profits to date.
While no one can predict the future for real estate prices, there are two basic questions when evaluating whether to accept an offer on a property. First, how much cash will be left after the sale and second, if the funds are invested how much of a return on investment is required to replace the rental income.
There are three main components in determining the cash available from a sale – expenses, debt and taxes.
Expenses – Legal, accounting, broker’s fees and any repairs required to sell along with closing adjustments (tenant deposits, tax adjustments, etc.).
Debt – Repayment of mortgages, overdraft and any lines of credit.
Taxes – Capital gains on the sale plus recapture of any capital cost allowance (depreciation) claimed.
Once the after tax cash is determined then the average net rental cash flow from the last few years is compared to the total to determine what rate of return is necessary to break even.
When the offer is first received, it can look attractive to receive such a high price however often when the analysis is complete the required rate of return is much higher than expected.
While there are many other considerations to a potential sale, particularly the fact that owning real estate can be an involved process that requires time and knowledge, a full analysis is often useful from the start in determining a minimum price that can work.
