I've spoken to a handful of people so far this year who have been presented with this very predicament... Should they begin (or continue) to rent their property out or sell it?
Many of these individuals would be first-time landlords, holding onto the property due to their low interest rate, in hopes of renting the property out for a profit. Others, are seasoned investors, weighing out whether the ROI for holding is just too thin now after all these years, and would possibly rather cash-out or even find a new property all together as an investment.
For many homeowners in New Jersey, the decision to sell or hold onto a property as a rental can be challenging. While keeping a property as a rental may seem like a solid investment, it’s essential to consider whether the return on investment (ROI) justifies the effort, risk, and ongoing maintenance. If your rental is generating little income—or worse, barely covering expenses—you may want to explore alternatives that can better position you for financial success.
The Reality of Holding a Low-ROI Rental
Managing a rental property isn’t just about collecting rent. Property taxes, insurance, maintenance, repairs, and potential vacancies all eat into your profits. If your rental property is yielding a low return, you may be better off selling and reinvesting in a more profitable asset. Ask yourself:
Is the rental income significantly exceeding expenses, including repairs and sometimes, property management?
Is the property market rents appreciating at a strong rate, or has the market flattened?
Is this rental appreciation keeping up with appreciating cost of repairs, utilies, taxes, etc?
Is the hassle of tenant management worth the return you’re getting?
If the numbers aren’t working in your favor, it may be time to consider selling and reallocating your capital.
Rolling Into a Better Investment Property
If you want to stay in real estate but improve your ROI, selling your current property and using the proceeds to purchase a new one with less maintenance and higher cash flow could be a smart move.
Options to consider:
1031 Exchange: This allows you to sell your property and reinvest in a new one without paying capital gains taxes immediately. You could upgrade to a property with better cash flow, lower upkeep, or in a stronger rental market.
Newer or Multi-Unit Properties: A newer property may have fewer maintenance issues, and multi-unit properties often generate better overall returns.
Short-Term Rentals: If the market allows, moving into the short-term rental space could provide higher profits than long-term tenants.
Selling and Investing for Long-Term Growth
If you’re more interested in passive growth, selling your property and investing the proceeds in the stock market or another long-term investment vehicle could be a better strategy. Over the past 30 years, the stock market has returned an average of about 8-10% annually—a figure that may outperform a struggling rental.
By selling, you could:
Invest in a diversified portfolio of stocks, bonds, and ETFs to build long-term wealth.
Allocate funds toward retirement accounts such as IRAs or 401(k)s, benefiting from tax advantages.
Eliminate the stress of property management while still growing your wealth.
What’s the Best Choice for You?
The best decision depends on your financial goals, risk tolerance, and how hands-on you want to be with your investments. If your rental property is underperforming, exploring alternatives like rolling into a better real estate investment or transitioning to stock market investments could set you up for greater financial success.
If you’re unsure whether to sell or hold, I’d be happy to provide a free analysis of your property’s market value and potential investment strategies. Let’s connect and discuss how to maximize your real estate wealth!
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