I often hear people talk about the day they’ll sell their rental property.

That’s a big assumption. There’s no law that says you must sell a rental property someday. You can hold onto rental property throughout your retirement years if it’s bringing positive cash flow.

But there are legitimate reasons to sell a rental property. So how do you determine the reasons and timing?

You want to cash in

Guessing the market is one strategy—buy low, sell high. This is a favorite strategy of house flippers who traditionally sell after holding the house a year or less. House flippers are typically not buying property to use as rental property. That’s usually Plan B if the house won’t sell. But some flippers have a five-year plan, where they hold a property for five years or so, making improvements gradually while collecting rent. Then when the house is sufficiently upgraded and if prices have risen in the area, they sell.

The property isn’t performing well

The best way to determine whether your rental property is doing well is by cash flow. Are you making or losing money each month? Determine this by taking your rental income and subtracting all your expenses associated with the property, including a mortgage payment. If you’re losing money, you might want to sell.

But first consider whether you can tweak the numbers so that you will have a positive cash flow. Do an analysis of what similar rental properties charge for rent in your area. You can save yourself some research time by getting a Rent Estimate report in Cozy. If you find you can get more for your rental than what you’re currently charging, consider raising the rent as soon as you can and keep the property.

For a more in-depth look at number crunching, check out this blog post. (I’ve interviewed this author many times, and he knows his stuff.)

You’re not cut out for the job/you’re just over it

Some people like the idea of renting property, but they let their emotions get in the way. They may become friends with their tenants, for example. If that happens, they don’t make the best business decisions. They may let tenants make late rent payments, for example, or they may waive their right to make periodic inspections because they feel awkward doing so. Landlords like this, may find—as what happened to me with my first rental—that their tenants have become way behind on rent and have damaged the place beyond repair. If that happens, it could be time to sell—either that or hire a property manager.

Related: The temptation of being friends with your tenants

You’re moving

If you manage your own rental properties, it’s easier to do so when you live nearby so that you can pop over when it’s time to inspect and maintain the property or to make or arrange repairs. If you want or need to move, you can keep your rental property and manage it from afar. You’ll probably need to hire a property manager, though. Another option would be to sell, especially if you’re moving to a favorable spot for rental property investment. You can buy another property in the new location.

Related: Should I invest in local or long-distance rental properties?

You want to trade it for something else

The rental property you own might be due for some major repairs, such as a new roof or HVAC system. You might want to sell rather than shell out a lot of money to replace big-ticket items. Or you might have bought an inexpensive property, but now you want to buy a nicer property and collect higher rents. If you decide to trade up, consider doing a 1031 exchange to postpone paying tax on any income gain your receive through the sale.

Related: The complete guide to 1031 exchanges

It’s time based on your plan

You might have bought rental property knowing that an event would trigger its sale. This could be sending a child to college, buying your dream home, or getting ready to retire. A death in the family or a job layoff are other reasons you might want to sell your rental property. But don’t make rush decisions. You might wish to meet with a financial advisor during emotional times in your life. It might make more sense, for example, to hold the property if it’s a good income stream for you.

The bottom line

If you decide it’s time to sell a rental property, you can feel better about your decision if you have a solid reason. Note that you can sell your rental property at any time, even with tenants in it. Just make sure you are doing so correctly.

Related: Tenant’s rights when selling an occupied rental property

Recently, I went down a residential mortgage rabbit hole.

I’ve been considering buying a vacation rental. With dreams of beachfront cottages and wooded cabins, I went online to research financing options. There were so many. True to myself, I obsessively researched it until the idea of a vacation rental gave me chills.

The amount of money we would have needed for a loan was too low for a traditional mortgage. I wasn’t aware that mortgages had minimums. I also wasn’t aware of the myriad of other stipulations with investment mortgages.

Securing financing for an investment property is more difficult than for your primary home. You need to prove that you can not only afford your mortgage but, if the property isn’t rented, you can afford the second mortgage as well. In addition, the down payment needs to be higher than with your home at a minimum of 20%. No small feat.

Here are the seven mortgage options for investment properties.

7 investment property mortgage options

1. Hard money loans

Hard money loans can be approved quickly and without too many hoops to jump, but they come at a risk. They are funded by investors who provide the loan based on the property and collateral. Hard money lenders generally lend with collateral to back up the landlord’s ability to pay. The loans are short-term (less than five years) and have high interest rates.

Pros: These loans can be funded quickly with fewer requirements than traditional loans. They are used mostly for fix-and-flip investors who will have the property for less than a year, sell it, and pay it off.

Cons: Hard money loans are expensive with high interest rates and origination fees. If your flip doesn’t work out as planned, a hard money loan could get very expensive and you risk losing your collateral.

Related: Top 10 reasons real estate investors use hard money loans

2. Conventional loans

Conventional loans are slightly less risky than other options; however, you need to be financially secure to be approved for an investment property. Loan requirements are more strict than with a primary home, and more money is needed up-front.

Pros: A conventional loan will have a better interest rate than a hard money loan. You can have a 30-year loan, so if you plan on keeping the property as a long-term rental, you have time to pay it off. Last, it’s backed by a bank, making the loan more secure.

Cons: The loan requirements are difficult to meet. Mortgage insurance is not available for second homes or investment properties, so a minimum of 20% needs to be put down on the property. In addition, if you need rental income to meet the debt-to-income ratio, you will have needed two years or more of property management experience (with a Freddie Mac backed loan). Last, the interest rate is higher on a second home.

Related: Pros and cons of making extra payments on your mortgage

3. HELOC

A HELOC—home equity line of credit—is when an investor takes equity out of their primary residence as a line of credit to purchase another property. You can use this line of credit for five to 10 years, depending on your lender, and you have 10 to 20 years to pay it off.

Pros: Using a HELOC loan for buying an investment property has a quick approval process, and you have a long period to pay it back.

Cons: The issue with HELOCs is that you are taking equity from your primary residence to buy an investment, and that is always a risk. The interest rate can vary, just like with a credit card, so payments will not be the same every year. If you are a Dave Ramsey fan, you know that he would say using a HELOC to buy an investment property is “dumb.” If you do not pay close attention to your finances, using a HELOC can be risky and your debt can get out of control.

Related:  6 ways to buy your first investment property for $1,000 or less

4. FHA loan

Many first time homebuyers know FHA loans well. They are federally backed loans that require only a 3.5% interest rate and a less restrictive approval process. For example, you can use a gift as a down payment. However, they come with extra stipulations, such as not using the home as a rental property.  So, why is it on this list?

Pros: FHA loans have low-interest rates, have extra funding available for renovations, and are less restrictive on the down payment.

Cons: You need to occupy the residence. That’s a big con. An FHA loan cannot be used for an investment property. However, it can be used for multi-unit properties. You can use an FHA loan to finance a three-flat, live in one unit, and rent the other two. That’s exactly how I financed my investment property.

5. VA loan

Veteran loans started in 1944 with the G.I. Bill of Rights. A VA loan is a home loan with no down payment. VA loans are available to vets whose service met a certain requirement. Like, FHA loans, VA loans cannot directly be used for investment properties, but there is a way around that.

Pros: VA loans can be used on properties with up to four units. If you want to use a VA loan to finance a rental property, you must occupy one of the units. The benefits of VA loans are no down payment, no PMI, eased debt-to-income requirements, and they are flexible.

Cons: There is a VA funding fee that is used to continue funding the VA loan program. You cannot buy a rental property that you do not occupy. It is difficult to qualify.

6. Cash-out refinance

A cash-out refinance is when you leverage the equity of a property you already own to purchase another. Let’s say your primary residence has $100,000 of equity in it. As long as you leave 20% equity in the property, you can refinance and take the cash out to invest in another property.

Pros: If your property has the equity, it is a quick process to get approved. You pay the interest rate of your primary residence, avoiding the high interest that comes with an investment property.

Cons: You start your mortgage over again. You might end up with a higher interest rate on your primary home than before. Without enough cash in your reserves, you might not be able to qualify for a refinance.

7. Seller financing

Seller financing, also known as private money mortgage, is financing supplied by the seller of the property. The financing can be for the down payment, whole mortgage, or both. Seller financing is popular among property investors and can benefit both the buyer and seller. Sellers can finance in two ways.

1) The buyer signs a contract to pay off the loan over a certain period of time, and the seller provides a deed of trust that lets them foreclose on the buyer if the buyer fails to pay, but also gives the buyer the right to sell. 2) The second option is a land contract where the seller keeps the deed until the loan is paid off. This option is less popular than the first because the buyer does not have the right to sell or refinance until the loan is paid off.

Pros: The approval process is fast. The closing fees are low. Down payment is flexible. The seller has pros as well. A motivated seller can finance the sale of their property. They have fewer tax implications. The promissory note can be sold to another investor if they need cash. The property can be sold “as-is” easier.

Cons: The seller needs to have the mortgage free and clear for a seller financing option to work. The interest rate is usually higher than with a standard loan. The seller needs to be willing to take the risk of holding a loan. Not all sellers will want to be responsible for financing.

Related: How to do a seller-financing deal

Conclusion

There are many ways to finance an investment property, but they each option has its quirks. When making an investment, look at all your options for financing. Making the wrong decision can cause you to go broke, but making the right decision can make you rich.

After my trip down the rabbit hole, I have an idea of which route is best for me. What’s right for your investment strategy?

The lure of a good deal can make some pounce before they think, and foreclosures are no exception.

Let’s say you’re scanning the internet for some hiking boots. As you know, your search history follows you, and a pair of hiking boots pop up in an ad for 50% lower than others. You pounce. You get them in the mail, and they look like a floppy, sad version of what you actually wanted.

That’s what acting too fast on a foreclosure is like. You see a good deal, buy, and find that it wasn’t worth the money.

Related: Save 40%-70% on your next rental property with a pre-foreclosure

Four considerations when buying a foreclosure

Before you buy a foreclosed home as your next rental property investment, consider these four things.

1. Can you view before you buy?

When you find a good deal, it might be tempting to buy sight unseen because of the fear of missing out (FOMO) nagging at your brain. Don’t let FOMO win. Always make time to see your potential investment before you buy, even if you need to travel to see it. No one wants a surprise money pit.

By seeing the property ahead of time, look for the following:

• The neighborhood. This can tell you what kind of tenants you will likely have.
• The house. This gives you an idea of what work needs to be done.
• Area rents. You’ll need to know what rent you are likely to get to determine whether the deal will be worth doing.

2.  How long was it empty?

When homes are unused for a long time, the decay gets worse, not better.

Rodents and bugs infest the house. Plumbing dries up from being unused. Bigger problems could have happened and never noticed like a roof leak, plumbing burst, mold, or vandalism/theft.

If you are purchasing a foreclosure that had been abandoned for some time, it’s even more important to get a thorough inspection before buying. You always want to get an inspection, but when it has been empty for a long period of time, ensure that the inspection dives deep.

Related: Risks of leaving a property vacant

3. Should you find skilled labor before you buy?

With nearly all foreclosures, there will be repairs that need to be completed. You should have a team of tradespeople in place before you buy, and have them review the property with you.

By having trusted tradespeople lined up, you have a better idea of what you are getting into or on whether to pass on the property. Ask them to go to the inspection, and then begin pricing repairs before you purchase. Ask their opinion on whether this is a good investment. A reliable team can help you budget properly, quickly repair the property, and turn a profit faster.

4. Are there any rules I should know?

Foreclosures have different rules than a typical property-buying situation.

Some government programs will not allow a buyer to rent out a property for up to five years. Understand the program you are buying your foreclosure from, and ensure that you are allowed to rent it once you own it.

If there are current tenants, legally, you need to honor their lease in some states. The Helping Families Save Their Homes Act of 2009 requires that all new owners of a foreclosure honor leases of previous tenants if they plan on renting the property.

However, if the new owner plans on living in the property, they are allowed to give the tenants 90 days’ notice. This law expired in 2014, and now tenant’s rights vary by state. In Illinois, tenants still need 90 days’ notice; however, in Wisconsin, they can be evicted immediately.

Related:  Are tenants required to move out during a foreclosure?

Use the same best practices as with any property

The same considerations for any rental property are still valid with a foreclosure.

Before buying, consider the cap rate. What is your predicted rent? Subtract expenses, including expenses to get the property ready to rent, from the annual rental income. Divide that number by the value of the property. A cap rate of 5%-10% shows that the property is a good investment.

The bottom line

Before making the decision to buy a foreclosure as a rental property, know what you are getting into. Landlords need to find tenants, make fixes, collect rent, and have great relationships with your tenants. You’re running a business, so weigh the pros and cons before diving into renting a foreclosure.

Don’t buy the discount hiking boots without doing the research first.

When I bought my first rental property, it was on the fourth floor of a walk-up. Imagine hauling groceries to that unit. It wasn’t fun, but my legs looked great. I saved $100 a month because the gym was no longer necessary. See how reframing changes your perspective?

While I jest, the sentiment has value. Reframing a negative into a positive can work for most issues you find in real estate investments. When there’s a negative about your unit or property, highlight something that would alleviate the need for what your property is lacking. Let’s look at four common negative situations and reframe them into selling points.

Related: How to use cap rate to make your investment property decisions

1. No laundry in building

When you live in an apartment building, laundry is an event. I remember saving up my laundry until I was on my last sock before I would finally think about doing laundry when I lived in an apartment (nothing has changed). I would put it in a wheeled laundry basket and walk it down the block to the Laundromat.

When I became a landlord, one of my buildings didn’t have any on-site laundry. This was an issue for potential renters. Time and time again, I would have prospective renters say that the laundry was a deal breaker for them, so I got creative.

Solution: I spoke with a local fluff-and-fold service that picks up laundry, cleans it, folds it, and drops it back off. I negotiated a special rate for tenants. What was once a deal breaker became a sale maker. The fluff-and-fold deal became a selling point, and I rented the unit the same day I updated my ad to include this feature.

2. Landlord is selling

I recently put one of my leased units on the market. The tenants still had six months left on their lease, so I had plenty working against the potential sale. One, the buyer would either need to be willing to wait to move in or want to be a landlord. Two, the tenants are living their lives in this unit. Showings would be an issue. It could be messy. It was definitely intrusive.

What could I do?

Solution: I spoke with a Realtor friend of mine and asked for advice. He specialized in buying and selling investment properties, so this wasn’t his first rodeo. He suggested offering a monthly discount as an incentive to keep the unit clean. Other options were offering a “bonus” when the unit sold, giving the tenants the option to end the lease early, and/or providing a weekly cleaning service. We chose to offer a “bonus,” when the sale closed. The unit is now under contract, and the tenant is still happy.

Related: How to stage a rental for showing

3. No assigned parking

In two of my real estate investments, I had the issue of no assigned parking. Street parking was the only parking available. At least, on the surface. I found that local parking lots had rental spaces available.

Solution: To turn this negative into a positive, I worked with local parking lot managers to secure monthly parking options. From here, you have a few options. You can secure the parking spaces yourself and roll the cost into the rent, or pass along the information to the tenant or prospective tenant to manage themselves.

If street parking is truly your only option, you can add other incentives to ease the burden by including the cost of a residential parking sticker (if needed) or a stipend for public transportation within the monthly rent.

4. No outdoor space

Outdoor space is an amenity that is important to today’s renters, and I didn’t have it. There was no place to put a barbecue or have drinks on a balcony.

Solution: I focused on what I did have: access to a great park. My unit did not have a terrace, and it never would. What it did have was a big park right behind the building that had barbecues, a playground, and hangout areas for the pups in the neighborhood. In fact, it was where I met all of my local friends and neighbors. I highlighted that outdoor space.

If you’re hard-pressed to find an outdoor space to highlight at your property, go a different direction. Provide a beach pass or a dog park pass in your move-in welcome package.

Related: The perfect tenant move-in package

No property is perfect, but any property can seem perfect to someone.

Being a landlord provides you with many opportunities to think of creative ways to make your tenant’s life better. Instead of thinking of yourself as a landlord, think of yourself as a tenant experience manager. You have the potential to make your tenant’s life better by finding innovative ways to solve problems. What problems can you solve for your tenants?

I know a landlord who charges less than any other rental around, never raises the rent, and is happy about it. He rarely has tenant turnover, but he isn’t making any money, either.

Then again, I know a renter who wanted to stay in her rental at least another year, but the management company informed her of a $200 rent increase to renew. She left that place so fast the property managers didn’t know what hit them. A vacancy, that’s what.

There’s an art to striking the right balance between making money on your rental properties and alienating good renters. We’re here to help you hone your art.

Related: How to Raise the Rent in 4 easy Steps [Free Template]

Why rent increases are a part of life

When expenses for owning property go up, raising the rent is necessary to just maintain the bottom line in your rental business. We’re talking expenses for which you have no control:

• Property taxes
• HOA fees
• Mortgage payments with an ARM
• Utilities
• Landlord insurance
• Property management fees

Add in expenses for which you have some control but are still expenses nonetheless:

• Maintenance (lawn care, pest control, gutter cleaning, etc.)
• Repairs (appliance repair or replacement, plumbing issues, tree removal, etc.)
• Vacancies

If you don’t raise the rent when your expenses go up, it’s like taking a pay decrease. Not too many people do that. If the thought of raising the rent at lease renewal time makes you queasy, just run the numbers to determine whether you must increase rent just to maintain your cash flow.

Your expenses don’t determine rent

Higher expenses might be the reason you need to increase rent. But the market ultimately decides how much rent you can charge. If you need to charge more for rent than what comparable units in your area charge, you probably won’t get it. If that’s the case, you should reevaluate whether it makes sense holding onto that property.

You are allowed to make money

You can raise the rent even if your expenses have not gone up or—by some miracle—have decreased. Being a landlord is a business, and the purpose of being in business is to make money. If your rents are lower than area rents, and your property is in comparable shape to those higher-priced rentals around you, go ahead and raise the rent to be on par with the other rentals.

How much of a rent increase is good?

Remember my friend who left her rental and found another place to rent because of the astronomical rent increase? Don’t be that landlord. The $200 increase represented 16.67 percent of her rent. A better yearly rental increase that most people can handle is in the range of 3 to 5 percent, or in this case, a rent increase somewhere between $36 and $60. Most renters probably won’t leave if the rent increase is slight.

When you can’t raise the rent

If your rental property is rent controlled, or if your jurisdiction has a statute limiting rent increases, you must comply with the law. You might not be able to raise the rent as much as you like—or at all.

You also cannot raise the rent on a fixed-term lease during the lease term, so if your lease agreement is for two years, for example, you cannot raise the rent after one year. You must wait until lease renewal time to raise the rent. On a month-to-month tenancy, you need to give proper notice per your state law before you raise the rent. This is usually 30 days, but check your state law first.

If you really can’t bear to raise the rent

If you are like that landlord I know who charges less rent to decrease turnover, that’s fine if you’re happy with the arrangement. But as soon as that tenant moves out, consider getting the market rate for your rental property.

Cozy rent estimate

If you want to find out the rent prices in your area, I recommend using the Cozy rent estimate tool. There’s a slight fee involved, but if you find out that you can get more for rent than what you were planning to charge, this cost pays for itself many times over. Or you might find that you’ve been asking too much; hence, the difficulty finding tenants.

Here’s how the Cozy rent estimate works. Note: the whole process is complete in a minute or two.

1. You fill out the particulars about your property. (If you already have your property stored in Cozy, this information auto fills for you.)
2. You pay.
3. You immediately get your rent estimate for your property.

You can then view the six-page report for a detailed analysis of how Cozy arrived at your rent estimate. Here are some highlights of what you’ll see:

• High and low rents for your ZIP code
• Days on market vs. vacancy for your county
• Addresses of comparable homes and the rent other landlords charge (my favorite section)
• Rent trends

View a sample Cozy Rent Estimate report.

Bottom line

If you know what comparable rental rates are for your area, you can feel confident in what you charge for rent. There are no rules (except if your property falls under rent control) on how much you should charge or whether you should raise the rent each year. But it’s always easier for renters to handle a slight rent increase each year than a one-time ginormous rent increase.

I had to make a tough decision. Was it time to sell my investment property?

As I’m writing this, my condo—and very first real estate investment—just went on the market. I had to say bye to that memory-filled investment to say hello to a new investment: one that is actually profitable. (Who buys a property in a real estate bubble? Me.)

What made me make the decision? How did I choose to say so-long to my always-rented property? The process started when I became a writer for Landlordology. I realized that while my condo’s always rented, and someone else was making the mortgage payments, the property wasn’t checking all the boxes for a good real estate investment.

What makes a good real estate investment?

While it’s easy to get carried away in the fun of starting a real estate business, it is important to pay close attention to know that your investment is a good one. Sometimes the signs are not so obvious that the property is a bad fit. So, what makes a good investment?

1. Your rental property is cash positive each month.  

The first thing you want to do when choosing a rental property is to determine the potential cash flow. To do this, use sites like Apartment.com, Redfin, WalkScore, and—of course—Cozy, to research the rental price. Now, look at the principal, interest, property tax, and insurance (PITI) per month. Subtract your rental estimate from your PITI. Is there positive cash flow? This is the first factor in a good investment.

2.  It’s in a high-demand rental community.

Location, location, location. We’ve all heard it, and it’s true. Renters flock to areas that are desirable. Look for properties that are walkable, have public transportation, shopping, beach, or are near popular destinations. For example, my rental properties are near Northwestern University with public transit to Chicago, the beach, and shopping. Universities with a high graduate population have great potential for rental properties. While the tenant turnover will be higher than other areas, there is always demand. Last, look at areas that will be hot soon. Certain areas price people out of the market, so renters move to another location that is nearby.

3.  You can easily manage the property.

If you are a Dave Ramsey fan, you know he always says to stay close to your rental properties. This makes managing your rental property easy. However, if your property is not so close, it gets tricky. A good real estate investment is close to where you live, low maintenance, and offers an easy system for managing your property and tenants. For example, let’s say you have a single-family home you rent out that is 10 years old and 10 miles from your home. The property management can be simple. Hire a lawn care service, a maintenance person, and use Cozy for collecting rent online and communicating with your tenants about maintenance requests. Now, if the property is high maintenance or hard to rent—that’s another story.

Related: When to sell your rental property

When should I sell my real estate investment?

While you should think of real estate investments like the stock market (buy and hold), sometimes the signs are there that it’s time to sell and reinvest or get out of the real estate game completely. Whatever makes you happy. Here are the surefire signs that it’s time to sell.

 1. Cash flow is consistently negative.

The No. 1 reason to choose a property to invest in is positive cash flow each month. When it’s negative, it’s time to sell. My first rental property was an accident. We bought a new house and couldn’t sell the old one. Because of this, checking the cap rate and PITI was not part of our “strategy” (read:  there was no strategy) for choosing an investment property. We fell into it, and from that first month, August of 2011, it has had negative cash flow. Negative cash flow is the first sign your rental property may not be meant to be. Consider moving back into it or selling it.

2. You’re a remote landlord.

When I began my landlord journey, I was only a few blocks from one rental property and lived in the other (a three-flat). Managing my property was easy. However, I sold the property I lived in, and now live 35 miles from my other property. I no longer had a relationship with my tenants. Showings were impossible. I felt panicked about maintenance requests. It wasn’t easy. If you’re moving away from your rental property, think about selling it and buying local. The property will be easier to manage, and you’ll have more control over your investment.

3. The cap rate has changed.

A cap rate is the income-expenses/value. The goal is to keep the cap rate between 5% and 10%. Generally, property investors determine the cap rate when choosing an investment property. However, if you are on the fence about whether to keep or sell a rental property, you should revisit this equation. Several changes can occur during the life of ownership that can turn a good cap rate bad. Did property taxes go up? Did the rental market in the area go down? Is maintenance more than expected? Are the utilities higher than you originally thought? Add up your monthly expenses over the year, and subtract that from your annual income from the property. Divide this number by the current value. If the percentage is less than 5%, you may want to consider selling.

Real estate investing can be lucrative, and the buy-and-hold strategy is typically best. However, sometimes you need to take a hard look at your investments and ask yourself, “Does this investment still make sense?” That’s what I did, and in the end, it didn’t make sense for me own my property anymore. Once you let go of a property that isn’t working for you, you can move onto the next property investment!