On the one hand, the answer is absolutely “never”. I’ve sold approx. 15 buildings I’ve renovated since 2012 and I regret selling nearly all of them.
Why? Because when you own a renovated apartment building with high quality tenants in an improving area, you can expect continued rent, and therefore value, increases over time. Add to that the transaction costs associated with selling and you’re very often better-off just buying and holding onto the buildings.
But there are some good reasons to sell income producing real estate, some related to the real estate itself and some to extrinsic factors:
1. Your depreciation runs out. This only affects long-term owners. After 27.5 years of ownership, the property is fully depreciated. That means you lose a very important tax shield (because you can no longer deduct 1/27.5 of the value of the structure at the time of purchase from your pre-tax income). At that time, you might want to consider selling the property via a 1031 exchange and rolling the proceeds into a new project where you will benefit from depreciation.
2. Your property requires major capital investment. Over time, all building deteriorate, even if they are well-cared for. If your building is due for major systems upgrades (plumbing, electric, etc.), then selling might be the right thing to do. Why? You need to value your time… and managing a re-piping of a building is a pain in the ass. You may be better off allowing a new owner to come in and do the work, while you take your money (again, via a 1031 exchange) and buy something in better condition.
3. You want to consolidate the equity from several smaller properties. Managing a bunch of little buildings can be a real drag. One good move can be to sell several of them at the same time via 1031 exchange and then roll the equity together into one larger property, which you can then hire a management company to run. These are complex transactions, but they are feasible if you know what you’re doing (or hire someone who does).
4. Moving equity from low-growth to high-growth neighborhoods. Rents (and therefore values) don’t rise at the same rate across the entire city. If you currently own somewhere that is stable or growing only very slowly, it can be advantageous to sell and then move the equity to a faster-growing neighborhood. This is a tricky one, because you need to have real conviction about both your existing neighborhood and the new one.
5. Life events / age. This one is not really a choice… it’s just an acknowledgement that life sometimes intrudes on real estate investments. Example from my own life: My folks have owned and managed small apartment buildings in Troy, NY for 30 years or so. Recently, they have begun to sell, since the market is strong and they’d rather sell out now, while they’re young enough that they’re not forced sellers. The alternative would be to hold until they’re too old to manage themselves and then potentially have to sell into a down market.
If you own property and any of the above apply to you, you might consider getting in touch. As you can probably guess, I’m going to lean on you not to sell. But, if, after we discuss, it seems like selling would make sense for you in your situation, then perhaps we can help.