Is Your Rental Investment Still Worth It?
While there are no 100% hard-and-fast rules, here are some things that you definitely do need to keep in mind when you’re pondering that question
One of the biggest problems with the high-risk/high-reward nature of the real estate market in the City of Detroit (versus the suburbs) is that when you hit that ‘high-risk’ side of the odds, it can be very difficult to know when you should strap in and ride out a rough patch, and when you’re better off ‘knowing when to fold ’em.’
While there are no 100% hard-and-fast rules, here are some things that you definitely do need to keep in mind when you’re pondering whether your rental investment is still worth it or not.
What Are Your Goals?
The first (and in our experience, most common) problem you can have with a rental investment property is not knowing what you’re trying to accomplish with it in the first place. Are you looking to generate immediate cash flow by bringing in more rent than you have expenses? Or is your aim to build value through appreciation and amortization by buying a property that pays its own bills but also builds equity and gains value over time? If you don’t know what your goal is, you can’t evaluate whether or not you’re achieving it.
Are You Achieving Them?
Of course, if you do know what your goals are, it’s pretty easy to figure out whether or not you’re achieving them. Is your value-building property building value and also paying its own expenses? Is your cashflow property bringing in an income that meets your needs after it has paid its own bills? Because the first sign that your rental investment might not be worth it is that it’s not meeting your needs.
Of course, just not meeting your needs at the moment isn’t enough to say that a property should be sold.
Would You Buy It Again?
One of the ways you can get a firm idea of whether or not it’s time to sell is to re-run the same equations you performed (hopefully) when you decided to buy the place. The first thing you should re-ask yourself is whether or not the cap rate is still worth your while. The super-short version goes like this: 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 to obtain the percentage of the current value that you are paying to capital each year, or your cap rate. (A ‘good’ cap rate for an investment property in the Detroit market is anything north of 10%.)
Do You Have Enough Equity to Make Selling Worthwhile?
The other side of the ‘should you sell’ question is equity, or how much value you have in your home. If you have a $20k mortgage on a house that you can only sell for $17k, the only situation where it makes sense to sell the house is it for you’re losing money month after month. And even then, you have to ask yourself whether the month-by-month situation is capable of being repaired by careful management.
There are definitely some houses, especially in high-risk/high-reward markets, that get into such a state that the question isn’t ‘can this house be profitable,’ but ‘how fast can I cut my losses?’ Obviously, in those cases, the question isn’t should you sell, but how can you sell to get away with as much as possible. But that’s a whole different article.