Purchasing an Orlando investment property offers many benefits to a real estate investor. This is why many people are attracted to the world of real estate.
In fact, the majority of the richest people in the world either made their fortune in property or have a large portion of their wealth in property.
Here are some benefits of investment properties:
- Big tax write-offs for your Orlando investment property. You can write off your mortgage, any legal and professional fees, travel expenses, maintenance and repairs, and even your property taxes.
What’s more, the government also allows you to depreciate your property’s purchase price even when its value is appreciating.
- You’ll benefit from mortgage amortization. Each year that your own your investment property, you are using the rent to pay off your debt. As you pay back the loan, you’ll be creating more wealth for yourself.
- Rental income is money in your pocket. As long as your rental property is occupied, you’ll stand to earn every month.
Suppose you have one tenant that pays $1,100 a month in rent. Compute for expenses like mortgage payments and property maintenance totaling $600. After subtracting the expenses from the rental income you’ll be left with a decent profit of $500 going directly into your pocket.
- You are the boss of the property. In the average nine to five job, you are subject to the wishes of your boss and the infrastructure of the company in general, like adhering to a dress code.
When you become your own boss, you choose what property to invest in, what tenant to screen for and how much rent you’ll charge.
With that being said, there may be a need to take a hard look at your investment property and ask yourself, “Does my Orlando investment property still make sense?”
Knowing when you should sell an investment property and when you shouldn’t is important. That’s why in this article, we are going to share 4 legitimate reasons to get rid of a rental property.
When to Sell an Orlando Rental Property
1. The Capitalization Rate has Changed
Also known as the cap rate, the capitalization rate is the income-expenses/value. Since your goal is to make a profit from your investment property, you should aim for a cap rate of between five and ten percent.
Normally, savvy investors calculate the cap rate when selecting an investment property. But, if you are on the fence on whether to sell or keep the property, revisiting this equation might be a good idea.
The change in the cap rate may have been caused by various things. For example, your utilities may have been higher than you initially thought. The cost of maintaining the property may have increased. The rental market value in the area may have gone down. Or, the property taxes may have gone up.
To calculate the cap rate, you’ll need to know your annual income and your annual expenses. Here is a good example to illustrate this.
Let’s say it costs you a total of $250,000 to purchase a rental property. It then rents for $1,500 every month and has annual operating expenses of about $5,000.
We know that cap rate equals to net operating expenses (NOI) divided by the cost of buying the rental property. And, NOI equals annual rental income minus operational expenses. So, NOI equal to $12,000 (12 x $1,500 – $6,000).
The cap rate for the rental property then becomes 4.8% ($12,000/$250,000).
In our example, since the percentage is less than 5%, it means the property isn’t performing well. Selling the property is the best option.
2. You are a Remote Landlord
Being a landlord isn’t easy. There are many things in the lease that you are responsible for. If you live near the property, managing these tasks is quite easy. You can pop over anytime you need to inspect your property or manage repairs.
However, the same cannot be said when you decide to live miles away from your property. Handling maintenance requests will be difficult as a long distance landlord. Showing the property to prospective tenants is also difficult.
In the end, you may need to hire a property manager. While a property manager may be able to do most things for you, their services come at a significant cost. If you only have a few units, it might not make any financial sense to hire one.
In such a case, the only option left would be to sell your Orlando investment property and buy another one in the area you relocate to.
3. Rental Property Cash Flow is Consistently Negative
Positive cash flow is the number one reason to choose a property to invest in. After all, the goal of any investor is to make a profit.
Positive cash flow means you are able to pay all the rental property’s operational costs and still making a profit. Comparatively, negative cash flow means that you are losing money.
Needless to say, when your cash flow is negative it’s probably the best time to sell your rental property. However, before you offload it, check whether it’s possible to tweak the numbers. To do this, you’ll need to perform a comparative market analysis.
The analysis will help you compare the rent of various similar properties in your area. If you find this task daunting, please consider hiring a good real estate agent to do it for you.
If you find that you are undercharging rent, then increase it accordingly. However, if you find that you have been charging the right rent amount, then it could be time to sell.
4. When it’s Personal
As in any business, life tends to get in the way, and certain circumstances may force you to sell off assets you were hoping to keep for the long haul.
Such situations may include loss of one’s primary source of income, a costly medical crisis or a divorce.
The decision to sell your Orlando investment property is a very individual one. It could be financially advisable, strictly business, or simply personal. Once you sell your Orlando real estate move onto the next property investment!