How long should I hold my real estate investment property?

When it makes sense to sell investment property.

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Question

How long should I hold on to my investment property to maximize the return on my investment?

Answer

The return on your investment (ROI) will vary based on many factors, including fluctuations in the market, your costs to maintain the property (such as taxes, maintenance, and insurance), the amount of rent you receive, the interest rate you obtained on your loan, and the type of property (such as a condo versus a single-family home). There is no guarantee that your property will appreciate, but presuming you did your research and the property is in a desirable location, you can reasonably assume the value will hold, if not increase, by at least 1% per year. Economists suggest 3% to 5% is reasonable to expect, but conservative forecasting approaches are better to avert financial concerns down the road.

Real estate investment trusts (REITS) and other commercial property investment companies frequently target properties with a five-year outlook potential. Whether they are looking to develop these investments or sit and hold them, these companies are aiming to maximize the return for their investors in the shortest amount of time. As an individual investor, you do not have that pressure hanging over you and can determine what’s more important to your needs. Say in five years your property is worth 10% more than what it is today and you decide to hold. If the subsequent five years earn no additional appreciation on your property, certainly, the additional five years you waited to sell would result in a worse return on your investment. But, although there was no appreciation, your property was still actively earning you cash to pay off your mortgage and provide stable income.

Before buying your investment property, determine what your goal is for this particular investment and stick to that plan, regardless of where the market goes. Some goals to consider:

  • Pay for college tuition. Maybe you missed the peak of the market, or the peak is yet to come, but now you need the cash. Don’t worry about what might have been. Sell when you need the money according to the plan you set. It's usually better to pay for the tuition debt free than take on student loans.
  • Use as a retirement annuity or source of second income. Who says you should sell? Investment properties can give you residual, passive income for the rest of your life, and the property can be depreciated for 27.5 years, reducing your tax burden. Once the property’s mortgage is paid off, that’s considerable peace of mind for your retirement years.
  • Maximize return quickly. This requires the most work and will likely involve some more initial investment to improve the property in order to flip it. Flipping is usually considered to be a process that occurs in just a few months, maybe even less, but the part-time investor should be more conservative, viewing anything within five years as a short-term flipping horizon. Unless you quit your day job and the market is booming, there is usually too much effort involved in improving the property to get it sold for measurable appreciation; looking for investments with high short-term returns are often few and far between. A good strategy for maximizing value fast is to do what the pros often do: Forecast a five-year plan where, after making some considerable improvements as time and budget allows, sell the property when the market is (hopefully) on an upswing.

Whatever your goal is for your investment property, it’s important to remember that real estate is not a liquid asset. Always consider the worst case scenario of not being able to sell your property in the time frame you want.

If you're new to real estate investing, check out Nolo's Top Resources for Real Estate Investors for useful advice. If your investment property is a single-family rental home, see Nolo's book First-Time Landlord for guidance on purchasing and managing residential rental property.

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