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When is it Time to Sell your Vacation Rental?
You’ve treated your second home like your baby for a decade, and in return she’s paid you handsomely in both rental income and in family vacation memories. But you’re starting to question whether it’s time to move on. How do you know when it’s finally time to pull the trigger and list your vacation rental for sale?
1. Consider Selling when Income < Expenses
If your monthly income starts to lag behind your expenses, look closely to determine if this is likely a one-off bad season (due to Covid-19, or some other externality), or if this drop in income is potentially the start of a larger trend. It makes great sense to do an annual checkup on your current capitalization rate (“cap rate”). To calculate your cap rate, simply take your net income (income minus expenses) and divide by the purchase price of the property. The cap rate is a great measure of a property’s performance over time, and it can be a strong sell-side indicator if it begins to trend lower.
2. Sell when You’re Ready to Upgrade or Your Lifestyle Changes
Families grow, children eventually leave the nest, and financial priorities evolve over time. These are just some of the reasons that lead some owners to consider selling their vacation rental property. If you find yourself not using your property as much as you once did, or in search of a new locale for your second home, then chances are it’s time to consider putting your property on the market.
3. Sell when Prices are High and It’s a Seller’s Market
The United States is in the midst of a very strong bull market in housing. In most major markets around the country, housing demand is far exceeding supply. New homes are slow to be built as Covid-19 has slowed construction considerably throughout the year. Furthermore, interest rates are at record lows, making home purchases more attainable than ever before. The result of this confluence of factors? Prices of residential and vacation properties have been reaching record levels in 2020. It is most definitely a seller’s market, as evidenced by the high prices and the short time that most houses are spending on the market before being snapped up. Always look to sell into a strong market such as the current one to maximize your return.
4. Sell Before Big Expenditures Come Due
When your vacation rental is on year 18 of a 20-year roof, year 8 of your latest HVAC system, and year 10 since your last paint job, you can rightfully expect that you have serious expenditures coming your way in the medium term. It is always a great time to sell when new buyers are willing to either overlook or accept the aging aspects of your vacation rental. In a strong seller’s market such as this, buyers are willing to overlook many things in order to compete in a competitive market. “As-is” contracts are much more common when buyers want to avoid a bidding war, and sellers can take advantage of this leverage to defer some major maintenance to the next owner.
It’s not always easy to sell an asset that may have significant sentimental value and that has been a centerpiece of family time over the years. Nevertheless, in order to maximize your fiscal return on your vacation rental investment, it is just as important to know when to sell as when to buy. Try to stand back for a moment from your emotional attachment to the property and consider the above 4 “reasons” to sell. See if any of them resonate with your rational, profiteering side. If so, it may just be time to call your realtor while reading our 5 Key Tips To Prepare Your Vacation Rental for Sale.