How to decide whether to keep or sell your rental property

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Q: My partner and I bought our first rental property a few years ago. It’s a condo in a newer building close to our own house. We found some great tenants who took care of the place like it’s their own, but they’ve now decided to move to another city for a work promotion. Of course we’re happy for them, but sad at the same time to lose them as tenants. While our son could move in with a roommate, he recently finished school and is busy working his first career job. He wants to live a bit closer to work to save on commuting time and gas. Part of our long-term plan was to offer it to him, but now that he’s chosen to live elsewhere, we are re-evaluating our situation and if we should sell it or keep it. What can you suggest? ~Megan 

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A: Deciding whether to keep or sell a rental property involves the careful evaluation of various factors, from financial and market conditions, to personal goals and legal obligations. While I will offer general guidance, it’s always important to consult with appropriate industry professionals when making a significant decision that can impact your financial future. Real estate agents, tax advisers, lawyers, and financial planners can share their insights and are licensed to answer your questions and provide advice specific to your situation.

With that in mind, here are some key elements to think about as you weigh the pros and cons and make a decision that aligns with your long-term goals.

Financial performance

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One of the most critical aspects of owning an investment property is its financial performance, specifically whether it results in positive or negative cash flow. At a minimum, your rental income should cover mortgage payments, strata fees, property taxes, insurance, and maintenance costs. If the property generates more income than it costs to maintain, this can be a compelling reason to keep it. However, depending on your overall goals and tax situation, a temporary negative cash flow might be manageable in the short term as the value of the property appreciates.

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Tax implications

When deciding to sell a rental property, it’s crucial to carefully consider the tax implications. Capital gains taxes can result in a significant tax bill, so it’s wise to set aside a portion of the sale proceeds to cover this expense during the next tax filing season. This proactive approach can help you avoid financial strain and ensure you’re prepared for the tax liabilities you will be responsible for.

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Consult with a tax professional to provide you with tailored advice based on your specific situation. They can help you explore strategies to minimize your tax liability. For example, you might consider timing the sale of your rental property in a year when your income is lower to reduce the overall tax impact. Additionally, using capital losses to offset gains can help manage your tax burden.

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Market conditions

If property values are high, selling could result in a substantial profit. Conversely, if the market is down, it might be wise to hold onto the property until values improve. Staying informed about market trends, forecasts, economic conditions, and local development proposals can help you time your decision to maximize financial benefits.

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Personal investment

Managing and maintaining a rental property can be time-consuming and shouldn’t interfere with your primary source of income. If it becomes costly and stressful, it might be more financially prudent to sell the property and invest in one with lower upkeep costs or opt for cash investments that generate passive monthly income. Alternatively, if the property is generating a positive cash flow, hiring a property manager to help you take more of a hands-off approach to time or labour-intensive work, such as placing new tenants, could be worthwhile. Consult a certified financial planner to help you explore various scenarios and make an informed decision.

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Tenant stability and mortgage fees

Selling a tenanted property can be more challenging than selling a vacant one, especially if your long-term tenants are paying below-market rent or have a fixed-term lease. Tenants have certain protections, and you must adhere to legislative requirements if you decide to sell your property while it is occupied.

In addition, whether you’re a seasoned investor or a first-time landlord, there are costs associated with selling a property. Real estate fees, legal expenses, and costs for discharging a mortgage and/or paying it off early need to be part of your calculations.

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Planning for the future

If one of your goals for the property is to help an adult child enter the market, consider discussing options with them and your lender for your child to either assume the mortgage or become a co-borrower or co-owner. Neighbourhood development plans for parks, schools, and new infrastructure can influence property desirability and your child may want to move in or become a landlord. Additionally, provincial or municipal regulations regarding rental properties, such as rent control measures, property tax changes, or new zoning requirements, can impact investment decisions for both sellers and buyers. While future potential might be appealing to one party, it may not be for another.

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The bottom line on selling or keeping an investment property

Reflect on your long-term financial goals and determine whether you seek steady rental income or need liquidity for other investments or expenses. If the property aligns with your investment strategy and provides a reliable income stream, it might be worth keeping. However, if you require cash for other opportunities or expenses, selling could be the better option. Ultimately, personal circumstances such as health considerations, family needs, or retirement plans may make one choice more practical than another. Seek professional advice to understand the pros and cons and make the best decision for your unique situation.

Related reading: 

Tips to Lower Your Fixed Monthly Expenses

Thinking of Taking Your CPP Retirement Income Benefits Early?

Tips to Teach Teens and Young Adults About Money

Peta Wales is President and CEO of the Credit Counselling Society, a non-profit organization. For more information about managing your money or debt, contact Peta by email, check nomoredebts.org or call 1-888-527-8999.  

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