The Golden Goose and The Rental Investment

​"Hey, Derek, let's sell the property." Landlords sometimes see that their investment property has appreciated in value and feel it may be the time to sell.

And what Realtor wouldn't jump at the chance?

Well, hold that train for a minute. Of course, I'll list the property if that is the owner's desire, but sometimes selling is not the best idea—if you have a Golden Goose.

There are plenty of good reasons to sell. You need the cash to make another purchase. You are at retirement (or early retirement) and want to cash out. The market could be changing and you want to sell before price reductions happen. Or the property is not performing well. All good reasons.

But a Golden Goose lays golden eggs. And before you sell it, consider these points . . .

A good rent-and-hold property is laying golden eggs for you. You can sell the goose for a lot of money. But you won't get any more eggs.

I use a measuring stick for residential rental properties, the Gross Rent Ratio (annual rent divided by total acquisition price). For example, a client might purchase a home for $320,000 and spend $40,000 on improvements. That's an acquisition price of $360,000. If the home rents for $2,600 then the Gross Rent Ratio is 8.7%.

I try to help clients find investments with 8% or better Gross Rent Ratios. In some markets, this may be impossible. But 8% is the gold standard (for a healthy Golden Goose).

One situation that tempts an owner to sell is when repairs start to become costly. In some cases, this is because the landlord avoided capital improvements and opted for short-term solutions rather than long-term. I've had owners who bought a house during the crash (2008-2010) for 50K and they're getting $2,000 in rent (a 49% Gross Rent Ratio!!) who want to sell it because the siding and HVAC need to be replaced.

If you're making a 49% Gross Rent Ratio, you have one heck of a Golden Goose! Spending 30k to repair a home that is performing that well is a financially sound decision.

In fact, if you're making 8% or better, you have a well-performing investment. If there is still a mortgage, someone else is paying for it. If the mortgage is paid off, you're getting some amazing cash flow. Hopefully you put some of the golden eggs into savings to pay for new HVAC or siding or roof or whatever is needed to keep the goose going strong.

Just throwing out some food for thought. Maybe Thanksgiving is a good time to talk about a Golden Goose. I mean, if your rental property is a Turkey, selling is a good idea.

Let us know if you have any Turkeys you'd like our help with or if you wish to engage our services for your very own Golden Goose!

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