Should You Sell Your Rental Property? Key Considerations Before Making the Move

Gregg Pacitti CFP®
4 days ago
4 min read

Real estate has long been a go-to asset for building wealth, especially through rental properties. But just because an investment has served you well in the past doesn’t mean it’s the best fit for your goals going forward. I recently spoke with a client who asked:

“How do I know when it’s the right time to sell my rental property?”

The answer depends on multiple financial and lifestyle factors—each worth examining closely. Below, we’ll walk through the most important considerations and compare holding real estate versus transitioning to a more passive “hands off” investment strategy like a dividend-focused stock portfolio.

Key Financial Factors to Evaluate

Net Rental Income (After All Expenses)

Start by calculating your true cash flow. Many investors only look at gross rent and forget to subtract:

Property taxes
Insurance
Maintenance and repairs
Property management fees (if applicable)
Vacancy periods
HOA fees (if applicable)

These fees can vary greatly from year to year and from property to property. Once subtracted from your gross rent, you will know your potential Net Rental Income.

2. Determine Your Capitalization Rate (Cap Rate)

The Cap Rate helps you evaluate the return your property is generating, independent of how it was financed. It’s a key benchmark in real estate investing.

How to Calculate It:

Calculate your Net Operating Income (NOI):NOI = Gross Rental Income − Operating Expenses(Do not include mortgage payments, depreciation, or income taxes.)
Determine the current market value of your property.(Use a recent appraisal, comparable sales, or listings in your area.)
Divide the NOI by the Current Market Value of your property.

For example, if you own a rental property generating $18,000 of Net Operating Income from a house that is worth $400,000 – then your cap rate is 4.5%.

What This Tells You:

A higher cap rate (e.g., 6–8%) usually reflects a higher cash flow return, but may also signal more risk or lower property value growth.
A lower cap rate (e.g., 3–5%) may suggest stability or strong price appreciation potential, but it could also mean your money isn't working as efficiently.

I personally prefer a cap rate of at least 7% for a real estate deal to look attractive. A lower cap rate likely means you are missing out on potential returns elsewhere.

3. Appreciation Potential

According to the Case-Shiller National Home Price Index, over the last five years U.S. home prices have grown significantly faster than the long-term historical average—primarily driven by pandemic-era dynamics, low interest rates, supply constraints, and increased demand. The annual price growth was 7-8% annually, about double the long-term average.

If most of the upside has already been realized, holding it may offer diminishing returns - especially if you have a low cap rate.
If local economic trends or demographic shifts suggest future stagnation, exiting now could lock in gains.

4. Depreciation Deduction and Tax Strategy

One of the key tax advantages of rental real estate is depreciation. However:

If you've owned the property for many years, the depreciation benefit may be nearly exhausted.
Upon selling, depreciation recapture can lead to a hefty tax bill unless offset with a 1031 exchange or tax-loss harvesting elsewhere in your portfolio.

This is where careful planning is crucial—work with a tax advisor to understand the full picture. You could be paying around 15% on capital gains on any appreciation above your original cost basis, as well as 25% tax on any accumulated depreciation you deducted against your income over the years.

An Alternative: Dividend-Focused Investment Portfolios

Let’s compare real estate to a more hands-off alternative—a portfolio focused on dividend-paying stocks, yielding:

Approx. 4% annual dividend income
Additional long-term price appreciation potential of 4–6% annually

What does this offer?

Liquidity: Easier to rebalance, diversify, or access funds when needed.
Passive income: No property management headaches.
Tax efficiency: Qualified dividends are often taxed more favorably than rental income or depreciation recapture.
Diversification: Spreads your risk across industries, geographies, and companies.

So, Should You Sell Your Rental Property?

Ask yourself:

Is your rental property still delivering net positive returns relative to your goals?
Are you prepared for future capital expenditures or tenant turnover?
Could your capital work harder elsewhere—without the same effort and risk?

Every situation is unique. If you've owned property for the past 5 years, you've likely seen above-average gains, especially if your property is in a high-demand metro or Sun Belt market. However, future growth will likely normalize, especially as interest rates stabilize and affordability constraints hit buyers. For long-term projections, I believe it would be wise to model future home appreciation at more conservative historical averages (2–3%) rather than recent peak trends. Also, if your property has become more of a burden than a benefit, reallocating into a dividend-focused portfolio may offer a more streamlined path to income and growth with a lot less stress or late-night calls to fix the plumbing. As Warren Buffet recently said at Berkshire Hathaway’s annual shareholder meeting, “There’s just so much more opportunity’ in the stock market than in real estate.”