If you've put your life savings into an investment property, you might find it difficult to let go of it, particularly if it's still bringing you income each month. Like with any investment though, knowing the right time to sell is equally important as the right time to buy.

What to consider before selling your investment property

1. Market conditions

The real estate market is constantly fluctuating, with demand for rental properties rising and falling over time. Monitoring market conditions is important in determining the best time to sell, as the state of the market has a big impact on the sale price of a property. Generally speaking, a booming real estate market with high demand and rising prices is the ideal time to sell a rental property. Similarly looking at sales history in your street and suburb, and the general stock level of your suburb can determine if it's a good time to sell.

2. Personal financial goals

Before selling a rental property, you'll want to consider your personal financial goals. If you are looking to retire or are facing unexpected financial challenges, selling the property could be a good way to generate a lump sum of cash. On the other hand, if you are looking to expand your real estate portfolio, you may want to hold onto the property for a longer period of time, perhaps intending to use equity in your existing property as security to add to your portfolio.

3. Whether you are prioritising cash flow or capital gains

The two ways to make money from an investment property is through the cash flow generated by rental income and the capital gains you make when you sell (the difference between the price you receive when you sell the property and the original price you bought it for). Some investment properties might generate a substantial positive cash flow each month (you are earning significantly more from rental income than the property is costing you in loan repayments and other expenses), but the value of the property is growing very slowly. On the other hand, your property may be negatively geared, meaning you make a loss each month, but the property value is appreciating quickly and you anticipate a large return when you sell the house.

The right time to sell in these scenarios will be very different. Lets say there is an increase in demand for home ownership, and subsequent decrease in demand for renting. In the first example, a contraction in rental demand might mean you choose to sell since you will no longer be generating as much income. However, in the second situation, you might be unperturbed by a reduction in rental income, and instead hold your property as the increased demand will likely mean your property appreciates even quicker in value, netting you a larger capital gain when you eventually do sell.

Keep in mind capital gains and positively geared rental income can be taxed at your marginal income tax rate, however the capital gains tax rate is usually halved if you hold the property for longer than a year.

4. Property specific needs

The specific needs of the rental property can also impact the best time to sell. For example, if the property requires significant repairs or renovations, you might choose to wait until these improvements have been made before putting the property on the market. Additionally, you'll want to consider the specific conditions of the surrounding area of your property. If there is significant nearby development in the pipeline that might increase the value of your property, it could be a good idea to hold off on selling until it is completed.

How to know when it could be time to sell

Every investment property is different, so you'll want to carefully consider your position before making any decision. The following though are examples of common circumstances that can prompt property owners to think more seriously about selling.

1. A looming recession

A recession, usually defined as two consecutive quarters where GDP growth falls, tends to reduce both property value and rental rates. As unemployment rises, many tenants struggle to afford rent, bringing down rates and even potentially embroiling you in legal proceedings should your tenants default. Property values also suffer as economic downturn leads to a reduction in disposable income, and thus the amount buyers have to spend on a new home.

While recessions can be difficult to predict, when there is uncertainty or trepidation about how an economy might perform over the coming years, selling your rental property early on could be a good way to protect yourself against potential losses.

2. Weakened rental demand

It's often helpful to think of your rental property purely as a business you own. If you anticipate demand contracting for the service you provide (temporary housing), you might want to sell your business before it becomes less profitable. There are several reasons rental demand may weaken, aside from recession. Firstly, if interest rates are very low for an extended period of time, it's likely that the demand for home ownership will increase. While this may see the sale value of your home increase, it could also mean that rental demand decreases, which could be detrimental if you view your investment primarily as a source of monthly income. Secondly, a decrease in fresh migration, whether due to policy change or some other factor, will generally decrease the demand for rental properties. Finally, a surge to the supply of new rental properties can reduce the demand for existing ones.

Should you observe any of the above, you might decide that the time is right to sell your investment property before you start receiving a reduced income.

3. Policy changes

There are many potential policy changes that could impact on the profitability of a rental property. For example, if the state or territory your property is in introduces rental controls, restricting the amount of rent tenants can be charged, you are likely to see diminished income. Tenant protection laws, an increase in the amount property owners are taxed and new policies targeting the affordability of building new properties that saturate the rental market with new housing are all other examples that could hurt your investment. If your local government is suggesting that policies like this might be implemented, it could be a clever idea to sell before governments make a move.

4. Interest rates are going up

When interest rates go up, unless you have already paid off your mortgage, your profit margins on your investment property will normally decrease, as your monthly repayments become more expensive. On top of this, increased interest rates often result in a decline in property prices after a few months. If you are sitting on a rental property that has seen a large increase in value when interest rates are hiked, you might choose to sell quickly to avoid your gains being eliminated.

However keep in mind that in such cases, a lot of other investors are probably thinking the same and the number of listings in your area might increase. As with a lot of investments, property is generally more about 'time in the market' rather than 'timing the market'.

5. Your interest-only period is coming to an end

Many investors choose interest-only (IO) home loans as interest is tax deductible. This makes it possible to pay next to nothing in home loan repayments for three, five, or even 10 years. Some lenders even allow 10-year interest-only periods extendable for a further 10. A consequence of this is that your principal repayments kick-in after this period, and are steeper because they're condensed into a shorter time frame.

If you are one of these borrowers, you might not necessarily have the cashflow to keep up with principal repayments (say if you're retired or the costs of the property outweigh the income). In this case, you might be looking at selling. On selling, you'd have hopefully made healthy capital gains to repay the lender the principal, plus pocket some profit for yourself.