Should I Sell My Investment Property in 2023?

Deciding whether to sell an investment property can be challenging, mainly when market conditions are uncertain. In Silicon Valley, where property prices are historically high and interest rates are on the rise, coupled with a decline in the stock market prices of local companies, the question of whether to sell or hold onto an investment property is particularly relevant.

While the answer to this question ultimately depends on your financial situation and investment objectives, here are some key factors to consider before making a decision.

Market Conditions

One of the most critical factors to consider when deciding whether to sell your investment property is the current market conditions. If property prices are high and interest rates are rising, it may be an excellent time to sell, as you could earn a higher profit. We believe this is where the market is right now in Silicon Valley. There is a window of opportunity to sell single-family residences to owners/users before widespread price declines cause more fear in the marketplace. With the current job cuts at major tech companies and expected future cuts along with local startups burning through cash with few prospects for additional funding, the jobs outlook for the region is not ideal for property price growth. This, coupled with a decline in stock values and most mortgages made in the last five years requiring RSU income to qualify, also will cause income declines for workers. Here is the latest housing market cycle update (November 2022) from John Burns Consulting:

Financial Objectives

Your financial objectives also play a critical role in determining whether to sell your investment property. If your primary goal is to earn a profit, or if you need to sell your home in the next couple of years to preserve your primary residence exclusion, selling when property prices are high could be the right decision. However, if your objective is to generate passive income through rental income over a longer time horizon, you may want to hold onto your property regardless of market conditions. Many investors we work with are nearing retirement, and cash flow is more important than asset appreciation, so selling highly appreciated properties with low rents (like in Silicon Valley) and purchasing multiple properties in other states with better rental rates can sometimes double or triple rental income with the same asset value.

Tax Implications

Another critical factor to consider when deciding whether to sell your investment property is the tax implications of the sale. If you've held the property for over a year, you may be subject to long-term capital gains tax. If you've owned the property for less than a year, you may be subject to short-term capital gains tax. Suppose the home was formerly your primary residence, and you converted it to a rental property. You can still sell within three years of moving out and retain your primary residence tax exclusion. You may also be able to completely defer capital gains using a 1031 exchange. It's important to consult with a tax professional to understand the potential tax implications of a sale. Although, if property prices decline 25% over the next couple of years, saving on taxes may not make much sense.

Personal Circumstances

Finally, your personal circumstances, such as your current financial situation and long-term financial goals, should also be considered when deciding whether to sell your investment property. Marketing your property could be the right decision if you need funds to pay off debt or make a significant purchase. However, if you have the flexibility to hold onto your property through thick and thin, it may be best to wait until market conditions improve. 

In conclusion, deciding to sell an investment property when market conditions are uncertain can be challenging. It's essential to consider your financial objectives, tax implications, and personal circumstances when making a decision. Ultimately, consulting with a financial advisor or real estate professional is crucial to understand the potential risks and benefits of selling or holding onto your investment property in Silicon Valley. We at Luxuriant Realty are ready to help guide you through these decisions and have resources in other states to support the next purchase through a 1031 exchange if needed.