I sit on the closing side of this business, which means I see what a tired NC landlord actually looks like at the table. They are not angry. They are quiet. They sign the deed, they take the wire confirmation, and they almost always say some version of “I should have done this two years ago.”

I want to fix that. If you sell rental property NC investors are bidding on, you should do it because the math says go, not because the third midnight plumbing call broke you. Here is the decision tree I walk landlords through before we ever talk price.

When should I sell my NC rental instead of finding a new tenant?

Sell instead of re-tenanting when your real cash-on-cash return on locked equity has dropped below 4 percent, when major capex (roof, HVAC, water heater) is due in the next 36 months, or when the eviction queue and management workload has stopped feeling like a business. In 2018 NC, landlords with a problem tenant, a tired property, and meaningful appreciation since 2014 are usually better off harvesting equity than chasing one more lease.

Question One: What Is Your Real Cash-on-Cash Return?

Most landlords I meet have a number in their head that is wrong by 20 to 40 percent.

Pull last year’s actual numbers. Not pro forma. Actual.

  • Gross rent collected (not billed)
  • Less property taxes
  • Less insurance
  • Less property management or your own time at a real hourly rate
  • Less every repair and capex line, including the ones you put on a credit card and forgot
  • Less vacancy, including the unit that sat empty between June and August

Now divide that net cash flow by your current equity, not your original down payment. If you have $180,000 of equity locked in a Wake County rental cash-flowing $4,200 a year, your real return on the locked equity is 2.3 percent. A 2018 CD pays better than that, with no toilets.

If your number is under 4 percent on locked equity in NC right now, that is a flag. Not a decision yet, just a flag.

Question Two: How Tired Are You, Really?

Tiredness is not weakness. It is data.

I track this with three questions when landlords call:

  1. When was the last vacancy you rented through, and how long did it sit?
  2. Are you fielding tenant calls on your personal cell?
  3. When did you last raise rent, and was it because the market moved or because you finally couldn’t take losing money?

If the vacancy was over 60 days, the calls are interrupting your weekends, and you have not raised rent since 2016, you are not running a business anymore. You are running a hostage situation where you are the hostage. That is the tired-landlord profile we close most often, and it is usually a sell.

Question Three: What Does the Property Actually Need in the Next 36 Months?

Walk the property. Get honest with yourself about the next big-ticket items.

A typical 1990s NC rental in Durham or south Charlotte has a roof that is 20 to 25 years old, an HVAC that is 10 to 15 years old, and water heaters that are over the warranty line. If you are looking at $9,000 of roof, $7,000 of HVAC, and $1,500 of water heater inside the next three years, you are not earning that $4,200 a year of cash flow. You are losing money in slow motion.

This is the math a lot of Raleigh landlords miss. They look at the rent check and think they are winning. They are not adding back the capex that is silently accruing in the structure.

Question Four: What Is Your Tenant Situation?

NC tenant law sits primarily under NCGS § 42, and 2018 has not been a kind year for landlords trying to remove non-paying tenants. Magistrate dockets in Wake and Mecklenburg are slow. Even when you win, you wait for the Sheriff to schedule the writ.

If you have a non-paying tenant, a tenant in active eviction, or a tenant on month-to-month who has been a problem for over a year, that situation will follow the property to a traditional buyer or a retail listing. It will not follow the property to a cash investor who buys with tenants in place. We close Raleigh and Durham rentals every month with the tenant staying.

That is a real difference. A retail buyer wants vacant possession at closing. We do not. We will buy with a paying tenant, a non-paying tenant, or a tenant in eviction. The price reflects the situation, but the door stays open.

Should You Sell Your NC Rental Property Now?

You should consider selling your NC rental property when your real cash-on-cash return on locked equity drops below 4 percent, when major capex is due in the next 36 months, when tenant management has become emotionally costly, or when local market values have outpaced rent growth so far that holding for cash flow no longer pencils out. In the 2018 Triangle and Charlotte markets, many landlords who bought before 2014 are sitting on so much equity appreciation that the right move is to harvest, redeploy, or exit.

The Five-Branch Decision Tree

Here is how I actually walk through it on a phone call.

Branch one, strong cash flow, low capex coming, good tenant. Hold. You have a real asset. Refinance if rates allow, raise rent to market, and keep going.

Branch two, strong cash flow, big capex coming, good tenant. Decide whether you want to fund the capex or convert the equity. If you have other better uses for the money, sell. If you want to keep the income, fund the work and keep going.

Branch three, weak cash flow, low capex, good tenant. This is the trap. The numbers feel okay because the property is quiet. Run the locked-equity return math. If it is under 4 percent, sell or 1031 exchange into a better asset.

Branch four, weak cash flow, capex coming, any tenant situation. Sell. The capex will eat your equity. The market is unlikely to rescue you in 2019 if the Fed keeps raising rates the way they have through 2018.

Branch five, any cash flow level, problem tenant, eviction in progress, or non-paying tenant. Sell to a cash buyer who closes with the tenant in place. Stop bleeding.

A Closing I Did Last Month

A landlord I’ll call Marie owned a 1,400 square foot ranch in Durham, near Hope Valley. She bought it in 2009 for $138,000, had $52,000 left on her mortgage, and rented it for $1,275 a month. Her tenant of seven years had stopped paying in May. She had already filed for eviction.

Marie was 64, had two other rentals, and was done. We toured the property with the tenant present, ran our number based on as-is value, and offered $194,000 cash, with the tenant staying or going as the situation resolved. Closed in 18 days. Marie wired the money into a brokerage account and the tenant ended up cash-for-keys two weeks later with our team.

She told me at closing she had been losing sleep for six months over a problem that took 18 days to solve once she made the call.

What 2018 NC Market Conditions Mean For This Decision

The Fed has raised rates four times in 2018, and 30-year mortgage rates have climbed from the low 4s into the high 4s. That matters for a landlord exit in two ways.

First, the retail buyer pool for your rental is smaller than it was in 2016 and 2017. Buyers who were qualified at 4.0 percent are not all qualified at 4.85 percent, especially the first-time buyers who would have absorbed the typical Wake County or Mecklenburg County rental property. The buyer pool keeps narrowing through the second half of 2018 and there is no public signal that the Fed is done.

Second, the cap rate the next investor will pay for your rental is rising with rates. A property that traded at a 7 cap in 2016 is trading closer to an 8 cap in late 2018, which means the same net operating income produces a lower price. If you wait another 18 months hoping for a stronger exit, you may be selling into a less favorable cap-rate environment as well.

The window in 2018 is narrower than it looks. The retail buyer pool still has fuel and the investor pool is still aggressive on quality stock. Both of those advantages compress in 2019 if the rate trajectory holds.

Two Questions To Ask Yourself Tonight

Pull last year’s actual rental numbers and write down the locked-equity return. Then write down the next three big repairs you know are coming and what you think they cost.

If those two numbers do not work, you have your answer. The Federal Reserve Economic Data shows clearly that 2018 has been a year of rising mortgage rates, which means the buyer pool is shrinking, which means landlord exits will get harder, not easier, into 2019.

When you are ready to talk numbers without pressure, call us at (845) 316-1119 or reach out through our contact page. We close on rentals in Charlotte, the Triangle, and most NC counties, with tenants in place or vacant, and we’ll give you a straight number the same week.

The decision tree is simple. Running it honestly is the hard part.