Continuing to hold a rental property isn't the only option in rental property ownership — at some point you'll need to consider an "exit," such as selling or rebuilding. Here's an overview of how to think about the three options of selling, rebuilding, and major renovation, and when to start considering one.
- The main exit strategies for rental property ownership are selling, rebuilding, and major renovation.
- Selling includes a method called an "owner-change sale," in which the property is sold with a tenant still in place.
- Rebuilding is the option of replacing a badly aged building with a new one, but it comes with a heavy burden in cost and time.
- Major renovation can, in some cases, boost a property's competitiveness while keeping costs lower than rebuilding.
- Which option to take should ideally be decided in consultation with specialists, weighing the balance of returns, time, and effort involved.
When to Start Thinking About an Exit Strategy in Rental Property Ownership
Rental property ownership isn't just about holding a property indefinitely while collecting rental income — at some stage, you'll choose an exit, such as selling or rebuilding. Common triggers for starting to think about an exit strategy include when the building has become significantly aged, when the time for a major repair is approaching, or when you start thinking about inheritance or estate planning. Rather than being forced into a rushed decision by a sudden circumstance, keeping the options in mind as part of everyday thinking makes it easier to consider them calmly when the time comes.
The Option of Selling (Including Owner-Change Sales)
Selling is the option of letting go of the property and converting it to cash. There's also a method called an "owner-change sale," in which the property is sold with the tenant still living there — its distinguishing feature is that you don't need the tenant's consent or to have them move out, since the property is handed over to the buyer as an income-producing asset as is. We cover the practical steps of an owner-change sale in more detail in a separate article on how to sell a tenanted property.
The Option of Rebuilding and What to Weigh
Rebuilding is the option of tearing down an aged building and constructing a new one. Because it lets you refresh the equipment and layout, it can be expected to improve long-term competitiveness — but demolition and construction costs, along with the vacancy period in between (when there's no rental income at all), tend to weigh heavily as considerations. Careful thought is needed, including whether financing is available and the repayment plan.
The Option of Major Renovation
Major renovation is the option of refreshing the interior and equipment while keeping the building's structural frame intact. It often costs less than rebuilding and tends to have a relatively shorter construction period, but depending on the building's structural constraints — the degree of deterioration, seismic performance, and so on — renovation alone may not be enough to address the issues.
A Framework for Comparing the Three Options
Deciding between selling, rebuilding, and major renovation requires comparing them from several angles — projected returns, time required, and the owner's own effort and workload. Selling wraps up in a relatively short period, but it means giving up the future income you would have earned by continuing to hold the property. Rebuilding and renovation require upfront costs, but can in some cases be expected to boost income-earning capacity afterward. Which option suits you best depends on the property's condition and your financial situation.
Where to Turn When You Start Considering an Exit Strategy
Considering an exit strategy calls for judgment that spans multiple specialist areas — real estate sales, construction, and tax, among others. It's advisable to start considering your options early, weighing the input of several specialists such as your management company, a real estate agency, a tax accountant, and a construction company. If you're thinking specifically about estate planning with inheritance in mind, it's important to allow yourself plenty of time to prepare. Rather than deciding based on the opinion of a single company, hearing views from multiple perspectives lets you keep your options open as you consider what to do.
Frequently Asked Questions
When should I start thinking about an exit strategy?
There's no fixed timing, but it tends to be triggered by things like the building becoming significantly aged, the time for a major repair approaching, or starting to think about inheritance or estate planning.
Should I consider rebuilding or renovation?
The suitable option differs depending on the building's structural constraints and your financial situation. We recommend having a construction company or your management company conduct a building inspection before comparing the two.
If I sell, can I sell it with a tenant still living there?
Yes — this is possible as an owner-change sale, selling the property with the tenant still in place. We cover the detailed process in a separate article, so please have a look at that as well.
Summary
The main exit strategies for rental property ownership are selling, rebuilding, and major renovation. Each has different characteristics in terms of returns, time, and effort, so it's advisable to start considering your options early, in consultation with several specialists.
Please also see How to Sell a Tenanted Property (Owner-Change Sale).