There are a lot of reasons why you might decide to move on from a specific rental property. Whether you want to cash out or reinvest the funds in another project, there are important considerations to make the process easy and profitable. The Hard Money Co. wants to help teach you how to sell your rental property with best practices in mind.
There is a wide range of variables in play when you decide to sell a rental property from tax regulations to existing tenants to property repairs. These obstacles can slow down the sale of your investment and eat away at your profit. To avoid the hassle, consider these tips while you're getting ready for a sale.
Inform your tenants and honor their lease
This only applies if you have tenants under contract when it's time to sell, but clearly communicate your intentions with them and allow them the opportunity to make the decision that best suits them. If you are intent on them vacating, you can offer them incentives to do so through negotiation. If they would prefer to stay, you can use that as a selling point to demonstrate cash flow for potential buyers. Ultimately, the decision is theirs and you'll have to respect the terms of the lease.
In most locations around the country, your lease will be passed along with the sale and the new owner is obligated to honor it until it expires. In situations where tenants are renting month-to-month, there may be a notice requirement before they must vacate. Additionally, regulations are constantly changing and the circumstances surrounding Covid-19 have altered the rules in many regions.
Use good tenants to add value to a property
You should do everything in your power to use your tenants as an asset in the sale of the property. Many potential buyers are going to continue to use the property as a rental. Having tenants in place saves them the effort of marketing and provides cash flow from Day 1. Use this fact to your advantage as you are marketing the property yourself. Promote the tenant as being consistent with their payments, trustworthy, and agreeable. Additionally, include all the information of the existing lease along with a brief history of prior tenants and market comparable. This will allow buyers to know exactly what they are getting into.
Consider making necessary repairs
Most likely avoiding repairs and renovations is a primary reason for selling the property, but it may be worth the effort to make the improvements before selling. In addition to improving the price of the property, it will also make it more attractive to potential buyers. This gets their attention and increases competition amongst buyers.
There may be additional tax benefits to your work as well. Items classified as 'repairs' may be tax-deductible and can be used to reduce your tax obligation. These differ from 'improvements' which are strictly value adds. Take inventory of the property and do the work that will add the most to your bottom line.
Stay on top of your capital gains tax obligation
When it's time to sell your rental property you're (hopefully) going to be earning a profit on the transaction and the IRS is going to want to take their share. This differs from the main residence sale which is usually tax-free. While paying some taxes may be unavoidable, there are some tax breaks that may be available to you if you do your research.
The first thing you need to consider is the length of ownership. If you are selling a property that you've held for less than a year, it will be considered 'short-term capital gains which are taxed at the same rate as your income. Your tax bracket will inform the exact rate, but it will likely be significantly higher than you might pay if held for a longer term. If you extend the ownership period beyond a year, the capital gains will be considered 'long-term' which are taxed at about half the rate.
When you're getting ready to sell, take this timing aspect seriously. While it may not be worth it to hold a fix and flip that was completed in just 3 months, it might be worthwhile to wait on a property you've had in your portfolio for 11.
Additionally, you may consider options that can defer your sale while still accomplishing your goals. Refinancing over a longer period of time can reduce your monthly debt obligation on a property and help you extend your ownership period.
Utilize a 1031 Exchange
If you're looking to use the funds from the sale of a property to invest in another, consider using a 1031 exchange. This means that you can defer capital gains on the sale of a property, so long as you are re-investing that capital into another real estate investment. For many who intend to make a career out of real estate investing, this is an excellent way to scale without being taxed at every transaction.
Live in your rental before selling
This may only apply to a select few investors, but living in your (previously rental) property is a legitimate way to avoid paying capital gains. The IRS employs an 'Ownership and Use' test which requires that a property is owned for at least 2 years and served as the primary residence of the owner for 2 of the last 5. If the property meets your living expectations and is still an appreciating asset, it may be a good idea to use it as your own primary residence prior to selling.
Hire a real estate agent
You're likely a savvy real estate investor, but that doesn't mean that asking for help is out of the question. Hiring a real estate agent can make the sale go considerably smoother. They will do the work to market and show the property and may even bring in potential buyers beyond the scope of any marketing efforts. You may think that the commission costs make hiring an agent untenable, but in many cases, a real estate agent can actually increase the sales price beyond the cost of commission.
Consider the state of the market and how quickly you want to sell. Even starting a conversation with an agent may help inform your decision.
Selling your property can be as easy or difficult as you make it, but the steps we've outlined here will help you streamline the process and maximize your profit. If you have additional questions about the selling process, reach out and we'll do our best to continue to guide you on your real estate investment journey.
The content of this blog should not be taken as investment advice. Any decision made with regards to the sale of your property should abide by all applicable regulations and should be made under the advisement of accredited console.