Any landlord worth their salt will tell you there are good times and bad, but it may be time to sell when the bad ones start piling up. The trick is to learn to recognize when it’s best to let a rental property go.
For example, many property owners decided to cash in on the rising home prices in 2020 and 2021 by selling their rental properties just as property taxes rose. Because their costs were rising faster than their rental income, they decided to liquidate their equity and reinvest it elsewhere.
There are various scenarios where a landlord can decide to sell their rental property. A landlord might need to upgrade from a small portfolio of single-family houses to a more extensive portfolio of multi-family units. It may also stem from a major life event or unexpected financial setback.
For whatever reason, selling multiple homes requires some additional effort. If you plan on selling a rental property, you’ll need to work with your renters to ensure that the property remains in good shape for showings and that they’re available when realtors drop by. Tenants that refuse to vacate your property after their lease expires might provide another obstacle.
Sell As A Portfolio
There are several upsides to selling your complete investment portfolio to a new investor. It’s quick, and there are methods to limit the financial impact on your taxes. If you find a buyer who sees potential in fixing up the place or raising the rent, you won’t have to do as much preliminary work.
Better funding and less uncertainty both increase the deal’s chances of success. However, it may be challenging to locate a buyer, and you may end up losing part of the earnings in the process.
Sell As Individual Properties
Having the rental property free of tenants is ideal in tenancy home sales. One reason is that people are more willing to purchase a vacant house and rent it out to a tenant they have personally screened. Making any required repairs and staging the property for showings is less of a hassle when the rental unit is empty, and there is no need to coordinate showings and open houses with the tenant’s schedule.
Being as pleasant and flexible as possible is crucial if you need to sell a rental home before the renter has moved out. Tenants are entitled to certain rights and may make life difficult for the agent and property owner if they don’t get what they believe is fair treatment.
Provide advanced notice of showings and think about employing a lawn care and cleaning firm to maintain the property without placing undue stress on the tenant. Lastly, keep the tenant updated on the sale of the property.
You can sell your single-family rental home without going crazy. Get in touch with a professional real estate agent if you lack the knowledge or confidence to price and sell your rental property, prepare it for showings, or target potential buyers. One drawback is that paying a real estate agent can reduce your earnings.
Sell To Your Tenants
It could be worth your while to talk to your renter. If the price is right, a renter may want to buy the property from you. In certain instances, long-term renters who have established themselves financially may be able to buy your house and therefore avoid having to relocate. No one has to uproot their lives, and you get to sell your real estate investment to someone already familiar with and fond of it.
A downside is that the seller financing requires you to be the only property owner and leaves you vulnerable to a defaulting buyer. Additionally, your renter, now acting as a potential buyer, may demand additional repairs or renovations before they agree to purchase the property.
Sell To Your Property Managers
Your current property managers may also represent a ready clientele for your rental properties. They will be familiar with the land and have a passion for real estate. Perhaps they are aspiring financiers wanting to expand their holdings. They may not have enough cash flow to buy your complete portfolio, but they could be interested in a piece of it.
Tips For Minimizing Your Expenses
Avoiding Capital Gains
Perhaps you’ve decided to sell a rental property that hasn’t been bringing in much money in favor of a new venture in a more promising locale. A 1031 exchange allows you to defer paying capital gains or home sales taxes on selling an investment property and purchasing a replacement “like-kind” property.
Short-term capital gains are earnings from the sale of a property held for a year or less. In contrast, long-term capital gains are realized through selling properties that have been held for more than a year. Tax rates on capital gains are generally lowered for investors who keep their assets for more than a year. All property owners who fall into a lesser tax bracket may not have to pay anything toward their capital gains tax at all.
The Internal Revenue Code Section 1031 exchange can’t be used to buy a primary residence; you must hold the replacement property for rental or resale purposes. Furthermore, the clock begins to run as soon as you sell the first property. You’ve got 45 days to narrow your search to three potential homes and another 180 days to complete the deal.
The most crucial step in initiating a 1031 exchange is to get in touch with a skilled intermediary, whose duty is to arrange all parts of the exchange and ensure that you follow all the needed processes, including the subsequent purchase and timing of the property sale.
Realtor Commission
Is it necessary to hire a realtor at a 3% commission rate? There goes $30,000 on a $1,000,000 portfolio in an instant. Luckily, this is entirely avoidable so long as you take the initiative to seek out the buyers on your own.
Attempting to sell your rental property without the help of a real estate agent may seem like a good idea due to the commission savings you’d get. However, compared to homes sold with the help of an agent, the average FSBO selling price was roughly 20% lower.
Having a professional with knowledge of disclosure laws is yet another benefit of working with a real estate agent. More than ever before, it is crucial to get every little detail right when selling a rental property. Generally speaking, failure to disclose relevant information is the leading cause of legal action.
To protect themselves against a claim by the buyer after closing, sellers often use agents to provide the information they aren’t aware of. For instance, the rise in the number of flood-prone locations in Texas might make it difficult to get enough coverage.
Avoiding Repairs
The thought of just putting a rental property up for sale and immediately walking away from it seems appealing. Even if you find a real estate investor willing to pay more for a property that needs maintenance, fixing the stuck window or leaky faucet may be worth your time before putting it on the real estate market.
It’s a good idea to upgrade the home to current rental standards, especially if it’s unoccupied, such as applying new paint or installing hard-surface flooring. In common home sales, a house that has been well-maintained and upgraded will fetch a more fantastic price than a run-down property.
On the other hand, while investing in property improvements might increase value, the cost of missed rent, maintenance, and additional costs can frequently outweigh the potential gain.
If you want to sell multiple properties, you should first fix any deferred maintenance. You may avoid this cost, but your bottom line would likely suffer as a result. However, when you factor in the time it will take to make the repairs and the potential risk to the purchase price and terms in the present market, it may not be worth it to do the repairs. Selling multiple rental properties as-is might still be the better choice.