Unlike stocks and shares, real estate investments can't be liquidated quickly or with a click of a mouse. It may take several weeks from a decision to sell until the sale occurs. Selling your house can already feel overwhelming if you aren't prepared – and selling investment properties often demands extra work and attention.
Some of the most frequent reasons for selling a rental property include:
Landlords may relocate and decide to invest in real estate at the new location
Issues with tenancy arrangements
Desire to maximize profit from the property
The property has a negative cash flow
How to Achieve a Smooth Sale
Here are some ways to follow to attain a smooth sale when selling a rental property:
Don't Be Caught Off Guard by Capital Gains Taxes
Any profits from the sale of your principal residence are typically taxation-free. Usually, you won't have to pay taxes on earnings of up to $250,000 (single) or $500,000 (married).
However, there's a catch: you must have owned the home for at least two years and resided in it for at least two of the previous five years to qualify. The IRS does not provide the same capital gains tax benefits to real estate investors; other regulations apply if you sell real estate investments.
Short-term capital gains, which include those from selling a rental property held for less than a year, are taxed at the same rate as regular income. It puts your potential tax liability between 10% to 37% as of this writing under current law.
Long-term capital gains receive a reduced rate tax: 15% for joint filers with taxable income between $83,350 and $517,200 and 20% for those with more. The capital gains tax is waived if your income is less than $83,350. But there may be ways to circumvent taxes even if your income exceeds that.
Use 1031 to Avoid Paying Taxes on Gains Made
When a rental property isn't bringing in enough money and the surrounding area is deteriorating, it may be time to sell and move on to greener pastures. The 1031 exchange allows you to defer paying capital gains tax when you sell an investment property and use the profits to buy a new "like-kind" estate.
What does "like-kind" mean? Real estate investors can't use the 1031 exchange to purchase a home for personal use; the replacement property must be for rental or resale purposes. Furthermore, the clock starts as soon as you sell the first property. You have 45 days to narrow your search to three potential properties and another 180 to complete the deal.
Honor Your Lease or Grant Tenants Ample Time to Leave
If you decide to sell an occupied rental property, you should negotiate with the renters and incentivize them to leave. If they insist on remaining there, or if you want to highlight a great tenant as a selling point, you'll need to abide by the lease.
In most jurisdictions, the lease automatically transfers with the property sale, and the new owner must wait until the lease expires to make any modifications. If your tenants are on a month-to-month lease, you can give them the notice to move. Make sure to research the laws that govern your state.
Use a Good Renter as a Selling Point
Some investors would rather have an active tenant in a property than an empty one. If you're selling with a renter, remember that you're advertising the property to investors alone. Include details in the listing that buyers would care about. Some examples of these are:
How long has the tenant been a resident?
How much is the rent each month?
Has rent always been paid on time?
Do tenants pay any utilities?
Are any licenses, deposits, or other permissions accompanying the lease?
What is the last date of the lease?
Providing your renters with an incentive is the easiest way to ensure they're willing to cooperate with you during your investment property sale. Consider offering rent reductions or gift cards to maintain the property in good condition and be flexible during showings.
Consider Whether the Property Requires Any Repair
You may want to unload a rental property as quickly as possible by putting it on the market without preparation. Even if you find an investor willing to pay more for a home that needs maintenance, fixing minor issues such as the dripping faucet or a creaky door may be worth your time. A house in good condition will fetch a better selling price than an older rental property needing a lot of maintenance.
Consider updating an empty home to contemporary rental standards with new paint, blinds, lighting fixtures, and more. This reassures purchasers that they won't have to undertake any repairs before finding a tenant. Some repairs you can skip include cosmetic flaws, minor electrical issues, and some old appliances. Read more about what not to fix when selling a home here.
Don't Rely on Rent to Increase the Value
Don't assume that a good, well-paying tenant will increase the value of your single-family home, even if that tenant makes the property more desirable to investors. Single-family rental properties are valued in the same way as other single-family residences.
If your rental property contains five or more units in the multi-family housing category, your value will depend on the rental income. Increasing rent won't impact the property's value, but it may increase your property's appeal to investors who appreciate stable rental revenue. In this scenario, higher-income tenants will reflect positively on the property's value.
Hire the Ideal Realtor
If you're trying to sell a rental property, saving money by not using a real estate agent could sound tempting. However, finding an agent with experience in investment properties can help ensure a smooth sale. They'll understand local rent trends, taxes, ROI expectations, and your home's after-repair value (AVR). They can also tell you when the time is right to sell.
At BidMyListing, our first-of-its-kind marketplace connects home sellers with top real estate agents who submit proposals to represent their home sales. Each proposal includes a listing term, commission rate, information about the agent, and cash bonus. By putting all the negotiating cards on the table – and having the agent invest in the home sale upfront – we empower home sellers to make more informed decisions. Get started here!
To learn more about selling your home, visit our Home Seller Resources >