Real estate can be a great investment when handled properly. Owning rental properties can provide you with supplemental income month after month over the course of your career and well into your retirement.
On the other hand, a time may come when you might not want to have to worry about dealing with your investment properties. Or perhaps you want to use the proceeds from selling your real estate to fund your retirement. In fact, retirement might not even factor into your decision—maybe you just want to unload your real estate portfolio for the cash to focus on other things or to invest in something else.
Whatever your reason is for selling your investment property, you should consider several factors. From tax implications to the current real estate market, you’ll want to gather as much information as you can to ensure you get the best possible return on investment. Once you feel like you can, you will want to make sure you take the proper steps to sell.
Keep reading to know what you should consider when you sell an investment property—as well as how to actually sell it.
Things to Consider When Selling Your Investment Property
So, you’re thinking about selling an investment property. If your rental appreciated over time, you could be looking at a significant ROI. It can be tempting to go after those profits as quickly as possible, but keep the following in mind before you sell.
Tax Impact
Money earned from selling your investment property will likely be subject to a capital gains tax. Speak with a tax professional to figure out how much money you’ll receive from the sale once those taxes are factored into the equation.
Taxes come into play if you’re selling your property for cash right away. If you want to hold off on paying a capital gains tax, however, you might consider a 1031 exchange. This process allows you to reinvest your investment property equity and put it into a similar property. Doing so allows you to defer any capital gains taxes that would otherwise be due. The IRS has certain rules that must be abided by when doing this exchange, but it can be beneficial if you’re looking to avoid capital gains tax until you’re truly ready to exit the investment property game.
The Real Estate Market
Along with location, timing can be everything when it comes to success in real estate. Take a look at how the rental market is doing as you consider selling your investment property or properties. If you’re looking to sell because you’re experiencing low cash flow, there’s a chance you could offset that by charging more rent rather than offloading the property—especially if rent prices are increasing in general. You may also want to hold on to your investment property if it’s in an area where a company is moving its headquarters. There will likely be an uptick in people who need a place to live. At the same time, that high housing demand could present you with an opportunity to sell your property for an even larger profit. Either way, pay attention to the market and see how you can make it work to your advantage before you sell.
Your Investment Property’s Condition
If your rental property constantly needs costly repairs, you may want to sell it. Every fix can cut into your profit and decrease your ROI. Plus, a building under constant maintenance can make it hard to attract and maintain tenants, costing you potential rent payments.
Repairs don’t always have to be a negative thing, however. Making much-needed fixes can make your investment property more attractive to tenants and potential buyers. Renovations could also increase your building’s property value over time, which would allow you to put a bigger price tag on it when you decide to sell.
Fixing up a rental property can be frustrating at the time, but down the road, those repairs could determine how easy or difficult it is for you to get and maintain tenants (if you opt to hold on to the property) or sell it. But before you begin a major renovation, decide what kind of ROI those fixes will yield.
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How to Sell Your Investment Property
You’ve taken factors such as taxes, ROI, and the real estate market into consideration and decided you want to sell your investment property. Before you hunt for buyers, you’ll want to take some key steps to ensure your sale goes as smoothly as possible:
Gather Important Documentation
Having paperwork on hand—such as maintenance logs, rental income records, and past renovation permits—handy at the beginning of the process can build trust with potential buyers and make your property more attractive.
Study the Market
When you sell your investment property can dictate how much you eventually get for it. If you’re in the midst of a period when rents are higher than usual, it’s been tough for people to find homes to buy, or more workers are moving to your area and need a place to live, your investment property will likely be easier to sell.
Look into Tax Implications
As you crunch numbers, be sure to figure in capital gains taxes. That will give you a clearer idea of how much money you can make from the sale; it’s not as simple as your sale price minus your mortgage, expenses, etc. Remember, you can defer those capital gain taxes with a 1031 exchange if you plan to reinvest in another rental property.
Make Any Necessary Renovations
You don’t have to break the bank upgrading your investment property before selling it, but finding a buyer becomes easier if you can improve the curb appeal. Putting on a new coat of paint, cutting the grass, and repairing broken fixtures can all be positive additions to your ROI.
Bring on a Real Estate Agent
Selling an investment property is a big undertaking; don’t attempt it on your own. Save yourself potential headaches and work with an experienced real estate agent. They can help you with pricing and marketing your property. Plus, professionals are well-versed in tenant rights, disclosure laws, rent trends, taxes, projected ROIs, and negotiations.
Market and Show the Property
When you and your agent list your investment property, be sure to mention how much rental income buyers could earn. Your agent should also note local insights and connections that will help ensure desired buyers know about the property
Review Your Offers
Look at how much buyers offered for your investment property, but also compare any contingencies and when they want to close. You can then counter any offers to try to gain a better price or deal terms. Your real estate agent can help you go through the offers and work out these details.
Close the Sale
Once you’ve settled on a deal you like, sign the appropriate paperwork; pay off your mortgage (if applicable); and tackle payments like taxes, your agent’s commission, and closing costs before collecting the net proceeds for yourself.
Your current tenants are another issue you’ll have to think about if you sell your investment property. You could approach them and try to work out a deal for them to vacate early, but if they want to stay, you’ll have to respect the lease terms. Again, working with an experienced real estate agent can help you better navigate this situation. On the other hand, keeping your building occupied as you try to sell could be a sign to potential buyers that they’ll have no trouble with cash flow once they take over the property.
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The Bottom Line
You have to consider a number of factors before you sell your investment property. Any one of them could impact how much you net from the transaction. You can increase the chances of a successful sale by gathering as much information upfront as you can. This includes what’s going on in the real estate market at the moment, how much you’ll owe in taxes after the sale, and the amount of money you’ll have to put in to renovate the property to make it more appealing to potential buyers.
Once you have this critical information at your disposal, there will still be plenty to think about, like working with current tenants, closing fees, potential 1031 exchanges, pricing, and negotiations. Bringing on an experienced real estate agent, especially one who deals with investment property sales, will make the process so much easier for you.
You’ve worked hard to acquire your investment property; take the proper steps in the sales process to reward yourself with the best possible ROI.
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