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Whether you own one single-family rental, an apartment building or a hundred condos across several cities, deciding to sell an investment property is full of challenges. Here are a few things to consider before and during the selling process.
Find the Best Time to Sell Your Investment
The Personality of the Neighborhood Has Changed
Imagine the neighborhood as a time-lapsed video — two decades dramatically unfold in the course of just a few minutes. You see retirees move out, young families move in. You see investors swoop in and flip properties. You have a constant coming and going of renters. You see kids go from stroller to tricycle to bicycle to their first car. You watch the trends in landscape design and front doors change eras.
The neighborhood 20 years ago might have been known for the grumpy old men who’d meet at the park every morning for cards; now it’s considered the best cul-de-sac for raising kids! Neighborhoods are constantly changing so when you sell has everything to do with to whom you sell.
If a neighborhood is up-and-coming, you may get top dollar for it or hang onto it as it increases further. If it’s on the decline, you may want it out of your portfolio ASAP.
You’re Not Sure About the State of the Market
Investments are hard to time correctly … otherwise, everyone would have bought Google stock back in 2004. Real estate is no different.
A new company moves to town, increasing the value of all the properties in the area because of demand. Conversely, a big factory may close, causing the surrounding neighborhoods to empty out or deteriorate. Just look at all the cities vying for Amazon’s Headquarters 2.0. Wherever they end up, the e-commerce giant will completely change the economy of the city — from jobs to cost of living — just like it’s done in Seattle (Headquarters 1.0) throughout the last decade.
Solution: Hire an Experienced Realtor
Maybe you did set up a time-lapse video for the last two decades and know exactly what’s happened with your area. Go you! If not, talk to someone who’s familiar with how the city and neighborhood have changed. Speak with someone who has watched the change happen over the course of their career.
“Work with an agent that knows the formulas. It’s a very data-driven process,” says Stephen FitzMaurice, a top-selling agent in Portland, Oregon. “It’s up to the agent to present a full financial picture. Investment properties have their own language and agents need to speak that language.”
HomeLight can match you with a top real estate agent in your area. This person will help you determine if you should sell or hold on a bit longer. They can also help you find a new rental if you’re looking to stay in the market.
The Hassle of Managing the Property
You Live Far Away
Say you bought two apartment units in Missouri back when you were 32 and living just down the street. Now you live in (or are moving to) San Diego. Being a long-distance landlord is no easy feat.
You Don’t Want to Deal with It
As you approach retirement, you’re excited about sitting in a cafe to read the newspaper until noon on a weekday and traveling to Paris on a whim. Dealing with a tenant’s early Saturday morning email request about the leaky faucet is not the retirement you dreamed of. Though real estate is considered passive income, it’s not Paris.
Solution: Find a Property Manager or Sell
If you live far away or just want to be done, it may be worth it to you to hand off the management. If you have family or friends in town, great. If not, a property manager is a good option. Property managers usually charge 8 to 12 percent of the monthly rental income, plus expenses. Fee structures vary so read the fine print before you sign on.
If you’re over it, sell. (Did we mention HomeLight?)
Dealing with Difficult Tenants
Selling a house when there are renters living in it is like a parent trying to get their 8-year-old to clean his room before dinner. The kid simply doesn’t care as much as the parent and he’s probably just going to shove most the mess under his bed. You can sell with tenants living in the house, but you’ll have to be creative.
Solution: Give Tenants Options and Incentives
- See if the tenants can continue their lease with the new owner.
This saves the new owner from having to find tenants and saves the tenants from having to move. Win-win.
- Pay them to move.
Avoid conflict altogether by paying your tenants to move. Offer a month of free rent for example. Remember these tenants will need to find a new place, so give them notice and stick to the legalities of the lease agreement.
- Incentivize a quick sale.
With renters, you’re dependent on them to be accommodating to showings, pick up their laundry off the bathroom floor and keep dirty dishes out of the sink. It’s no fun for tenants to be in the middle of a story that ends with them getting kicked out of their house, so what is their incentive? Create one.
- See if the renters are interested in buying.
Sometimes renters — especially long-term ones — would rather stay put. Before you go searching for a new owner, see if the current tenants are interested in taking it off your hands.
- See if the tenants can continue their lease with the new owner.
The Cost Out-Weighs the Income
You’re Not Profiting Enough or You’re Losing Money
You could own in a great housing market — like San Francisco or Los Angeles or New York, but if you’re renting out properties in those areas, your capitalization (or cap) rate is low. Sure, you’re able to charge a lot in rent but you also pay a lot in mortgage, maintenance and utility costs, so you’re not making much. It seems counterintuitive, that such a high-demand area isn’t a profitable rental market.
Areas that have a higher cap rate — Memphis, Oklahoma City, Cincinnati — are where you’ll make the best profit margin on your rental properties. This means the costs you’re paying (mortgage and expenses) are well outweighed by what you’re able to charge in rent.
You’re Worried About Having to Pay Capital Gains
If your home has appreciated, you will need to pay capital gains tax on that appreciated amount. You should also be accounting for depreciation (or else you’re leaving money on the table) Sound complicated? It’s because it is. Here’s a good primer.
The term “capital gains” is foreign to many, and thanks to politics has been made to sound like an insane amount of money, but we should get something straight, the capital gains tax rate (about 15%) is less than your income tax rate (likely between 25 and 39%), so making investment real estate sales and then having to pay capital gains tax on them isn’t the worst situation in the world. That said, there are a few ways to get around capital gains.
Solution: Sell and Reinvest in a Better Area
Option 1: You can live in the house as your primary residence for two of the five years pre-sale. You don’t pay gains on your primary residence. If you only have one rental property, this may be an option. If you have 20, it’s not.
Option 2: You sell the house in the poorly performing neighborhood and you reinvest all the proceeds from that sale to buy an investment property in an area with a higher cap rate. This is called the 1031 exchange and allows you to defer capital gains taxes.
Typically, hanging onto an investment properties pays off in the long run but that doesn’t mean there’s never a good reason to sell. Deciding if it’s time to sell an investment property takes strategy, legwork and good Realtor.
Article Image Source: (Ibrahim Asad/ Pexels)