What to Do Before Selling Your Rental Property
As a real estate investor, you’ve developed instincts for understanding the rental marketplace.
When expenses are increasing too quickly, vacancies are imminent, or high market prices are prevailing, your instincts might tell you to sell.
However, selling a rental property shouldn’t be a spontaneous decision. Even if your goal is to sell as quickly as possible, you can’t skip any steps when preparing a house to sell. Before you can move on to your next real estate endeavor, you must communicate with your current tenants, make repairs, hire an agent, and pay recapture tax on your sales profit.
Read on to learn about the four most important things to do before selling your rental property.
#1 Notify your tenants.
If your units are currently occupied, your first priority should be to notify your tenants.
Your tenants will be impacted by the sale, so keeping them in the know is only courteous and fair. Tenants will have several options when the sale goes through. They can either move, negotiate a new rental agreement with the new buyer, or continue their existing lease if the sale is in the middle of the lease term.
In general, it’s best to wait for the lease term to end before selling the property. This way, tenants who want to move won’t feel rushed to do so and can be fully prepared. More tenants may decide to move if this is the case, and unoccupied units are much easier to show.
However, there are also some benefits to selling to another real estate investor and transferring your existing leases. Occupied units with stable, responsible tenants are highly attractive. If you can manage to keep your tenants on board, you can use their presence as leverage in the sale.
#2 Evaluate your property’s condition.
Your next step should be to evaluate your property’s condition and decide which repairs and/or improvements are necessary.
While you can certainly try to sell your property as is, this isn’t likely to be a good idea, especially if long-term tenants have been living in the units. It’s usually worth it to make minor repairs and address any cosmetic issues (e.g., refreshing old paint) before showing your property.
Occupied units are more difficult to repair due to having to work around your tenants’ schedules and adhering to legal entry requirements. On the other hand, vacant units offer an excellent opportunity to make renovations such as installing hard-wood flooring or replacing an appliance.
The trick is to find the right balance of work on the property that won’t sacrifice too much rental income.
#3 Hire a knowledgeable real estate agent.
There’s no better resource for a landlord looking to sell than a real estate agent.
Real estate agents can offer all kinds of invaluable insight, including your property’s return on investment (ROI), recent trends in the local market, tax issues with your sale, and the after-repair value (ARV) of your property.
By hiring a real estate agent, you can also gain access to their vast networking privileges. You’ll be able to reach a network of hundreds of real estate investors looking to buy properties in your area.
Finally, when you do find potential buyers, a real estate showing agent can help you understand all parts of the showing process, including navigating the rules and regulations for entering when tenants are present. Even if you decide to show your properties yourself, you can learn much about house showing etiquette from an agent.
#4 Understand taxes and capital gains.
Lastly, it’s important to understand how your sale will be taxed by the IRS.
Rental property taxes are highly complex and will require a significant amount of research. For this reason, you’ll want to enlist a tax professional or read about how to maximize your return and minimize capital gains tax.
If the reason you’re selling your property is because you’ve found another property to invest in, you may be eligible for a special kind of tax strategy: a like-kind exchange. There are rules you must meet to qualify, but if you fulfill all the criteria, you can defer your capital gains taxes until later in your real estate investing journey.
Additionally, there are many ways to use property management tech during the sales process. Look out for useful tax documents and resources on your property management software platform or invest in another real estate investing resource, such as BiggerPockets.
Selling a rental property is not the end of your investing journey, but often another step in the journey. By keeping these four steps in mind, you can ensure a smooth transition to your next real estate goal.