When To Sell Rental Property And How To Do It The Right Way
If you’re trying to make money selling a rental property, there are several key strategies to know before closing a deal. When to sell rental property matters, so this short guide covers the most critical information. The trick is to figure out what works best for your long-term financial goals when you sell rental property.
Do you want to sell rental property that was a primary residence? Or are you selling rental property to buy a primary home? The answers to those questions mean a lot when maximizing the market value of investment property and accounting for taxes, too.
Every home sale is a work in progress until you officially close, walking away confident that you received the best deal.
Here’s what you need to know before you jump headfirst into the rental property business.
When Should I Sell My Rental Property?
Deciding when to keep or sell rental property is never as easy as it sounds.
Research by Zillow shows that rental rates are increasing 2.7% every year in the U.S., so why sell if it’s creating significant cash flow?
Like most rental homeowners, you might be using the property to generate passive income. In this case, selling the home has to recover the lost passive income at a minimum.
No realtor or real estate agent can decide for you when the time is right to sell. It all depends upon the health of the real estate market and local nuances, but generally, it’s a good idea to know the answers to the following questions:
- Is the demand for homes high in the area?
- Does the cap rate justify the sale?
- Is the rental home’s equity at its peak?
- What’s the current interest rate?
- How much does it cost to maintain the investment property?
- Have bad tenants trashed your rental?
Once you know the answers, you can make an informed, wise decision on whether or not to initiate a property sale.
Is the demand for homes high in the area?
In some parts of the country, new homes sell quickly that rental properties sometimes have increased value. A bustling local economy, lots of well-paying jobs, and plenty of new construction in the area are a few subtle indicators that might be a good time to sell.
Does the cap rate justify the sale?
As a rental property owner, knowing your cap rate is one of the essential calculations you can make.
Cap rates can shift over time and for various reasons, too.
The most straightforward formula for calculating the cap rate is to subtract all expenses from gross rental income. Take that figure and divide it by the purchase price you paid for the property.
Every investor has their interpretation, but overall, a 4 percent to 10 percent annual cap rate is acceptable for a rental sale.
Is the rental home’s equity at its peak?
Along with the cap rate, you need to keep in mind your rental home’s equity. If you don’t have much debt in the property and you didn’t have to renovate it, your equity should be high enough to sell.
It’s a common mistake to sell a rental property before equity reaches its peak. The challenge is figuring out when the fair market value of the investment property is optimal.
What’s the current interest rate?
Any change in interest rates can significantly affect your choice to sell an investment property. When homebuyers take advantage of low-interest rates, it can influence the rental market’s health because it’s easier to borrow money.
How much does it cost to maintain the investment property?
The high cost of maintaining a property is the deciding factor for many. As rentals tend to be older homes, depreciation and repair costs accumulate over time.
Any home will need substantive repairs after several occupancy decades, whether it be a rental or a primary residence.
Can I sell my rental while tenants still occupy it?
Once you’ve strategically lined up everything you need, you may come across scenarios that require a careful touch, such as when you sell rental property with tenants still residing in it.
Quality tenants with a long history of paying on time may raise the property’s value, but some buyers may not want to purchase unless the home is already empty.
OK, I want to sell my rental property…now what?
The benefits of selling rental property are worth the effort, and it’s not always about passive income generation.
Sometimes, readjusting your finances puts you in a better position to buy a better primary residence, the dream home you’ve worked a lifetime to afford.
It’s not a bad idea to seek the advice of a few personal accountants, realtors who specialize in rental sales, and maybe a handyman to put the finishing touches on repairs and renovations. You can even schedule a free consultation with a professional home buying company like Vitality Home Buyers. We specialize in helping landlords and rental property owners sell their homes fast by providing creative win-win solutions.
But the final consideration – some say the most critical to making a profit – is accounting for and minimizing capital gains tax.
How to avoid capital gains tax on rental property
Paying taxes is inevitable, but that doesn’t mean that you have to pay an excessive amount; you want to pay what’s fair for the deal.
- Personal income
- Years of ownership
- Tactics to lower tax liability
Depending on your particular tax bracket, you can expect to pay zero, 15 percent, or 20 percent in capital gains. Thankfully, there are tactics that lower capital gains tax on profits from selling rental property.
- Reinvest profits into a 1031 real estate exchange
- Offset low gains with tax-loss harvesting
- Live in the rental as your primary residence
At this point in the process, your relationship with your realtor or real estate agent matters most.
Yes, a 1031 real estate exchange is an option, but to do that, you need to plan for the reinvesting of profits to reduce capital gains costs. Likewise, tax-loss harvesting requires a skilled accountant to make sure you don’t run afoul with the IRS.
In either case, professional financial advice is at a premium.
For more information about selling rental property, check out our related articles below.
- Pros and Cons of Owning a Vacation Rental in Charlotte
- 5 Tips for Selling Your Rental Property with Tenants
Are You Selling A Rental Property?
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We buy rental properties at fair market prices and have an excellent reputation in the industry for our professionalism.