Selling A Rental Property
Once, your rental property was a great source for passive income. Unfortunately, it's now a headache to maintain and generate minimal profit. What can you do? What should you do?
While most homeowners consider the housing market trends when deciding when to sell their homes, there are other factors that rental property owners can consider. You will need to consider economic factors, personal finances, maintenance requirements, taxes, and other considerations before you sell your rental property. We'll be answering common questions that rental property owners have before they decide to sell.
Should I Sell My Investment Property On A Buyer's Market?
If the potential future property value growth is greater than the loss of passive rental income, then you should consider selling your investment property in a seller's market. A seller's market favors sellers with faster sales, lower prices, and offer prices close to, or sometimes higher than, the asking listing price. Although it is impossible to predict the future, some factors could make it the right moment to sell.
I Have Significant Equity
You might consider selling your property if it was purchased years ago at a reasonable price and you have seen substantial appreciation.
It's impossible to predict how long the prices will remain high, so if you can make more today than you expected, it's a strong indicator that you should list.
Right Now, Buyers Are In High Demand
You might want to sell now if there is a lot of demand in your area, possibly due to significant job growth.
I Intend To Sell Anyway
While a few months more passive income can be beneficial, it is a smart move to sell when you are confident you will get a good price. It may be a waste of your monthly rent checks if you have to wait and sell later at a lower price.
What Should I Do If Rent Drops?
It's better to be prepared for price drops. Don't wait until it's too late. Pay attention to local market trends and predict when rental prices will fall too low to pay your mortgage, taxes, and maintenance costs. Rent growth slows down when there is an oversupply in your area. Rent growth may slow down if there is a flood of rental housing available. However, if the supply exceeds the demand, rental growth may decrease.
Rent growth is on the rise in many major markets. However, trends can change depending on where you live. Pay attention to the following market conditions, which could result in a slower rate of rent growth.
New Construction In Flux
Be aware of residential construction in your locality. Developers who are focusing on rental housing will have high demand. However, once these thousands of units flood the market, it may cause rent growth to slow down or even drop.
Low-Interest Rates
People who rent can take advantage of low-interest rates to make homeownership more affordable. This could help reduce rental demand.
Low Cap Rates Should I Consider Selling My Investment Property?
Yes, a low cap rate is persuasive. Most property investors use cap rates to determine how strong their investments are and calculate their cash flow. While you probably calculated a cap rate when you bought the property, you should do it again to compare your current position. Compare your investment options to see if you get a better return.
What Is A Cap Rate?
A cap rate is a calculation that determines the profitability of an investment property. A high cap rate will be possible if you buy a property for very little money and rent it out for high prices. A high cap rate usually indicates a good deal. The location you live in will determine what is considered a good rate. A cap rate of 4% is acceptable in large cities with high rent costs. A cap rate of 10% can be applied to rural areas and regions with lower rental rates.
Your rental income should grow faster than your operating expenses. This would increase your cap rate. Investors might consider selling if cap rates drop.
How To Calculate The Cap Rate
Cap rate is your net operating profit (gross rental income fewer expenses) divided by the purchase price.
The annual numbers should be used to calculate your cap rate. Your gross income includes all income from renters. These expenses include insurance, taxes, and maintenance fees. Here's an example.
Purchase price: 100,000
Annual rental income of $12,000
Annual expenses minus: $5,000
This will give you a net operating profit of $7,000
A cap rate of 7.7% is achieved by dividing $7,000 net operating profit by your purchase price.
Higher cap rates mean higher rewards. It is tempting to sell one rental property to purchase another with a higher rate cap. Keep in mind that cap rates can fluctuate depending on market conditions. If the rental market slows, a hot deal with a 10% cap rate might be cut.
Do I Need To Sell My Investment Property If It Is In Dire Need Of Repairs?
If repairs become too costly, it is a good idea to sell your investment property. You should consider both unexpected and expected expenses when estimating maintenance costs.
Calculate The Age Of Appliances
Some appliances may need to be repaired or replaced over the next few decades, even if they don't require immediate replacement. You might consider selling appliances while they are still in good condition if you don't have the funds for major upgrades like a furnace or roof.
Special Assessments May Require Factoring
Consider any special assessments that may be coming to your rental property if it is a homeowners association. It could cost you $20,000 to $30,000. Depending on how much ownership you have in the building, your HOA might be considering replacing the roof.
Be Aware Of Buyer Needs
Selling your home now can help you save money on long-term repairs, but there are things that a buyer may want to have done. If you don't have the funds to make your home attractive to traditional buyers, these are some alternatives.
Buyer Concession If you are offered a concession by a buyer that you want to make repairs before closing, The buyer will receive some of the sale proceeds, but they won't be responsible for the costs.
Are Property Taxes The Deciding Factor In When To Sell A Rental Home?
Property taxes, while they are a part of your monthly expenses, and ultimately your cap-rate, are a strong indicator for profitability and when it is time to sell. Selling could be more profitable if you have high taxes. You might consider buying property in a lower tax market if you decide to sell.
The states with the highest effective property taxes are New Jersey (22.55%), Illinois (22.22%), or Texas (2.18%). Property taxes for single-family homes increased by 4% in 2018. Dallas experienced an 8.8% increase, Los Angeles saw a 5% increase, and Washington, D.C., saw a 4% rise.
What Capital Gains Tax Will I Have To Pay On Real Estate Investments?
Capital gains tax may be due depending on your income. Investment properties are not exempted from capital gains, unlike a primary residence which is exempt up to a specific threshold. If your investment property is sold and you make a profit, you will owe capital gains taxes at a rate between 0%, 15%, or 20%, depending on your income or filing status.
You can try a few strategies to reduce your capital gains when investing in property. Always consult your tax professional if you decide to explore any of these options.
Subtract Losses
To offset capital gains from the property's sale, losses from other investments should be added to your annual tax return.
Do A 1031 Exchange
You can defer taxes through a 1031 exchange by trading one investment property for another. Although this type of transaction is difficult to complete, it can be worth it if you plan to buy another investment property within 180-days or before your income tax return is due.
You Can Turn The Investment Property Into Your Primary Residence
You can avoid capital gains tax if you make your rental home your primary residence. However, it is not an easy fix. To qualify for the $250,000 profit exclusion for single filers, you must live in the house as your primary residence for at most two years. For married filers, $500,000 is required.
Is It A Wise Financial Move To Sell A Rental Property?
When you intend to use the profits to invest in stronger opportunities or diversify your portfolio, selling an investment property is the best financial decision.
These are just a few examples of situations where renting out your rental property might make sense financially.
I Found A Better Passive Income Opportunity
You have several options for investing:
The stock market
Bonds
Real estate investment trusts (REIT)
Other properties with better cap rates
My Net Worth Is Tightly Tied To One Property Or Portfolio
If your net worth is concentrated in one property (e.g., a rental home) or in one portfolio (e.g., rental property investments), you are not adequately diversified. Your entire financial security could be at risk if the housing market crashes. It may be worth selling real estate if you own too much money.
Am I Satisfied With My Investment?
It's not just about whether an investment is financially sound. It is important to also consider non-financial implications. For example, these owners may be well advised to sell.
I've Undergone A Major Life Event
A health problem, a new family member, or a financial emergency could mean that you need to access the equity in your rental property. On the other hand, you may be too busy to manage your investment property, or you might have a new job.
I Don't Have The Time Or Ability To Manage Maintenance And Other Hassles
Simply put, if managing tenants and maintaining maintenance is too difficult for you as a landlord, it may be time to move on.
