6 Tips for Selling Your Rental Property

Rental Property
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You’ve dedicated your time and energy to a rental property. You’ve built equity in the property and maybe even improved it to take advantage of appreciation.

But if you want to invest elsewhere, it’s time to sell.

Selling a rental property can be a complex process. Not only do you need to consider all the legal and tax components of the sale, but you also have to think about your tenants.

How can you ensure the sales process is smooth and efficient?

Here are six tips for selling your rental property.

#1 Communicate with Tenants

Before you proceed with any part of the sale, you should first tell your tenants that you plan to sell.

Communication is critical not only because you’ve signed contracts with your tenants, but also because their cooperation is key to a smooth sales process.

Selling your property will mean a lot of inconveniences for your tenants: frequent entry for repairs, showings for buyers, getting to know a new owner, renegotiating contracts, or even moving. Communicating with tenants about dates and times and asking for their help during the sale is key to your success.

You’ll also want to give your tenants enough heads up to move if you aren’t transferring their leases, or to consider moving even if you are.

Keep in mind that local laws often dictate tenant rights and treatment during a property sale. Contact a lawyer or local apartment association to learn more about your obligations to them.

#2 Get a Pre-Listing Inspection

No buyer wants to discover a host of maintenance issues when visiting your property.

Before placing your property on the market, you need to evaluate its condition.

The best way to do this is to hire someone to perform a pre-listing inspection. During the inspection, you can identify the maintenance/cosmetic issues and repairs you must complete before selling your property.

#3 Hire a Real Estate Agent

In most cases, it’s not a good idea to try to sell your property alone. You’ll need expert help during the process.

The first person you should hire is a real estate agent. Your agent will assist you throughout the sales process and when transferring a title, including during advertising, showings, and signing paperwork.

Another reason to hire a real estate agent is that they can access the Multiple Listing Service (MLS). The MLS is a private database created and maintained by real estate professionals to help property owners like you buy and sell properties.

#4 Make Sure Your Property Has a Clear Title

The first thing a potential buyer will do is conduct a property lien search. A mortgage lien is a legal claim against your property by your creditor or lender.

Liens prevent you from transferring the deed to your property to another owner. A buyer will look to see a “clear title,” or no liens on your property. If there is a lien, you’ll have to identify and resolve it along with any other legal obstacles before transferring the property title.

#5 Sell to Another Investor

For most landlords, selling to another investor is the most profitable option.

Why? Because investors will likely be happy to take on your active leases.

This is good news for several reasons. First, your tenants won’t have to move if they don’t want to. Their leases can be transferred from you to the new buyer, who will become their new landlord.

Secondly, keeping your tenants means you can advertise your filled units as a selling point and increase the purchase price accordingly. Investors will pay much more for a property already filled with reliable tenants. This means they won’t have to advertise the units, clean them, or screen new tenants.

On the other hand, a buyer looking for a primary residence has no incentive to pay more than the property’s adjusted cost basis, or comparable market value. In fact, existing tenants are only inconveniences to them during the sales process.

#6 Calculate Depreciation Recapture

The final step in the sales process is often the most dreaded: taxes.

When you sell your property, you’ll need to calculate sold rental property depreciation. Depreciation recapture is a complex calculation we won’t cover now, but here are a few tax tips in case you’re looking to make your sale even more profitable:

  1. Make a 1031 (Like-Kind) exchange to defer capital gains taxes. You won’t have to pay tax immediately if you make this kind of exchange. However, you will need the help of a Qualified Intermediary (QI), as these exchanges can be quite complex.
  2. Live in your property for two years before selling it. If your property is your “principal home” for two years before you sell, you can get tax breaks in accordance with the Home Sale Exclusion.

Conclusion

Selling your property is the final stage in your rental investment journey. Whether you’re looking to invest elsewhere or are simply satisfied with your landlord career, these six tips should make the process as simple and manageable as possible.

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