What To Do Before Selling Your Rental Property

Some properties in your portfolio are not intended to be held onto forever. Even if the property is a short-term success, there may be greater opportunities if you sell. Using the profits on another project can produce greater revenue than what you are currently generating with your rental.

Deciding to sell isn’t something that should be taken lightly. You should weigh all the pros and cons before making a decision that will have a lasting impact on your business. Never let a short-term setback or financial crunch force your hand. There are several avenues you can use instead of selling a cash flow producing property. That being said, you may also simply tire of the process and want to focus your attention elsewhere. If you are thinking about selling your rental property, weigh these five important items before making a decision.

• Long Term Property Outlook: Owning a rental property is a tremendous way of generating both short- and long-term income. However, it is also time consuming and at times very frustrating. You need to look at your investment and dive into the numbers. Is there anything on the horizon with the property that will have a dramatic impact on the cash flow? Do you need a new furnace or roof? Has rental demand softened in the past few years? Is there a loan adjustment in the future? As we stated, don’t let a short-term cash crunch throw away years of ownership. If you only owe less than ten years on your note think of prospects of owning the property free and clear. Landlords will go through times when they have bad tenants or three items in the property break at once. Short term issues stink, but they shouldn’t push you to make a rash decision to sell.
• Benefits Of Selling: Why are you thinking about selling your rental? It is a straightforward question but there are often many different answers. You may want to sell because you feel the market is peaking and you want to cash out. You may sell because you have had enough of tenants and chasing rent. Maybe you want to sell because you have a partner and they are looking to get out. Whatever the reason is make sure it has a true benefit for you. You don’t necessarily need to have another project lined up, but you should have an idea of what you would do with the profits. Remember, that with any sale there are tax consequences. Without reinvesting the profits, you will be hit with a tax bill from Uncle Sam. If the property is generating cash flow with no signs of stopping there should be a legitimate benefit to make selling worthwhile. If not, you may solve a short-term problem by selling but you will have financial and emotional regret in the not so distant future.
• Market Conditions: Is now really the best time to sell? Unless there is significant pressure to sell you should sell when is best for you. Take a step back and evaluate the current market conditions. Are there positive demographics in your favor, or did the market hit a bump in the road? Are sales in the market strong or is there too much supply and demand softened? It is important to consider the season if you are in an area with cold winters and excessively hot summers. Waiting just a few extra months can help increase demand, and ultimately your bottom line. Market conditions are constantly changing but it doesn’t take a real estate agent to know that reduced inventory and strong demand will impact your bottom line. This must be a major consideration if you are thinking about selling. If the market is in a down turn you may be better off waiting for things to change prior to listing your property.
• Repairs Needed: Even the best landlords do not take care of their rental like they do their primary residence. They may not neglect the property, but they are usually not two steps ahead of repairs either. If you plan on selling you should take inventory of any work that may be needed. All buyers want to take ownership with the property free of any lingering repairs. Either the work must be done, or a steep discount taken off the purchase price. This must be a consideration if you are thinking about selling. You may not have the capital to do a new roof or knock down a wall in the kitchen. If this is the case you must accept that your list price, and ultimately, your sales price will be impacted. If not, you need to make your property look like any other new listing in your market.
• Tax Implications: The best real estate investors are those who know how to use the tax code to their advantage. The most common way of doing this is by utilizing a 1031 exchange. This allows you to defer tax payment if you use the profits to buy another property within a year. Whatever you plan on doing with your profits must be a consideration prior to listing. Are you going to reinvest the capital on another project or simply park your money in the bank? Do you have a project in mind or an alternate investing vehicle? Whatever you decide to do you need to know that there will be significant tax consequences.

Whatever you decide to do with your rental make sure it is on your terms and you know the pros and cons of your decision.