Housing inventory remains low, which means home prices are high. The number of buyers far exceeds the number of houses on the market in many areas, which creates a seller’s market.

If you bought a rental property a few years (or a few decades) ago, you might decide that now is the best time to sell to get your ideal return on investment.

However, selling a rental property can be more complicated than a primary residence. You have to think about your tenants, the tax implications, and other unexpected costs that can eat into your profits. 

Fortunately, our team at FastExpert is here to help. Use this guide to learn how to sell a rental property to get the most from your investment. 

1. Hire a Real Estate Agent with Investment Property Experience

The first step when selling your rental property is to hire a Realtor who specializes in these types of sales. Talk to a real estate investor in your area and see if they have a few agents they prefer working with. You can also use FastExpert to find real estate agents who specialize in investment homes. 

Set aside time to interview at least three Realtors before you hire the best one. Ask questions about the types of homes they sell and how they market them. If you currently have a tenant in your rental property, ask how they handle the transition to the new owner.

This can help you understand the agent’s knowledge of local laws that protect renters. You can also ask about their knowledge of tax law if you want to avoid capital gains tax. 

Not only do you need to find a Realtor with detailed knowledge of the real estate market, but you also want to make sure they are a professional fit. You will likely talk to your Realtor every day (or at least several times each week) so you need to get along with them. It’s okay to choose one Realtor over another just because they are a better personality fit.

2. Navigate Capital Gains Tax Effectively

The capital gains tax is the main thing you need to focus on when preparing to sell your investment property. If you have owned the house for more than a year, then you will pay the long-term capital gains tax. These tax rates can reach up to 20% depending on your income.

The main thing to know is that you only pay capital gains taxes on the profits from your home sale. If the purchase price was $125,000 and you are selling it for $500,000 then your taxable income starts at $375,000.  

Additionally, there are other ways to lower your tax bill. Track all of your expenses related to marketing the home and selling it – including your Realtor commission. These costs reduce your total profits. Using the same example above, if you pay a six percent commission on the sale of a $500,000 home, it would cost $30,000. This brings your taxable profits down to $345,000. 

Every line item counts when it comes to calculating your tax payment. This is another reason why hiring an experienced real estate agent or working with a trusted accountant can help you save money.

Utilize the 1031 Exchange for Tax Deferral

There are additional ways to reduce or defer your tax bill. A 1031 Exchange is used when you use the profits from the home sale to buy another investment property.

For example, if you want to move to another state and take your rental property investment with you, you can sell the house, buy another in your new town, and use the 1031 Exchange to defer the taxes.

Keep in mind this is a deferral, not an exemption. You will have to pay the capital gains tax when you sell your rental property in the future. 

There are multiple rules involved in a 1031 Exchange. Make sure you have a trusted Realtor or tax advisor to make sure your next purchase qualifies.  

Consider Occupying the Rental Before Selling

There are other ways to avoid paying capital gains taxes entirely. For example, if you aren’t in a hurry to sell your rental property, you can live in it as your primary residence. The IRS offers tax exemptions on home sales that have been occupied by the owners for at least two of the last five years. If the property is currently unoccupied, you could move in, make it your permanent residence, and then sell the house in two years.

You will need to prove that this house is your main residence. This usually means changing your driver’s license and other documents to reflect the move. 

This exemption is meant to protect homeowners who want to move. The average home seller doesn’t have to worry about capital gains because they aren’t selling an investment rental property.  

3. Ethically Manage Tenant Lease Agreements

One of the most frequent discussions about selling a rental property focuses on tenants. The first thing to do is decide whether you plan to sell the house with tenants or wait for your current renters to move out.

When your existing tenants learn that you are selling the house, they might worry about their lease agreement. They want to know that they won’t be evicted as soon as the new buyer takes over.

While you can’t guarantee that your tenants will be cared for, you can prepare them for a potential transition. Here are a few best practices to follow if you plan to sell the house with renters: 

• Review your local tenant laws. Know how much notice you need to give and what rights your tenants have in your state or city. 
• Give tenants in your rental properties notice of your intent to sell. Your state might have specific guidelines for this, but the more notice you provide the better. 
• Provide 24 hours’ notice whenever you need to access the property. This includes entering the home to make repairs or scheduling showings. 
• Be available to answer questions from your tenants and provide updates about the home sale process as often as possible. 

The biggest issue will arise if someone buys the home to use as a primary residence. While another investor might take over the active lease with minor adjustments or disruption to your tenants, a buyer who wants to live in the home provides more complications.

You and the buyer will need to decide who is responsible for making sure the tenants move out, which will depend on the closing date, current lease agreement, and willingness of the buyer.

Turn Reliable Tenants into a Selling Point

If you are marketing a tenant-occupied property to other investors, highlight your reliable tenants as a selling point. You can talk about the longevity of the tenants on the premises and showcase a timely payment history.

This appeals to real estate investors because they can immediately take over the property and collect rental income from tenants. There won’t be any gaps where they need to refurbish the space or try to find new renters. 

Your tenants might also appreciate that you are selling your home to another investor who will keep them in place. The home sale might not disrupt them at all.

Read Local Laws if You are Ending Lease Agreements

If you want to sell a vacant rental home, know the legality of asking your tenants to move out. Reading local laws can protect both you and your renters. You can even share these laws with the people currently in your home so they know that you are acting ethically and fairly.

First, look at the least period. It might be easiest to let the lease expire naturally before you sell the home. Within a few months, your renters can move out because they had ample notice that you would not renew their lease.

Next, check for an early termination clause. See if you owe your tenant any money for canceling the lease when the reason isn’t their fault. If the house is in good condition, they should at least get their security deposit back. 

Set a final day to collect rent and a day for your tenants to move out. If you aren’t sure if this is enforceable, consult with a real estate attorney. They can help you follow due process that is legally binding with your tenants.

Naturally, this is a non-issue with month-to-month renters. You can let them know that you will not renew their lease the following month and ask them to move out. Rental agreements are more complicated for long-term leases, like six and twelve-month terms.

4. Prioritize Repairs and Upgrades

It might take a few months to prepare your home for sale, which gives your tenants time to find a new place – especially if their lease is ending. The average homeowner spends $5,400 on home upgrades before placing their property on the market. This usually involves landscaping costs, repairs, and upgrades to make the property more desirable. 

Identify the repairs and improvements needed on the rental property to make it appealing to buyers. Once again, these decisions might be impacted by your tenants. You might decide to replace the carpet and repaint the walls but you will have to wait until your current renters leave.

Also, consider the return on investment that comes with these repairs. Replacing the garage door might have a higher ROI than replacing old and outdated flooring. A new front door can create a good first impression that has a bigger impact than new laundry units. You don’t want to spend money on upgrades that fail to increase your home’s value. 

Making these repairs can increase your property’s value and make the house more desirable, increasing the chances that it sells quickly. However, there’s another reason to focus on repairs when selling a rental property: capital gains taxes.

You can deduct the repairs you make on the home as essential costs that reduce your overall profits. If you spend $10,000 to prepare your home for sale, you can deduct that amount once your tax bill arrives.

5. Develop a Realistic and Competitive Pricing Strategy

When you meet with your real estate agent, develop a pricing strategy for the home. Your Realtor should provide a comparative marketing analysis (CMA) that pulls information from similar properties in your area. Your agent will look at homes that have a similar size, in the same area, that sold within a recent period. This can help them gauge what your home should sell for. 

Every home is unique, which means the price of your home might be higher or lower than others in the area. If it has amenities like a pool or enclosed garage, then the price goes up. However, if the home is worn out and needs serious upgrades, the estimated sale price will go down. 

You can also set the sale price based on your specific needs. Some sellers will list properties at lower prices if they want to move in a hurry. This strategy attracts more buyers and the owners can choose the offers that provide the best options – usually cash bids that offer favorable closing dates.

However, an experienced real estate agent can help you get the full value of your property while helping you move on your team. They can reach out to rental property owners in the area to see if they are interested in growing their investment portfolios.

6. Effective Marketing of Your Rental Property

Selling a rental property can be more complicated than an owner-occupied home. This is particularly true if you have an existing tenant or want to sell a multi-family housing unit. Decide whether you want to market your property to any buyer – either investor or house hunter – or if you specifically want to reach out to real estate investors. This will determine how you promote your home. 

If you want to sell to another real estate investor, consider staging an open house. Alert your tenants to the situation and pay for a deep cleaning of the property. This event can bring in multiple potential buyers who might want to buy your duplex or single-family rental property.

Find a Realtor With Experience in Rental Property Sales 

Whether you own a single rental home or multiple investment properties in the area, you can easily sell this asset when you are ready. The first step is to hire a Realtor you can trust.

By hiring an agent who understands property taxes, lease agreements, and the rental market, you can quickly and legally sell your investment property. They can effectively price and market your home to attract the right buyers. 

To find that real estate agent, turn to the professionals at FastExpert. You can look at Realtor profiles to learn about different agents and hire the best one to support you through the entire process.

Find Realtors who know your local market and are ready to help you sell your home. Try FastExpert today.

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• Source: https://www.fastexpert.com/blog/how-to-sell-a-rental-property/