Selling Investment Property: 7 Signals It’s Time

There is a lot of ink about the benefits of owning an investment property. I personally have a rental portfolio as part of my investment portfolio and highly recommend it. On the other hand, not much is written about when you should sell an investment property. Let's take a look at some signs to look for when selling an investment property.

7 Signals You Need To Be Aware Of

  • Major home components are reaching the end of their useful life
  • Your property marks all the hot spots in the hot market
  • Property costs are rising faster than rents
  • Are you tired of owning?
  • Cannot afford maintenance or necessary repairs
  • Do you want to diversify your investment holdings?
  • Are you operating with negative cash flow?

1. Major Home Components Are Reaching the End of Their Useful Life

The systems that keep the home running deteriorate over time and can be very expensive to replace. The average cost of a new roof in Maryland, where I invest, is $6,000 to $10,000. If your cash flow from your rental income is $400 a month, the cost of that new roof could be equivalent to 25 months of zero cash flow. It may be more profitable to sell a few years before you need a roof replacement.

2. Your Property Ticks All the Hot Buttons in a Hot Market

Buyer preferences vary. And homes that tick all the hot spots buyers are looking for sell faster. If there is an increase in demand for the style and type of your investment property, it may be time to consider selling.

The same goes for location. For example, if a particular area has become more popular because a subway station has been built nearby (which causes all the houses to appreciate quickly), it may be a good time to sell. You can find these types of offers, for example, at Origin Investments.

The stock investor's goal of “buy low, sell high” is also a recipe for making money in real estate. The real estate market fluctuates. Therefore, there are good times to sell, known as a “seller's market,” and good times to buy, known as a “buyer's market.”

Unlike investing in the stock market, where you can sell your shares the same day you choose, real estate transactions take time because the process is more complicated. That means you need to predict the direction of the market and start the selling process before the top of the market if you want to sell at the best price.

>> Further reading. How to buy an investment property?

3. Ownership Costs Are Rising More Rapidly Than Rents

Things can happen that increase your property costs while owning an investment property. A rapid increase in property taxes can be a signal to sell. Or maybe there's a special assessment for your condo or homeowners association that will significantly reduce your cash flow once approved.

If the return on investment in real estate has decreased, it would be a good idea to sell and buy another property in a better location that will have better cash flow and profitability.

4. You Grow Tired of Being a Landlord

I assisted an investor who was simultaneously liquidating his rental property portfolio. Your Reason for Selling The hassles of ownership have outweighed the joy of cashing those rent checks.

Being an owner is not an easy or glamorous job. And eventually, you may decide you'd rather be doing something else with your money and time.

5. You Can't Afford the Maintenance or Needed Renovations

Maintenance and repairs are a constant cost of renting a property. Maybe you've been putting off maintenance because your tenant has been there for 10 years and never complained. But now they're moving out, and you don't have the funds for those sloppy repairs and improvements needed before you can put in a new tenant. This may mean it's a good time to sell to another investor on an “as is” basis and move on.

6. You Want to Diversify Your Investment Holdings

Real estate is an expensive asset class. To invest in it substantially while maintaining a diversified investment portfolio, you need a lot of money.

As your wealth increases in value, it's easy to end up with most of your portfolio invested in the same type of asset. And that makes your overall portfolio unbalanced. You may want to sell real estate and invest the money in another asset class.

Or maybe you want to diversify your holdings within real estate. So you sell a few single-family homes to invest in a commercial real estate opportunity.

7. You're Operating With a Negative Cash Flow

Not all investments work. Perhaps you bought money unintentionally. And now it costs far more to maintain than the annual rental income it generates. This is a sure sign that it is time to sell.

Be sure to research tax loss harvesting. It may be possible to reduce your total income tax while reducing your losses on investment properties that did not perform as expected.

Steps For Selling an Investment Property

So now you have decided to sell one or more of your properties. Below are the steps you can take to achieve this (we've prepared a full guide on how to sell a rental property here).

1. Factor In the Tax Implications of Selling

Offset capital gains tax. You want to consider all of the selling costs when evaluating whether or not it makes sense to sell. When you sell an investment property, your profit or gain is subject to short-term or long-term capital gains taxation.

Under current tax law, if you hold an investment property for less than a year, your gain is taxed at your current tax rate. Long-term investments are typically taxed as capital gains at 15% or 20%, depending on your tax bracket.

You will also have to pay taxes on “depreciation recovery” when you sell a long-term investment. Depreciation is a tax deduction you take each year when you own an investment property. Whether you write off depreciation or not, the accumulated value of that annual deduction becomes taxable income when you sell.

(See also the Avoid or Defer Taxes section below.)

>> Further reading. How to lower your closing costs

2. Prepare Your Property for Sale

Features The question of the ages is what improvements and renovations will pay off in the sale price you get. It may make sense to make minor or major repairs to the property before selling it. Or maybe it makes more sense to sell it “as is”. The choice depends on local market conditions, your investment objectives, your available cash and risk/reward tolerance.

In my experience, it's often best to do deferred maintenance before putting your home on the market. When you sell, the prospective buyer hires an inspector to do a detailed report on the home's condition. The inspector's job is to comment and inform the buyer of every little thing they find. Many items are complicated, but an inspection report showing a long list of repairs can scare off your buyer.
Also, it's not uncommon for buyers to expect sellers to fix anything the inspector points out. And on the advice of their real estate agent, the buyer will likely have a licensed contractor do all the repairs. I reviewed many inspection reports and found that many “requests” are minor repairs that you or a handyman can do without hiring a licensed professional. Getting them done ahead of time can save money on repairs.

Plus, taking care of deferred maintenance before putting your home on the market will help keep it looking its best. Buyers can see a small thing and wonder what important things are that are not obvious. Getting things right before buyers start walking eliminates objections before they even enter a buyer's mind.

3. Hire a Successful Local Agent

How to Find a Great Agent Hiring an agent saves you a lot of work and worry. And you'll likely get a higher selling price in a shorter period of time. Yes, you will pay a commission, but having a knowledgeable, professional, local member represent your interests in a transaction as large as the average home sale price can be worth it.

Like any profession, there are excellent, average, and below-average agents. And it pays essentially the same commission as any licensed agent. So take your time and interview several agents to find the one who can best represent you. Research their success, read their reviews, talk to some past customers.

Hire a great real estate agent and then leave the selling process to a professional. If you need help finding a good agent, you can use a free service like HomeLight to connect you with the top three real estate agents in your area.

4. Price the Home Right and Market Aggressively as Soon as It Hits the Market

Time is of the essence when selling a home. The biggest mistake I see sellers make is setting the listing price too high. The real estate market is driven by the forces of supply and demand, which keeps prices competitive.

The market value of your property is not determined by what you paid for it, how much you spent on repairs, or what your uncle would have paid for it if he had the money. It is the price agreed upon by the buyer and seller. And that price is based on the market value of similar nearby homes that are for sale at the time you want to sell.

A house priced too high will languish in the market and be stigmatized. In addition to neighborhood and price comparisons, buyers and their agents consider “days on market” to determine their offer price. As those days begin to pile up, shoppers think: “There must be something wrong with the house or it would already be sold.”
Worse yet, sometimes the buyer assumes that because the clock is ticking and the seller obviously has monthly maintenance costs, the seller must now be more motivated to sell. So the buyer submits a low offer.

Research shows that in most cases, overpriced listings take longer to sell and usually sell for less than the competitive market price.

How to Avoid or Defer Tax When Selling Your Investment Property

One way to defer tax is through a 1031 exchange. This IRS provision allows you to waive the capital gains tax if you replace the property you are selling with a “like” property within 180 days. In theory, you can defer this tax over and over again by doing a 1031 exchange every time you sell an investment property.

And the good news is that the same kind of definition can be applied to crowdfunding contracts. You don't have to buy another investment property outright. Fundrise, for example, is one of the leading forces in real estate crowdfunding.

Of course, there are strict rules that must be followed to qualify. Invested property does not qualify for 1031 exchange treatment. And you'll need a qualified broker to handle the exchange and deposit the sale proceeds on your behalf.

But a 1031 exchange can be a very useful and legal method to avoid capital gains taxation on the investment property you sell.

Final Thoughts

Investing in real estate can be profitable. It is important to understand that owning a rental property is a long-term strategy known as “buy and hold”. Homes appreciate over time, not overnight. Because the transaction costs of buying and selling real estate are significant, you don't want to be “switching” in and out of different rental properties.

However, like any investment strategy, it is wise to periodically evaluate your holdings and decide whether you should continue to hold or sell. Whether and when you sell a particular stock is a business decision, and you're in business to make money. This requires that you frequently perform a cost/benefit analysis and determine where your investment dollars are best spent.

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