When Is It Time to Sell Your Rental Property

There is no one definitive answer to when the best time to unload an investment property is. The decision is dependent on a variety of factors and should be made on a case-by-case basis. The main reason to sell investments is to make a profit, but there are other reasons why someone might sell, such as if the investment is not doing well or if the person’s circumstances have changed.

When and why should you sell your rental property, as well as tips for preparing your property for sale, are offered below.

Reasons to Sell Your Rental Property

1. You need the capital.

If you’re thinking of selling your investment property to pay for major life expenses, it makes sense to consider it. If you’re looking to sell a perfectly good investment to pay for non-essential items, we suggest doing some reading first.

2. Your property has appreciated.

Checking the local market will give you a sense of how good of an investment your rental property is. If it has been appreciating in value, then it is likely a good investment. Zillow is a great website to look at for real estate prices or you could ask your advisor for help.

This means that if you’re looking to invest in real estate, you should be aware that decreasing rents in the market may signal that the value of your investment will not increase as rapidly. If interest rates remain low for an extended period of time, it may be a good time to sell your property and buy a property in another market that has high potential.

It may be a good time to sell if your property increases in value faster than the market rent. The reason for this is that your return on equity decreases as your property value increases.

The prices of existing homes increased by 15.8% in a year according to NAR while the rents for single-family homes were up by 3.8% in the US , as of January 2021, as per CoreLogic.

To calculate your return on equity, divide your annual profit by your accrued equity.

3. It’s not making you money monthly.

Some rental properties lose money. This is simply part of the risk that comes with the territory, like any investment.

Although a few months of negative cash flow may not be a good enough reason to sell, there are other factors to consider. New investors often make the mistake of calculating their expected annual gross income based on the assumption that the property will be occupied for the entire year. Although it is normal for there to be periods of vacancy, there are other times when you may not have enough money to cover costs for a given month.

You should speak to your property manager if you notice that tenant turnover is becoming a regular problem and has been going on for more than a year. Identify the crux of why your property is underperforming — whether tenant or CapEx related — and determine whether it’s worth the time and resources to address it.

The value of the property has been increasing every year and if you can cover the mortgage during vacancies, it may be best to wait and get the continued appreciation. If something isn’t working out, it may be time to try something new.

4. You’ve identified a better investment opportunity.

You could be considering selling your current investment property in order to purchase a new one. If you’re thinking about selling your investment property and upgrading to a better one, a 1031 exchange could be a good option to consider.

A 1031 exchange allows you to pay capital gains and related federal income tax liability at a later date.

If you mostly invest in single-family rental properties, the 1031 exchange lets you buy and sell assets without being taxed on every sale. This can help you grow your portfolio while deferring taxes.

If you sell investment real estate, you will generally have to pay tax on any capital gains, as well as tax on the recapture of depreciation. Depreciation is a way to reduce your taxable income by taking a non-cash expense. You are able to depreciate 3.636% of the cost of your property annually for 27.5 years according to the IRS.

5. You want to invest in a different market.

The timing of your investment is key to getting the most return on your investment in real estate. If you find an area that is beginning to grow, it may be a good idea to sell your current property to get the money you need to invest in that area before it becomes too popular.

There is another good reason to think about selling your rental property and investing the money in another market and that is to get a different geographic location. If your primary residence, income property and job are all located in the same area, you run the risk of being greatly affected by changes in the local economy.

6. You’re done with real estate investing.

You might be ready to finish the real estate investing section of your life. You want to cash out the money you have made from your rental properties. End of story. If you are in that situation, it is good for you.

How to Value Your Rental Property

When valuing a rental property, the fact that it is tenanted must be taken into account. This is different from when valuing a property with vacant possession, as the fact there is no tenant means there is no rental income.

Calculating the value is a fine art. It takes some research.

Step 1

If you want to know how much homes are selling for in a certain area, you can put the area’s postcode into Rightmove and it will show you a list of properties and their selling prices.

Look for similar properties within a quarter-mile radius if you can’t find any within the initial search.

That should give you an idea on price. Always compare the condition of the property.

An item in excellent condition will sell for more than one that needs repairs. You need to adjust for these.

Take note of when they were listed.

If store prices are reduced, it may be because the items are overpriced or in low demand.

Please note that an estate agent’s advertised price for a property does not always reflect the property’s true value.

Estate agents often list properties at high prices, in the hope that buyers will make offers near the asking price.

Step 2

If you want to more accurately value your property, you should look up the sold prices on Rightmove from the last two years.

This text is discussing comparable sold prices, which are homes that have been sold recently (in the last 12-24 months) that are similar in size, style, age, and condition to the home being considered.

Step 3

Now that you know the price, another thing that can help convince you to buy is the rental yield.

The more attractive the investment is to a buyer, the higher the yield will be.

This is the amount of rent you receive per year.

This will give your annual rental amount.

For example, a property that costs £50,000 and brings in rental income of £5,000 per year has a 10% yield.

The value of a property should not be based only on its yield.

Many landlords think that if a property has a high yield, it will bring a high price.

This is not the right way to look at it, landlords should be considering the return on their investment (ROI).

Step 4

You should now have an accurate idea of what the item is worth, based on your research.

You now need to consider some other facts.

A property that is selling with vacant possession is going to be more appealing to potential buyers as it could be attractive to those who would want to buy the property to live in.

Vacant properties may be just as appealing to investors as those with tenants.

Tenants can be found quickly in most areas.

If you want to attract a property investor, you will need to price your property competitively.

You must price your property at a realistic level. If you overprice, then you won’t sell full stop.

How to Sell My Rental Property with Tenants

You’re more likely to sell to an experienced landlord if your property is currently tenanted. They will ask lots of questions about the tenant before making any firm offers.

A potential tenant that is good will make your investment much more appealing.

The condition of the property will be a major factor for any serious buyer, as well as the quality of your tenant.

If you have a tenant who is not paying their rent or causing damage to your property, it is usually best to not try to sell the property with them still living there. This will likely cause potential buyers to back out of the deal, and you will end up losing money in the end.

Managing Your Tenants the Right Way

You need to manage your tenants.

You should schedule a meeting to discuss your decision and what it means with your boss.

You don’t want to evict them because they’ve been good tenants and you don’t want them to lose their home.

There is a chance that another landlord will buy the property, so their occupancy is probably safe.

Managing your tenants can be tricky and it might be a good idea to hire a professional to do it.

Viewings with tenants in situ can be difficult.

A few statutory rights are protecting the tenant, regardless of who is responsible for the viewings.

The tenant should be given at least two days’ notice in writing before any viewing of the property, and they must agree to each viewing at a time that is convenient for them.

Constant disruptions might upset them.

As a landlord/agent, it’s important to understand that viewings can be disruptive and stressful for tenants.

I would recommend organizing your TV show viewings into blocks, instead of watching a little bit each day. This will help minimize the pain.

It might be a good idea to ask your tenant what days work best for them and then stick to those days.

Agreeing to Sell Your Investment Property

If you and the buyer have agreed on a sale, it is recommended that you use a solicitor or conveyancer who has experience in selling properties that are rented out. This is because they will understand the process.

This will save you time and money.

The new owner of a property that has been sold will automatically become the landlord of any tenants.

Although the landlord’s name is no longer accurate, the tenancy agreement contract is still valid.

If you have received a deposit from the tenant, you are required by law to place the deposit in a tenancy deposit scheme.

If you are moving from one rental unit to another, you will need to transfer your security deposit to the new landlord. Your conveyance solicitor should help with this.

If you are thinking about transferring ownership of your rental property, you should reach out to the deposit scheme to see if they have any guidance or suggestions.

Either way, it should be relatively easy.

The transfer of the tenancy should be arranged to take place on a rent payment date to make it easier, so there’s no need for the rental income to be apportioned between the buyer and seller.

If the situation is different, the buyer and seller should come to an agreement about the right amount of rent to give to the buyer.

How Much Tax Do I Have to Pay When Selling My Rental?

If you sell your property for more than you paid for it, you may have to pay taxes on the extra money you make.

The principal tax is Capital Gains Tax, which is a tax on the increase in value of an asset when it is sold.

The tax is levied on the profit you make, not the amount of money you are paid.

Tip: Wait until you’ve owned the property for a year.

If you are thinking about selling your property, you may be able to save on taxes by waiting to sell the property for at least a year. This is because selling a property that you have owned for less than a year is considered a short-term capital gain, which is taxed at a higher rate than a long-term capital gain. Otherwise, any money you make from the sale will be considered as part of your income, and you will be taxed accordingly.

Short-term capital gains are taxed at your marginal tax rate, which could be as high as 37%. The tax rate for long-term capital gains is 0%, 15%, or 20% depending on your tax bracket, while short-term capital gains are taxed at your marginal tax rate, which could be up to 37%. Delaying the sale of your property could have a significant effect on the amount of income tax you’ll pay, and could potentially save you thousands of dollars.

What We Are Doing

Our own personal plan is to keep our rental properties at a minimum of 10 years.  The first option for us is to access the equity in those properties via a cash out refinance after the 10 year mark. However, we aren’t necessarily opposed to the sale of those properties, but rather will re-assess once we hit the 10 year mark.