How to Maximize Profits When Selling Your Investment Property

In this red-hot market that most of America is currently experiencing, it can be tempting to cash out your investment, let it appreciate (in some cases) highly, and move it into another investment. Perhaps you are tired of tenants and toilers and would like to check out the notes instead. You may want to locate larger properties or participate in syndication deals.

While it’s tempting to just list a property and be done with it, a little planning can save you time and money!

sell rental property

As market conditions become more favorable, it is time to reevaluate your portfolio and sell some of those dogs. Properties that don’t perform as you thought they would, properties that are difficult to rent for whatever reason, or that are just downright weird. Sometimes, an asset just doesn’t work, no matter how good those numbers look when you analyze it.

If your market has taken a turn for the better, now is a great time to sell. But do you sell with a tenant or do you wait until you vacate?

occupied vs vacant

There are pros and cons to both methods. Selling an occupied property means that you have a lot less cash out of your pocket when you list, go under contract, and close on the property. If you’re selling to another landlord, they have one less thing to do after closing. A good tenant—one with a record of paying rent on time—can go a long way in getting the sale.

However, when one is looking for a home to live in, an occupied property is not ideal. A property with a lease that expires next month can still be put on the market with the hopes of attracting an owner-occupant buyer, but generally, when you’re trying to sell an occupied property, you’re crowding out investors. marketing for. It’s not all bad. Investors understand tenants. But investors also want a deal.

Connected: 5 Essential Things to Consider Before Selling Your Rental

Consider these things when selling an occupied rental.

1. You cannot evict your tenants before their lease expires. The lease runs from the property, not the owner. You cannot deliver the vacant property at closing if there are still six months left on the lease and the tenant wants to stay. You can offer to buy out the tenant – but if they say no, you’re out of luck.
2. Work with your tenants. Trying to sell a property with tenants means inconveniencing your tenants, not you. He is also in the driver’s seat. If they don’t clean their unit before showing, you’re going to get very few offers. If they make it difficult to show the property, you may not get an offer. Consider waiving the fare for showing shows or holding weekend shows to ease their inconvenience. Ask what times they would like people to view the property, and only accept showings during these times.
3. Sweeten the deal with great records. Landlords care about the bottom line. Telling someone the rent is $1,000 a month is great, but being able to back up that statement with written proof is even better. Have your tenants fill out an estoppel statement that shows how much the tenant is paying in rent and their security deposit. As a landlord, you should be keeping good records anyway, so show potential buyers the tenants’ payment history, along with any expense and repair records.

Selling a vacant property is very easy, but you pay for everything until you close. All utilities and any external maintenance that tenants would have paid for are now on your wallet. You also have to secure the property – no one lives there, it can be an easy target for copper thieves and grabbers.

However, when it is empty, you can accept the display at any time of the day or night and you know that it is clean because there is no one there and nothing to dirty it.

Decide what works best for your selling time frame.

legally avoid taxes

At the time this is written (late 2017), you have two ways to legally avoid paying taxes when you sell your property. Both seem poised to change in the new tax bill, but haven’t changed yet. Be sure to check with your CPA for the most up-to-date tax information; There is no set time to change this.

section 121 exclusion

The Section 121 exclusion, commonly referred to as the “two out of five rule,” comes from the Taxpayer Relief Act of 1997. Before the Act, you had to buy a more expensive home in order to defer capital gains taxes. But Section 121 now eliminates capital gains taxes up to $250,000 for single homeowners and $500,000 for married homeowners.

But, there’s a catch. (It’s a government program—of course there’s a catch!)

1. It is only available for your primary residence. You must have lived in and owned the property for two out of the last five years. You can still use it to sell a rental property, but only if you meet the two out of five year residency requirement.
2. You can only do this once every two years. Those two years don’t have to be consecutive. you can break them; The time of stay in the property should be equal to just two years.

If you meet these requirements, you can save yourself a lot of money. If you’re just shy about the requirements, it might be well worth it to go back to the property to make sure you hit them all.

You should definitely consult with your CPA before attempting to claim this exemption, especially if there is any question if you meet the requirements.

1031 Exchange

What you are more likely to qualify for when selling your investment property is a 1031 exchange. While this doesn’t exempt you from capital gains taxes like the Section 121 exclusion, it does prevent them, essentially kicking you down the tax road.

Again, since this is a government program, there are rules. Lots of rules. Forget to cross out just one “i” or even just one “t” and you could blow the whole thing out of the water owing capital gains tax that you could have avoided. And the rules aren’t even “common sense” rules. No, it’s a government program, complete with government red tape, seemingly pulled out of thin air for no logical reason.

First, you need a qualified intermediary to facilitate the transaction. If you’re planning on doing a 1031 exchange, start looking for a QI now. Ask for recommendations in the BiggerPockets forum for reputable QI. Once you’ve decided on a QI, follow their directions – and ask as many questions as necessary to understand the process.

There are hard and fast dates you must follow, forms to fill out and documents to file. Your QI must be included in the sale transaction and also included in the purchase before the sale is closed.

The requirements get really complicated, so don’t take this overview as gospel. You need a QI involved in the sales and subsequent purchases anyway. Be sure to follow their instructions. However, here’s a brief overview:

1. You have to buy an equal or more expensive property.
2. You must use your entire net proceeds from the sale to fund the new purchase.
3. You must identify your new property within 45 calendar days of the closing of the existing property.
4. You must close the new property within 180 calendar days of the closing of the previous property.
5. You must have previous ownership of the property as an investment property.
6. You should buy the new property as an investment property.

There are many more rules to follow, and your QI will be able to guide you through the process. But to take advantage of any of the 1031 exchange benefits, you must include your QI in the sale of current property. Do not sell investment property without consulting a CPA and qualified intermediary.

selling a fix and flip

There’s a sense of satisfaction in taking an ugly house and turning it into a beautiful, modern abode. There’s also a nice, fat paycheck at the end if you do it right. It’s my favorite way to invest, and I combine it with the Section 121 exclusion to eliminate capital gains taxes. But it is a plan that I implement from the time I buy the property. If you haven’t lived in the home for two years, you can’t defer capital gains taxes.

You can still move in, live there for two years and then sell. The clock starts ticking when you actually move in, not when you bought the home, so you’ll add two years to your sales timeline. Not everyone’s timeline will have two years.

Connected: Here’s what you need to list to sell property fast

I think it goes without saying that you shouldn’t cut corners or do shoddy work. Of course, every time I say, “this goes without saying,” I find an instance where it needs to be said. Don’t do poor work, and don’t let your contractors do poor work either.

There is debate as to whether you should start marketing the property before completing the remodel. While it’s only a minimal cost to put up a sign in the front yard that says “coming soon,” buyers have zero imagination, and seeing what a mid-rehab home looks like is too much for some people. It is possible

I don’t advertise my flips until I’m finished. I’ve had a lot of bad responses from potential buyers who didn’t understand the process.

Here are tips for selling a flipped house after the rehab is complete:

1. Staging assets. Most people can figure out what to do with a master bedroom or living room, but they can find awkward spaces or awkward nooks confusing. Buyers have absolutely no imagination, and anything you can do to help them see these spots that aren’t obvious can help your home sell faster.
2. Make a binder about the house. In this binder, put each appliance manual (with a notation on where to install it if available), all warranty information, the name of any contractors you used, and any other relevant information about the property.
3. List (almost) everything you’ve done. Not all improvements are obvious, but that doesn’t mean they aren’t important. New doorknobs and light switch covers are not something anyone cares about or notices. On the other hand, new electrical service or plumbing work is not visible but is extremely important to notice. Go through the house room by room, and note everything you’ve done, especially those repairs that aren’t obvious. When you’ve recently bought a home and you’re asking for a significantly higher amount than you paid for it, you want to make it abundantly clear why you’re asking so much for the home. Keep a copy in a binder and print one out, frame it, and leave it in a very conspicuous place in the house during the show.

market timing

For every investor who sold at the peak of the market, there are 12 billion that missed that peak on both sides. OK, that’s a made-up statistic, but I’m trying to prove a point. You cannot time the market. Trying to do so is an exercise in futility.

is there any Always Going to sell a house for more than you, shortly after you close.

someone will do Always For more money than you’ll be able to get, sell a property right before you do.

Sell ​​because you are happy with your returns. Sell ​​because you want to make a difference. Sell ​​because you need to cash out, but sell because it’s time to sell, not because you’re trying to time the market.

Selling your home can be overwhelming. There is a lot that you need to do, know and all the dreaded forms that you have to fill out. in his new book how to sell your houseAgent and investor Mindy Jensen takes you step-by-step through the process, from getting your home ready to sell, to choosing the right agent for you, to the closing procedures and beyond.

Slated for release on January 11th, 2018, this book can be pre-ordered now!

What tips would you add to this topic?

comment below!

Note by BiggerPockets: These are the views expressed by the author and do not necessarily represent the views of BigPockets.