Many Investors have experienced rapid appreciation of their investments in the past couple years, and are deciding whether it’s a good idea to sell their investment properties and take their equity to buy something larger to increase their returns.
Selling your property can be one of the smartest decisions a savvy investor makes. Before you decide to sell, it’s important to understand your commissions, taxes, returns, and opportunities for reinvestment.
Understanding Returns & Profits
The first step in selling a rental property is understanding how much return you can expect when you sell. The easiest way to do this is to contact a local real estate agent, and have them run a comparative market analysis to show you what you can expect your property to sell for.
Modeling your Returns
Then you need to model your expected sales price, commissions, closing costs, and your remaining mortgage to arrive at your net proceeds. To maximize your net proceeds, you can use a service like Clever Real Estate that lets you list your home with a full service agent for a flat fee of $3,000, or 1% if your home is more than $350,000.
Commissions can be one of the most expensive costs of selling a home, and finding ways to save can sometimes be the difference in deciding to sell a property.
Taxes & 1031s
Once you’ve decided to sell your home, you need to take a closer look at your taxes. If you’ve owned your property for over a year, your proceeds will most likely be taxed as capital gains instead of ordinary income. However, for some investors, this can still be a large portion of their profit wiped out by taxes.
That doesn’t have to be the case. If you’re looking to buy another investment property, you can do a 1031 exchange. A 1031 exchange lets an investor defer all of their taxes, as long as you take the proceeds from the sale of your first property, and put it all into buying a larger, more expensive investment property.
This allows investors to rapidly grow their portfolio by using all of their equity for growth. You will eventually have to pay taxes when you decide to sell without purchasing again, but a 1031 exchange lets you grow your portfolio and drastically increase your cash flow, tax free.
Pro Tip: Don’t let prospective sellers know that you’re doing a 1031 exchange, as they might know about the time limits for purchase and refuse to negotiate.
Look to the Future
Another important aspect of selling a property is analyzing the market for new opportunities. Selling your investment property for a large profit is great, but if you have to pay a similar amount for your next investment, you might not come out as far ahead as you think.
Before I ever decide to sell a property, I like to survey the market, and speak with several agents that I trust to bring me deals so I can get a feel for the market. I only want to sell a property if I can find a great replacement to grow my portfolio.
Generally speaking, even in a hot market, there are deals to be found. You just have to be willing to work hard to find them, and stay conscious of how much capital you have available for your down payment, and the short term expenditures a new purchase will incur.
Thanks for taking your time to learn more about Managing Tenants and reading Part 5 of my Landlording Investing installment. Here are the direct links to all the investing articles in the series: