An investment property, by definition, is a place with one simple goal: to make money. So if you want to learn how to sell an investment property, we’d wager that maximizing those profits is likely your top priority.
In many ways, the steps to selling an investment property are the same as selling a home where you live: You hire an agent (here’s how to find a real estate agent in your area) who will market your property on realtor.com®and start bringingin potential buyers. Still, since investment properties operate under different rules taxwise than a homewhere you live, you’ll want to ask certain questions.
Here are the factors to consider—plus the fun part: how much money you couldstand to make.
Should Isell my investment property?
First things first: Are you sure you want to sell? Because there are other options that could drum up income—steady income—such as renting it out.
Whitney Nicely, principal broker withWhitney Buys Housesin Knoxville, TN, has more of a buy-and-hold mindset. “It’s silly to sell the one you have unless you have a really good reason,” Nicely says. So yes, there are valid reasons to sell, but you should make sure yours make the cut:
- The neighborhood is changing. If the hood is hot,and you’ve made a pile of cash, it could be a good time to take your money and run. Conversely, if a neighborhood is deteriorating, you might want to get out before it falls too far. “Even if you end up only breaking even on your property, at least you won’t lose money if the market continues to dive,” Nicely says.
- The property needs massive repairs. Maybe you’re looking at a foundation or roof that needs overhauling, or another big-ticket expense on a rental house. Or, a condo you’ve invested in is due for a major assessment. “If substantial repair work is needed, or you just don’t want to put the energy into it, it is likely a good time to move on,” says broker Jared LaFrenais of Douglas Elliman in New York. However, you need todisclose these issues and will likely figure them into the price notes.
- It’s a tax liability.Owning property, even as an investment, can bump you up a tax bracket. That’s a good reason to sell, especially if you have no interest in being a landlord. You also should take note of potential expiration of tax abatements, notesLaFrenais. “If, for example, your investment is a condominium in which you generate a rental income, the expiration of an abatement and the resulting tax increase will impact your finances, so consider the advantages to selling before this occurs.”
- You could get a better return elsewhere. Most important, consider your options, LaFrenais notes.“If you have held a property for many years, it has likely increased in value, which can allow you to sell and diversify into an emerging neighborhood or multifamily homes.”
Who will buyan investment property?
Even though you’veused the propertyas an investment, the homemay attract actual buyers who want to live therein addition tolandlords and investors. In fact, if your investment property has renters in it already, you will probably want to give them the option to buy the place since they might preferto stay put and be happy to pay for the privilege, which also makes your job easy!
Tax considerations to take into account
Yet with the sale of an investment property, you will incurcapital gains tax. It could be a long-term capital gain, which applies to properties held for greater than a year and is taxed at a lower rate. Or, the property may fall into the short-term capital gain, which is taxed like ordinary income. In most cases, it’s smart to work with a trusted adviser to figure out how taxes will affectyour sale.
You may also want to know the transfer taxes in your state and determine if a 1031 exchange is a good choice. The exchange of like-kind properties may defer the recognition of capital gains at sale time, which can defer tax due. It’s a strategy LaFrenais frequently recommends: “There is no limit to how many times you can do a 1031, so you can continue to swap like-kind properties and grow your investment tax-deferred.”
How much can you make selling an investment property?
While your exact profits will vary widely dependingon your market, statistics from RealtyTrac suggest that people who flip homes—meaning buy a run-downproperty, renovate it, and then sellit—yield an average gross profit of $58,250, or 50% more than what they bought it for! Granted, that’sgross profits, which don’t include money spent on renovations. Still, that’s a healthy return by any standards in a very short span of time.
Still, though, not all investment propertiesare “flips”; others may be homes you’ve bought, held, and rented out. In those cases, the return will depend on how much prices have appreciated in your particular market, how long you’ve held the property, whether you’ve had a mortgage on theplace, andother factors. But in general, if the property is held long enough, real estateprices have nowhere to go but up, so odds areyou’ll come out ahead!
