If you’re asking whether you should sell your rental property and how to do it, we’ve outlined 5 different scenarios below, when selling your rental property is an absolute must. We’ll also cover everything else you’ll need to know to sell your rental property with the least amount of hassle possible.
Check out the Table of Contents to get a quick overview of everything in this guide.
5 Reasons you Should Sell Your Rental Property
1. It's not generating revenue
Rental properties are only great when they generate revenue with as little work as possible on your part. If your rental property is becoming more expensive to maintain than it’s earning, you might consider selling. When expenses relating to the property and the money you’re getting in return don’t match up, it’s time to take another look at things.
However, keep in mind that a rental isn’t always immediately profitable.
You might need to fix it up and advertise it before you can fill it, and you won’t start seeing any real profit until after your tenants have paid up for a few months.
If you’re still seeing low profits (or even worse, losing money) after you’ve been renting the property for a while, you might have gotten yourself into a situation that’s seemingly impossible to fix.
You can raise the rent, but if you raise it higher than what people are paying for similar properties in your area, you’re never going to be able to fill the property.
When this happens, your best choice is to sell the property to someone who's prepared to solve the problem – particularly if they have enough money to wait out a tough period or make the changes to the property that would justify a rent increase. With this route, at least you’ll get some of your money back and leave the problem to someone else.
2. You live or need to move out of state
It’s hard to remotely manage a rental property. You can’t keep coming back and forth to meet with your tenants but the travel and maintenance costs can significantly outweigh your profits.
If you're out of state or need to move you have two options:
- You can hire a property management company to handle the property or...
- You can sell the rental.
1. Hiring a Property Management Company
When you hire a property management company, you’ll still need to deal with them. Most of them will handle properties for remote owners, but they'll want a hefty fee.
Property Management Companies are generally best reserved when you have an excess of rentals in your portfolio that justify the cost. With a smaller portfolio or one rental, you'll likely end up making less profit while still having some of the responsibility.
2. Selling your Rental
When you sell the property, you can be completely done with it. You can take whatever money you make and use it for relocation costs or for another investment. This way you can simply be done with it and won't need to deal with it anymore.
3. Your Tenants are driving you crazy
Not all tenants are respectful, abide by the lease, and pay on time.
Most tenants are easy to deal with for the first month, but things can quickly change once they settle in. If you feel stuck to nightmare tenants, you can evict them and go through the process of finding new ones, or sell the property altogether.
When you find new tenants, you have no guarantee they’ll be on their best behavior. Especially if the property is in a less than ideal area. Though it’s not probable every tenant who lives in your rental will be terrible, many people who have experience with bad tenants find themselves burned out on land-lording.
Some tired landlords sell their properties to investors. Investors can help get terrible tenants out of the property by paying them to leave or providing you with resources to expedite their eviction when they’ve violated the lease. They’ll also purchase the property even if the tenants have damaged it.
4. Your Property needs major repairs
Properties need a lot of maintenance, especially if they’re older. Some of the wear and tear is normal, and it won’t be your tenants’ fault. You’re responsible for fixing the property. An old roof, old AC/Heater, or a flood from a plumbing failure are costly problems to fix. If you have issues that are too costly to fix then you may have trouble making profit in rent.
Selling your property in as-is condition, will get you off the hook quickly. Someone else will assume the responsibility of repairing the property, and you won’t be bleeding money. You can take the money you’ve earned and use it to buy a property in better condition, or invest it into a different venture.
5. You want to do or invest in something else
Is it time for a career change? Are you ready to retire? Or are you burned out on land-lording entirely?
Whatever the case may be, if land-lording isn't your cup of tea, do yourself and your sanity a favor and stop wasting your time land-lording when you’ve found a new calling.
The average person changes careers between 3 and 7 times in their life. When it’s your time to change, you’ll know.
You deserve to do work you feel good about.
If you've come to despise owning rentals then sell the property, and start your next big venture.
When is the Best Time to Sell Your Rental?
Of course, the real question isn’t whether to sell – it’s when to sell a rental property.
To put it simply, the best time to sell a rental property is when the effort to upkeep your property outweighs your profits.
This can happen when your property management company starts charging too much, it’s sitting vacant for too long, or the home needs extensive repairs.
Compare your time-frame to the current market
What’s the real estate climate like in the area of your unwanted property?
Here's a few things to consider:
- How long have the houses in your area been listed?
- How many price reductions have they seen since their original listing?
Looking over the current situation of similar homes in your area will give you an idea of how long it will take you to go through the motions of selling your property through an agent.
This can give you a good idea of when you should try and sell.
Estimate how long showing the house, finding a buyer, and going through closing will take. While using a real estate agent to sell your property is a tried and true method, it does have a tendency to take a long time. If speed of sale is a concern a Real Estate Investor might be a better option.
There are also different seasonal advantages and disadvantages to take into consideration when selling your home.
Preparing Your Rental for Sale
It’s easy to decide to sell your rental property, but how to sell a rental property is a different story.
Don’t overlook the importance of preparing your rental for sale.
There’s paperwork to organize for your potential buyer, like income and expense reports and any leases, permits or other contracts that currently apply to the property.
1. Fix the issues your property has
If things are wrecked, you may have a hard time finding a traditional buyer who’s willing to deal with it. Things like bad roofs and shoddy plumbing can be very off-putting to traditional buyers as well as some investors or property flippers.
Investors are often willing to purchase fixer-uppers, but there are some that won’t go near properties that are ransacked. If they do, they won’t be willing to give you nearly enough to cover your investment. You have a lot to lose.
In times of desperation, it may seem like a relief to take a rock-bottom offer and just move on, but you can get much more if you have a budget to make the needed repairs.
First, take an inventory of the big things that need to be done, and come up with a budget for serious repairs.
Fixing any potential property damages like termites, leaky plumbing, roof damage, or an old AC/Heater will determine what you may need to invest to get it market ready.
However, you'll need to determine if these investments will be worth the cost. If not, even though you may not get market value for your home, selling to an Investor might be a wise decision to cut your losses.
Walking away tired is one thing, but walking away tired and broke is an entirely different ballgame.
2. Maximize the value of your property
If the home isn't in disrepair, but you allowed you tenants to paint or make changes, what you’re left with is their taste. This can make it hard to see your property as the blank slate traditional buyers are looking for.
If your property is vacant and in fairly good condition, you’ll need to put some effort into the cosmetic elements of the home to get it market ready and presentable.
Paint, flooring, fixtures, hardware, and lawns can completely change a property for a relatively small amount of money.
If your property hasn’t been updated in a while, a small face lift can help it fit into the modern market. Properties that look clean and new move much faster on the market than ones that look tattered and worn.
If you're considering an investor, (who typically buys a property in as-is condition) to buy your property without these cosmetic changes, keep in mind that they’re going to deduct the changes they'll need to make from your offer.
If you can, you might as well handle things on your own and keep that budget for yourself.
How to Sell Your Rental Property
When you sell your rental property, there are a lot of California laws dictating what you can or can’t do. How to sell a rental property in California is different than in bordering states like Nevada, Oregon, or Arizona.
Even within the state, each city and county have different laws on how to sell a rental property.
It also depends on whether there are tenants living in it.
Let's take a look at the basics first.
1. Determine the Value
Look At Other Prices in Your Area
Investigate what similar properties in the neighborhood of your unwanted rental are selling for. Some properties will be worth more, and others will be worth less. It’s important that the properties you’re investigating are reasonably comparable to your own - especially condition wise.
In addition to the asking prices of these properties, you’ll have to consider how long they’ve been sitting on the market.
For example – if a property that’s virtually similar to yours is listed at $250,000, but it’s been sitting on the market for 3 years, it probably won’t sell at that price.
Look at how many price reductions a property has gone through also.
It also helps to look at properties that have already sold.
Those homes turned out to be worth their asking prices. Let them be your guide.
Can you afford to price yours competitively, or comparably at the very least?
Come up with your sales price
Once you know what houses are actually selling for, it’s easier to determine the maximum amount that you can ask for your property. If you spent $175,000 on your property and spent $15,000 on improvements, you’ve put down $190,000.
If similar houses are finding real buyers and successfully selling at $225,000, your realistic maximum potential profit sits at $35,000. How much of that you’ll actually get depends on the way you choose to sell it.
Depending on the route you select, that number can either stay the same, go up or down.
You may need to tweak your numbers depending on the selling method you use.
Let's take a look at two of your best options.
2. What are your best options?
1. Selling through a Realtor
While going through a realtor is probably the most popular way, it can be complicated and drawn-out.
The realtor will come in, inspect your property, and come up with a listing figure of their own. This number may be higher or lower than what you’ve estimated, and that can affect your plan.
Realtors also take a commission out of your selling price. Depending on the realtor and the circumstances, this is anywhere between 3-6% of the final sale price of your property.
Depending on the housing market in your area, the realtor may suggest reducing the price if your home has sat for a while. If it doesn’t sell quickly, your realtor will want to bring down your asking price.
This means your profit will be reduced, and you’ll still be paying commission.
The longer your property sits on the market, the less you’ll be able to ask for it. Worse case scenario, you watch your profit margin decease over a period of a few months, while you remain stuck with the property and the maintenance costs.
2. Selling to an Investor
Realtors will profit off of your home, and so will investors.
The main difference between the two is that you’re taking fewer risks by going to an investor. Generally, investors only purchase properties that are below market value. Once the property belongs to them, they’ll update it and resell it.
Some people are hesitant to go towards investors because it’s a guarantee that they won’t make market value on their property. Truthfully, almost no sale method will get you full market value.
Real estate agents take their cut, too, as well as escrow fees and closing costs that are deducted.
Investors generally pay in cash immediately.
You’ll be able to sell your house closest to your maximum profit at the current moment, rather than risking fluctuation within the real estate market or a slow sale process reducing your profit margin even further.
Since investors buy real estate quickly, you won’t have to worry about maintaining the property or incurring any further costs associated with your ownership of the property while you’re waiting to find a buyer.
Once you understand the market value of your property, approach investors with that number. They won’t be willing to pay the full price, but you’ll be able to negotiate to your benefit and probably make a comparable profit in the end.
Of course, no matter how you sell your rental property, you’ll need to notify tenants, if any.
3. How to sell your rental with Tenants
A tenant-occupied rental property can sell easier to an Investor because the buyer knows it’s already generating revenue. This assumes you have tenant cooperation (and a buyer who isn’t looking to evict the tenants and live in the home themselves).
Notice of intent to sell a rental property should be done as soon as possible.
Your tenants will need as much advanced notice as possible for any showings or even to prepare for a move. Some tenants will not want to live in a home that’s in the process of being sold, and they can break the lease if necessary. That will be discussed more in the next section.
Either way, empathize with your tenants and work with them to find the best solution. Don’t just provide them with your notice of intent to sell your rental property – give them incentives to work with you, such as gift certificates, a cleaning service, and alternative housing accommodations during open house weekends.
In fact, depending on your tenant relationship, it’s possible the tenant may want to purchase the property. This is a mutually beneficial situation because it skips a LOT of steps for both parties. Even if the new investor wants to maintain the same tenants, new leases will need to be signed. Otherwise, there’s the process of moving, showing, etc.
Let’s discuss more about renters’ rights in California.
Rights of CA Renters when a property is sold
As discussed in the previous section, to sell rental property with tenants requires a notice of intent. You can’t just evict tenants because you’re selling your rental property (although a foreclosure will certainly lead to eviction).
In fact, the lease must be honored by both sides through its entirety. It’s not until the end of the lease that problems start to arise.
Besides a notice of intent to sell (30-60 days), you should provide reasonable notice (24 hours) before showing the property. California law also dictates that showings occur at a reasonable time, such as noon instead of late evening. In the case of a foreclosure, the bank needs to provide the tenants 90 days’ notice to vacate.
Tenants can give up their rights through an independent agreement signed with the landlord. This replaces the original lease terms and concessions are often given to ensure the best outcome for both the tenants and landlord.
In worst case scenarios, you may be dealing with bad tenants.
How to sell your rental property with bad tenants
When you sell rental property, you’re depending on good tenants. If you’re dealing with bad tenants, it’s time to start the eviction process. You’ll want to properly document all contractual breaches to make the legal process as smooth as possible. Hire a lawyer if you’re not familiar with the process.
You’ll also want to take advantage of insurance policies to help cover any damages from the rental property sale. File a claim and start making repairs. Eviction is a lengthy process that will inevitably give time for the bad tenants to do even more damage to the property.
The damage from bad tenants needs to be mitigated and removed without delay. It lowers the selling price of your home and can even stop the sale process altogether.
If you really need to get the property (and tenants) off your hands as fast as possible, sell your rental property to an investor of distressed properties. Real estate investors like SoCal Home Buyers can handle such sales, giving you cash up front to move on with your life while we deal with the hassle of getting the Tenants out of the home.
Learn More: How to Sell a House with Tenants Living in it
4. How to sell a vacant rental property
No matter how high-end the neighborhood, a vacant house is going to inevitably draw vandalism. Even worse, you may attract squatters, making it a good idea to live in the house at least part-time while it’s on the market.
It can take up to 180 days or longer to sell your rental property on the open market. This is especially true with a vacant rental property, because it begs the question, “why isn’t it occupied?”
In this case, consider a real estate investor if you need a faster sell.
Selling a vacant rental property has its own set of problems. Now, you’re not dealing with bad tenants – you’re possibly dealing with every criminal element in town. Vacant properties attract vandals and squatters who will damage the property and even cause legal issues if they can prove they’ve been there long enough.
What’s worse – listing your property as vacant on the open market is basically advertising for criminals to come take advantage. You never know what’s going to happen.
Living in the vacant property is an option, but the easiest way to unload a vacant property is through a real estate investor. Real estate investors can handle issues the average buyer can’t. Whatever problems you’re facing, SoCal Home Buyers has seen it all and can offer the best price for your vacant rental property.
This, of course, begs the question, “If I sell my rental property, do I pay taxes?”
Tax Implications of Selling a Rental
The only two guarantees in life are death and taxes. So, the answer to your question of, “If I sell my rental property, do I pay taxes,” is yes.
Any rental property sale for profit will be taxed.
This leads to another question: how much tax do you pay when you sell a rental property?
Selling a rental property has both federal and California state tax implications. You’ll pay anywhere from 1% to 25% federal taxes on your sale, depending on your income and tax bracket. This is a combination of the capital gain (profit) of the sale and depreciation recapture.
California has no long-term capital gain rates or depreciation recapture, so it’s taxed as ordinary income, which ranges from 1% to 12.3%, according to Intuit.
This is just the start of rental property taxes you’ll pay.
1. How much Tax will you pay selling your Rental?
When you sell rental property, tax is determined by a combination of capital gain and depreciation recapture. This is only on a federal level since California taxes the property as normal income based on your income bracket.
You should be prepared to pay capital gains taxes to the federal IRS. If you held the property for more than a year, it’s a long-term gain. It all depends on how much you profit from the sale. Rental properties have higher property taxes than a personal property.
The IRS determines a rental property depreciates over 27.5 years, which equates to a 3.636% annual rate. So, if you held a $200,000 home for five years, it would depreciate by $7,272 each year, or $36,360 total. Add your profit to this, and that’s how much you’ll be taxed.
Many people try to avoid this extra tax, which adds up quickly on high-value property sales.
Let’s talk more about that.
2. How to avoid a tax hit when selling your rental
How to sell a rental property without paying taxes is an art. For joint filing incomes between $77,201 and $479,000, the long-term capital gains tax rate is 15% as of 2018. The rate increases to 20% for income above that. Selling a house for $100,000 capital gains will get you hit with a $15,000 to $20,000 tax bill.
You’ll need to offset this.
Using creative accounting is how you’ll sell a rental property without paying taxes.
Some accountants recommend tax-loss harvesting.
In this strategy, you pair the gain from the sale with losses in other investments. Anyone who lost on cryptocurrency in 2018 could’ve benefitted from this great tax loophole.
Offsetting gains with losses is a popular tax strategy used by billionaires, but you don’t need to be in the one percent to benefit. Anyone selling a rental property can avoid paying hefty tax penalties.
Section 1031 is the other popular method, which is discussed below.
3. How to avoid paying capital gains
You want to sell your rental property and avoid capital gains. Keep that mantra in your head – sell rental property, avoid capital gains. The IRS loves to make money off your revenue, so a Section 1031 exchange is necessary.
With a Section 1031 exchange, you reinvest proceeds from your rental property sale into the purchase of another investment property. This means you essentially roll any profits over into another investment, which is allowed in the IRS tax code.
Of course, the swap must be a like-kind exchange. This means you’ll be best off investing in another real estate investment. Pouring that money into another business venture or other assets will make it more difficult to claim a section 1031 exchange.
There are also deadlines involved.
You have less than a year to pull off the swap. This means you need to both sell and buy your properties as fast as possible. With long closing times on the sale of your old property and purchase of your new one, you don’t have time to waste.
You’ll have to time this with the tax year too, so, for example, if you sell your house in October, you only have until April to reinvest that money. That’s only six months!
You can’t afford to wait.
If you want to be able to sell your rental property as quickly as possible so you can re-invest into another property, while avoiding major tax hits, a real estate investor can help you unload your property fast, so you can immediately invest in a new property, or simply move on with your life.
Don’t settle for less – contact SoCal Home Buyers to learn how your can sell your California rental property today with the least amount of hassle.
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