The turbulence in 2020 surrounding Covid-19 has certainty caused many landlords to re-think their long term investment strategies. Some have decided to sell their properties to rid themselves of the complications surrounding ever reaching landlord tenant laws, overly strict eviction laws, and moratoriums on rent rate increases. Other investors have doubled down, seeing the fragile economy as a clear indicator that the ‘lifetime renter’ is here to stay.
If you are going to consider selling your rental property, here are a couple of things to consider.
1 – Attempting to sell the property to the tenant can be a great strategy, however it is not always the best financial decision. While it’s true we can save you on the total commission paid, the reality is that given current market conditions you are limiting yourself to one buyer when there are likely dozens of other prospective buyers out there who may be willing to pay more for the property. If this is something you are considering, we should discuss the pros and cons of this strategy with you about your specific situation.
2 – Taxes. This is an obvious one that you are likely already thinking of so we won’t go into to much detail here. The quick note is, if you have not lived in this home for at least 2 out of the last 5 years, you will likely be subject to capital gains taxes unless you roll that money into another investment via a 1031 exchange. Here’s a comprehensive article and video with more info about 1031s.
3 – Will you sell with the tenant occupying, or wait until it becomes vacant? Our preference is to wait until the property is vacant. MOST of the time, this will result in a higher price and better overall terms with your eventual purchase and sale agreement because we can get into the property and gussy it up as needed. We also don’t have to worry about how messy the tenant is living nor deal with the ’24 hour to show’ requirement which will deter potential buyers and agents from seeing the property in the first place. If you plan on selling the property while it is occupied, to capture both investor and owner occupant buyers, you’ll want to wait until they have about 45-60 days left on their lease to list it for sale. This will allow for both investors and owner occupants to to see the property as a valid contender.
4 – What else are you going to do with the money? Buy a boat? Invest in Pokémon cards? Bulk up your retirement savings or kids 529 plans? Perhaps a commonly overlooked aspect of selling a rental property is what are your plans with the net proceeds. I’d argue that if you plan to just stick the money under your mattress or spend it wastefully, it’s probably not the most financially savvy decision. However if you have an alternative investment strategy to redeploy those funds, them perhaps it makes sense.
5 – Inflation, Inflation, Inflation (Protection). Of all the financial swans to keep me awake at night, this is the one that causes nightmares. Inflation is the thief in the night that steals your wealth without any regard to your plans. In my opinion, perhaps other than Gold and Bitcoin, Real Estate is the best long-term hedge against inflation. Short of a complete takeover of housing by the government, your rental prices will continue to go up along with the reminder of CPI, as monthly rental rates are the largest component of CPI. Just like with college tuition, if the Government continues to print money and give it away ‘for free’ this will cause your rental rates to keep up with inflation.
While not an exhaustive list of everything you need to consider, I hope this helps stir the pot a little! If you do decide that selling is in your best interest, we are here to help!