Question #: Is It Actually Worth Selling My Investment Property
Also ask how much tax and fees we have to pay, and will it be worth it? Going back to what I was saying, if you sell your property, youre going to have to pay all these fees.
Maybe you bought a property for $500,000. Its gone up 10 percent, its worth $550,000. Youd love to realize that $50,000. If you sold that property, youd have to pay real estate agent fees. 2 percent on $500,000 is $10,000.
You lose $10,000 there. You might have to pay stamp duty. You might lose $20,000 to $30,000 by selling it, and youve only made $10,000 to $20,000 back. Calculate those fees and ask yourself whether its going to be worth it to actually sell your property, or if its better to just keep it until it goes up in value more.
Is Buying A Condo A Good Investment
Condos can be a good option for rental property buyers because they tend to be more affordable than comparable single-family homes, and they are often located in desirable locations . Additionally, condos often have fewer maintenance demands because owners arent responsible for taking care of the grounds or the buildings exterior.
Still, financing a condo can be trickier than getting a mortgage for a single-family home. For instance, most lenders require that at least 50% of the units are owner-occupied and that the homeowners association is in good shape. Its also important to consider potential special assessments. You may be able to swing the monthly dues with no problems, but if the building needs, say, a new roof, you may owe a special one-time payment that could be thousands of dollars.
Should I Sell My Investment Property In A Sellers Market
Yes, you should sell an investment property in a sellers market if the profit you earn will outweigh the future property value growth and the passive rental income youll miss out on by selling. In a sellers market, conditions favor sellers with faster sales, fewer price cuts, and offers very close to or even sometimes above asking listing prices. While its impossible to forecast future market conditions precisely, here are a few factors that might make it the right time to sell.
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When Should You Sell An Investment Property
Knowing when you should sell an investment property and when you should keep it is an important part of being a successful property investor.
Sell too early and you could miss a property boom and a lot of capital growth, sell too late and you could see the price of your property stagnate for years while you miss countless opportunities for better investments.
Reasons Why You Shouldn’t Sell Your Investment Property In Chicago
Thinking about selling your investment property in Chicago? Think again. While there are many reasons to sell off a rental property, there are better reasons to hold onto one.
In this article we’ll clear the air, giving you five excellent reasons why you should hold onto your investment property and how we can help make the process easier for you.
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Get Several Opinions On Your Propertys Value
As a seller, youll obviously want the highest possible price for your property. Remember, though, that setting an unrealistic price will deter buyers and increase the chances of your property staying on the market longer. Seek out valuation advice from more than one agent so you can compare the difference and settle on a realistic figure that youre comfortable with.
Tax Consequences Of Selling Rental Property
Now, lets look at the potential tax consequences of selling a rental property. In this example, well assume the property was originally purchased for $100,000 and is sold for $150,000. Over the 5-year holding period, $14,500 in depreciation expense was claimed by the owner.
When the rental property is sold, depreciation is recaptured and taxed, and the remaining profits are taxed as a long-term capital gain:
Depreciation Recapture Tax
Real estate investors use the depreciation expense to reduce taxable net income during the time they own a rental property. When the property is sold, the total depreciation expense claimed is taxed as regular income up to a rate of 25%.
Assuming an investor is in the top tax bracket, the depreciation recapture tax would be:
- $14,500 recaptured depreciation x 25% depreciation recapture tax rate = $3,625
Capital Gains Tax
The remaining profit of $50,000 is subject to capital gains tax. At the highest income bracket, the capital gains tax rate for 2021 is 20%:
- $50,000 capital gain x 20% capital gain tax rate = $10,000
In this simplified example, the tax consequences of selling the rental property are $13,625.
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Rental Rates Are Favorable
Understanding the local market and rental competition is essential to determining whether to sell or rent. Ideally, owners should set a goal of a rental rate that is at least 1% of the total investment. For example, if the property investment costs $150,000, then the market should support a rate of $1,500 per month. That said, some areas may garner even higher rates. So, if your property is achieving high rates and the market continues to grow, keeping a rental may be the best investment choice.
Should You Be Keeping It For A Longer
One factor to think about is the length of time in which you have owned the property and if selling for a profit, how capital gains may impact your decision. Before choosing to sell, speak with your financial advisor about how selling might affect your finances and future investment.
On the flip side, your advisor may also speak with you about options if you are losing money on the property and with rises and falls in costs, ongoing maintenance, and potential vacancy expenses, how this impacts your income and the investment.
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You Dont Have A Properly Diversified Portfolio
A lot of real estate investors start out with a single property and then build their portfolio.
But its also possible that you have a single property and no intent to get further into the market.
When you only have a single piece of real estate, youre actually very vulnerable. Lets say you have an expensive home you used as a residence its $300,000 and it now rents for $1,750.
If someone stops paying the rent, youre significantly in the red.
Ask yourself: If my existing tenant stops paying for six months, can I keep paying the mortgage? If the answer is no, then the risk might not be worth the capital gain.
Is Your Rental Property Cash Flow Positive
The reason we all have rental properties is to make money, preferably every month. Do you know if your rental makes money? Use our rental calculator to determine the annual cash flow and the cash on cash return of a rental property.
This is probably the most important consideration when trying to decide whether to keep or sell an investment property.
If your rental sucks money out of your bank account every month, its a no-brainer decision.
Subsidizing your rental property and waiting for appreciation to make money is risky. In certain situations, it may be worth keeping a neutral or even negative cash flow rental but this is a more advanced investment strategy.
For most real estate investors, its a risky proposition. If you have a negative cash flow property and you rely on income from your job to support it, what happens if you lose your job? Would you be able to continue supporting your rental?
Some investors think that the tax deduction will offset the negative cash flow. Because rental income is considered a passive income and loss from a rental can only be deducted from other passive income, thats not a good strategy for most landlords. There are some exceptions for real estate investors who actively manage their properties and have an adjusted gross income of $ 100,000 or less.
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How To Sell A Rental Property While Avoiding A Tax Hit
Selling a rental property involves more than just hiring a local real estate agent and holding an open house. In fact, oftentimes it can be more profitable to not sell the traditional way.
Changes in the marketplace, existing tenants, repairs, and taxes can make selling more difficult than it may seem. In this article, well begin by looking at the sign that it may be time to sell, then explain the steps to take to increase your potential profits, and how to minimize your tax bill.
Other Selling Considerations For Landlords
- If youre thinking of selling an investment house or multi-unit dwelling soon, dont sign new leases. Youll get a higher price for your house if you are targeting both investors and end-users who want to live in one of the apartments themselves. Having a vacant apartment is an attractive feature for many Buyers.
- If youre NOT thinking of selling soon, increase your rents every year. The amount of rent your Tenant pays will directly impact the sale price of your house. Because the lease transfers with the property, a Tenant who is paying below-market rent will mean the new owner will take in less income than they would with a comparable property, and that will make your house less valuable . Always charge market rent to a new Tenant, and always increase rents annually by the amount allowed by law.
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Continue To Imagine What You Could Do With The Money
In holding a property, in holding an asset or anything with financial value their is always going to be the opportunities cost that you could be doing something better with your money.
The fact is you have your money tied in one investment but if it was in another investment it could be performing better.
Keep looking at the market, keep learning, keep looking for better ways to invest and get a better return on your investment.
You Have Positive Cash Flow
Brian Davis, a real estate investor and co-founder at SparkRental.com, says good rental properties have positive cash flow after all of the bills are paid. Cash flow is the amount of money that is left over after all of your expenses are covered.
Shea Adair, a real estate investor in Raleigh, North Carolina, says a good rental property can survive on its own without any money from the owner. That means the rent payments can cover the MITI and also pay you at least $300 per month of income, he explains.
Davis says new rental investors often underestimate their expenses. Landlords incur far more expenses than the average person realizes, he says. In particular, rental investors need to accurately average out irregular expenses like repairs and vacancy rate, and account for them in their monthly cash flow numbers.
He suggests using a free rental cash flow calculator to run these numbers.
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When Should You Sell A Rental Property
- By Mackenzie Born | Last updated March 18, 2022
Investment properties can be a lucrative source of passive income, but factors like profitability, maintenance, and the housing market at large can become good reasons to sell a rental property.
According to Avail data, roughly 16% of landlords reported plans to sell an investment property in 2022. If youre wondering whether to sell your property or when to sell it, heres what to know about selling a rental property.
Find Opportunities Within Your Own Property
Maybe youve decided youre not quite ready to sell of if you sell you wont make quite as much money as you would like. Most people stop there and just decide to stay put.
Robert Kiyosaki taught me that it is the INVESTOR who makes a property a good or bad investment. We know this because we will often see a great investor turn around a bad investment, and we have also seen people buy perfectly good investments and through mismanagement they become bad investments.
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What Are Your Real Estate Investing Goals
Everyone has different goals for investing in real estate. Some people want to hit $XXX a year and live off of that income for retirement. To do this, they need to obtain a certain number of properties, generally 5-10, that theyll pay off before retiring.
Most people run into difficulties acquiring that number of properties as it takes a significant amount of money to buy a home. This means they need to optimize their wealth creation so they can get on the right track.
Things To Consider When Selling Investment Property Before Retirement
The decision of whether and when to sell an investment property will depend on an investors unique personal and financial situation.
For example, some real estate experts warn that the longer an investor hangs onto a rental property, the bigger the capital gains tax liability could be, assuming property prices keep increasing.
Of course, if an investor assumes that home prices will keep going up, the potential profit from selling could also increase the longer the property is held. So while the potential taxes may be bigger, the pay out could also be greater.
On the flip side, some investors may consider cashing out while home prices are high, in the event that the real estate market enters a normal downward cycle. Investors with a significant amount of equity in a rental property may begin thinking about selling and using that money for other things.
Here are some of the possible pros and cons to consider to help decide if selling before retirement is a good or bad move:
Pros
- Free-up accrued equity by selling, then use the cash for other uses, such as buying a vacation home or adding to a retirement fund.
- Eliminate ownership responsibilities such as reviewing financial reports from the property management company, worrying about potential negative cash flow, or ensuring that tax filings to the IRS are true and correct.
- Have extra time to do more enjoyable things, such as traveling, beginning a hobby, or spending more time with family.
Cons
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Can I Afford To Keep My Property
When you have a negatively geared property with positive growth potential, its worth considering whether you can afford to keep it long-term until your investment starts yielding better returns. Think about how long you are willing to lose money and whether the eventual return justifies the initial expense.
Should I Sell My Investment Property Because Of A Low Cap Rate
Yes, a low cap rate is a persuasive reason to sell. Most, if not all, property investors use cap rates as an indicator of how strong their investments are and to calculate their cash flow. You probably did a cap rate calculation when you first purchased the property, but you should calculate it again to see where you stand now. And make sure you compare against other investment opportunities, in case you can make a better return elsewhere.
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Your Life Situation Is Changing
Investments are there to build our capital so that we can live our lives. It may be that youre having another child, that youre quitting your job, that youre retiring, moving to another countrythings happen.
When your life situation changes dramatically, being a rental property owner can feel like a burden. It may be that youre better off selling rather than trying to manage the property while more complex things are going on in your life.
Remember, we become real estate investors so we can live, not the other way around!
Still, just as with the other scenarios, think it through. Its possible that you can still make more money by taking out an equity loan against the property and continue to enjoy capital growth. It all depends on your personal and financial goals.
Final Thoughts On Selling A Rental Property
There are a number of reasons for selling a rental property. Investors who bought several years ago and have a substantial amount of equity may decide to cash out, especially when the demand for housing today is so strong that buyers are making offers almost too good to refuse.
Other times, owners sell because significant repairs are needed and theyd rather sell than fix, or people inherit property and dont want to deal with being a landlord.
If your property is occupied by a good tenant, it may be possible to increase your profits by selling your home as a turnkey rental property to another real estate investor looking for recurring cash flow.
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Will I Owe Capital Gains Tax On A Real Estate Investment Property
Yes, depending on your income, you may owe capital gains tax on the sale of an investment property. Unlike a primary residence where you are exempt from capital gains up to a certain threshold, investment properties are not exempt from capital gains at any amount. If you turn a profit on the sale of your investment property after owning it for a year or more, youll owe long-term capital gains taxes at a rate of 0%, 15% or 20%, depending on your income and filing status.
| Income single filers | |
| $488,851 or more | 20% |
If youre filing under a different status, capital gains tax rates can be found here.
There are a few strategies you may try to minimize your capital gains on an investment property. If you choose to explore one of these options, always consult your tax professional.
Tax Considerations: Renting Vs Selling
Have you considered the tax consequences if you sell your rental property? Some landlords are not aware of the depreciation recapture gain, which can be significant and its taxed as ordinary income.
Its important to note that everyone who sells a depreciable asset will have this gain, even if they didnt deduct depreciation from their taxes.
One way to avoid paying taxes is to do a 1031 Exchange and buy a property that has a better cash flow and is generally a better investment.
Consult an accountant or tax professionals in order to get a full understanding of your tax liabilities if you sell.
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