HOW TO SELL YOUR RENTAL PROPERTY
Like any investment, there comes a time when it makes sense to sell a rental property. Perhaps your portfolio is too heavily invested in real estate and you need to rebalance your asset allocation to diversify your portfolio risk. Or maybe one of your rentals isn’t delivering the returns you’d hoped for. Or it could be a seller’s market and a perfect time to get top dollar for your rental property. There are many reasons it makes sense to sell.
But selling a rental property is not like selling stock shares. As a tangible asset that’s likely inhabited by a family who calls it their home, you and your tenants have rights and responsibilities to consider. Whatever your reason for selling, your selling plan needs to consider the costs of selling and the tax consequences.
If you are looking to sell your rental property, here are the things you need to keep in mind.
Things to Keep in Mind Before You Sell
Whether you sell to your tenants or ask them to move, check with your state and county laws to understand your rights and responsibilities. In Maryland, where my rentals are located, landlords must give 30 days’ written notice to tenants with a month-to-month lease. But if you’re only six months into a one-year lease, you probably need to get an agreement from the tenant to breach the lease terms.
And in most cases, it makes sense to offer tenants an incentive to keep the home in tip-top showable shape while it’s on the market for sale. You could offer a rent payment discount or pay for a weekly cleaning service or give some other type of financial incentive or “inconvenience” fee. You could even pay for a hotel room for a weekend and take advantage of the vacancy to schedule a block of showings and open houses.
Work With Your Tenants on a Departure Date
In all dealings with tenants (including the desire to sell) be transparent and involve them in the decision-making. Be kind and considerate. Talk with them and agree on their departure date. Tell them what to expect during the process. And set ground rules about access for showing the house.
Many landlords give their tenants the “first right of refusal” to purchase the home. If the tenants are both interested and financially qualified to get a mortgage, selling to your tenants is typically the most seamless and inexpensive way to sell your rental property.
Consider Offering “Cash for Keys”
If your tenants are not current with their rent and not making the necessary steps to pay or move, it often makes sense to give them “cash for keys” to incentivize them to move out. It may seem counterintuitive to give money to renters who owe you money, but it’s often the less painful and less expensive way to expedite getting possession of your property again.
The alternative is going through the court system and filing for eviction. And depending on your state and county laws, this could take many months and drown you in court and lawyer fees.
Decide on Your Target Buyer
If you’re not fortunate enough to sell to your tenants, you need to decide on your target buyer. If you’re selling to another investor, it could make sense to market the property with tenants in place. But more likely, your rental shows better when vacant.
Some investors prefer to purchase tenanted properties, as long as the tenants are current with their rent payments. Investors also want a profitable spread between the rent collected and the property expenses. But many investors prefer to purchase vacant properties and place tenants they personally prescreen.
If you’re selling to a retail buyer, such as a first-time homeowner, you want to show the house empty. So wait for your tenants to move out. Then deep clean the property, make necessary repairs and take professional pictures before you start marketing the home for sale. In general, you make more money selling to a retail buyer (who wants to live in the home) than an investor (who is less emotionally involved and is looking just at the numbers).
However, selling to a retail buyer is a more involved process and potentially more expensive. Most tenants don’t leave the home in perfect condition. So you probably need to make some repairs such as painting and re-flooring to make the home more showable.
But when your tenant moves out, your rental income stops. So calculate if the higher sales price and convenience of selling the property vacant is worth the potential income loss if the property sits vacant for a long time.
There Are Many Options When Selling Your Rental Property
Selling your rental property could be the next wise step when it comes to reaching your long-term investing goals. Selling the traditional way involves hiring a real estate agent to represent you, listing your home online and going through the process of showings, negotiations and closing locally and in person.