From cutting your losses to scoring a big win, there are many reasons that people sell their real estate investments. Given how big of an undertaking selling real estate is, the whole process merits attention.
So, let’s take a deep dive into the whys behind unloading your assets.
Reasons to Sell Your Real Estate
1. Portfolio Diversification
Having a geographically diverse portfolio makes you a more resilient investor. Suppose all your eggs are in one basket, and that basket happens to be in a town that’s devastated by a natural disaster, or the local economy collapses. In that case, you could suffer considerable losses. Having assets in different locations will keep you from making a potentially big hit.
Additionally, by expanding your search for properties, you can:
- Invest in landlord friendly states.
- Invest in states with zero property tax.
- Invest in Class C or Class D assets to increase your cash on cash return (CCR).
You can always manage a property remotely yourself, although given how much it takes to manage a property, you may want to invest in a property manager.
If you intend to diversify, consider a 1031 exchange, which is when the profits of a sale are used to purchase equal or greater value to defer capital gains taxes.
A 1031 exchange, in general, is a good idea if you want to continue investing as opposed to converting all your money into cash.
2. You Don’t Want to Manage Remotely
Conversely, you may want to sell your property because you don’t want to manage it remotely, irrespective of whether you use a property manager. Some investors just want to be close to their investments.
3. You Want to Sell an Inherited Property
You have many options when you inherit property. Selling is one of those options. If you’re sure you want to sell the property after you inherit it, you may want to tell the person who owns it before they fund real estate into a trust. That’s because taxes on deferred gains from a 1031 exchange don’t have to be paid if the person performing the 1031 exchange dies and the heir inherits the replacement property.
In that case, the replacement property will be received on a stepped-up basis, meaning that the property will be treated as if its value is equal to its fair market value. Imagine you began your real estate investment career with a $50,000 property and, through a series of 1031 exchanges, ended up with a property worth $1 million. Instead of paying capital gains taxes on nearly $1 million, your heir won’t have to pay capital gains taxes, period.
That’s just one of many ways to pay less real estate taxes!
4. You Want to Change Your Real Estate Investment Strategy
You may want to sell your real estate investment because you want to change your investment strategy. If that’s the case, you should go back and check your real estate investment plan. There are seven common real estate investment strategies, so you’re likely to choose one of them if you switch.
- Investing in real estate properties
- Buying and holding properties
- Flipping properties
- Real Estate Investment Trusts (REITs)
- Buying, rehabbing, renting, refinancing, and repeating (BRRRR)
5. It Was Always Your Plan to Sell
If you created a rental property investment plan and it was always your plan to sell, then that’s a good reason to sell! However, don’t just sell because it was your goal to sell. Re-evaluate your goals, wants, and situation before selling. It might just be the case that your plan needs to change.
6. You Don’t Want to be a Real Estate Investor Anymore
If you’re considering getting out of real estate altogether, first consider all the advantages to real estate investing you’d be leaving behind.
- A regular income stream
- An investment that’s likely to appreciate over time
- Tax advantages
- Legal entity-specific tax advantages and liability protections
- Less volatility than the stock market
If you’re considering getting out of real estate because you’ve plateaued or are having a hard time finding more money, don’t forget that you have many ways to scale your portfolio. You can invest with bad to no credit, and that there are also many financing options out there.
7. Your Property is Worth More
A good reason to sell a property is that it’s gone up in value, and you want to profit from that increase. You may want to hold out a little longer in case it goes up even more, but it’s unlikely that the amount it would go up during that time would be so significant that it would merit not selling. Real estate tends not to suddenly vastly increase in value for no reason at all.
8. You Want a Property That’s Easier to Manage
A good reason to sell your real estate is if you want a property that’s easier to manage. This could mean selling off several single-family homes in favor of an apartment complex, buying newer homes, or anything else. The decision is entirely up to you!
9. You Want to Invest in a Different Type of Real Estate
One reason to sell off property is investing in different types of assets. There’s much more than residential out there!
- Data centers
- Office space
- Parking lots
- Raw land
- And more
10. Your Property is Generating a Negative Cash Flow
If your property is losing you money, then, eventually, you’re going to have to abandon ship. You simply won’t be able to manage your investment. You may have budgeted for emergencies and vacancies, but what happens when you’ve burned through that? Sometimes cutting your losses is the best way to go. And you could always invest that money elsewhere.
11. Rental Income is Stagnant
Suppose your rental property’s income is worse than the returns on a tax-free municipal bond or a REIT’s dividend yield. In that case, your rental property likely isn’t worth it unless you expect to raise the rent or for it to appreciate significantly.
12. Your Cap Rate Is Near or Below the Risk-Free Rate of Return
Cap rate stands for capacity rate, and it’s the measure of how well your investment can pay for itself and generate profit expressed as a percentage. If your cap rate is too close to the risk-free rate of return or even below it, then your investment is no longer paying for itself and is on track to generating a negative return.
13. If You Can BURL
BURL stands for “buy utility rent luxury.” It’s another real estate investment strategy. When you BURL, you buy real estate with a high cap rate so you can afford real estate with a low cap rate. You might, for example, have some assets that were affordable and generate a reliable monthly income. This income may allow you to pay off the loans (if you have them) while providing you with money to spend elsewhere.
These investments can offset the low cap rate of a luxury property that has a large mortgage that the rent just barely covers with little money to spend elsewhere, which is worth it if the luxury property has a high probability of appreciating.
14. You’ve Reached the End of Your Loan Term
An investment loan isn’t the same as a residential loan. If you’ve taken an investment loan, you might borrow money for five to 10 years and then have to figure out if you want to sell or refinance by the loan’s end. Investment loans often have large prepayment fees because the lender wants you to keep making interest payments for as long as possible. So, many investors hold out until the loan’s end to sell.
15. Long-term Tenants Leave
After long-term tenants leave, many real estate investors perform home improvements to add value to rental properties or major repairs like replacing an HVAC, making it a potentially good time to sell. One way to get tenants to resign is to perform these repairs and upgrades while still living there so that the tenants can benefit from them, feel appreciated, and potentially re-sign as a result.
16. It’s Time for Major Repairs
If it’s time for major repairs and the cost of those repairs will lead to negative cash flow for an extended period, then you may better off selling your home. If you do the math right now and the costs of the new roof you’ll have to put in a few years from now will lead to a long stretch of negative cash flow (upwards of two years, for example), then it may be time to sell.
Things to Consider Before Selling
1. Capital Gains
Capital gains are taxes you pay on the profit made from selling a capital asset. Your capital gains are impacted by how long you’ve held the property, how much the property sells for, and how much it costs to sell the property. There are also things you can do to offset capital gains.
2. The Current Market
There are two types of real estate markets.
- Buyers’ Market:
- Supply is greater than demand.
- Properties are sold for less because sellers have to compete for buyers.
- Favors buyers.
- Sellers’ Market
- Supply is less than demand.
- Properties are sold for more because buyers have to compete for houses.
- Favors sellers.
If you want to maximize your profit, you want to sell during a seller’s market. If you just want the property off your hands, though, it won’t matter. And if you’re in a real rush, you may want to consider using an iBuyer, which is a business that uses technology to automate and speed up much of the home selling process.
3. Your Property’s Price
Knowing your property’s price will impact when and how you’ll be able to sell it. There are five ways to calculate your property value based on rental income.
- The sales comparison approach
- The capital asset pricing model
- The income approach
- The gross rent multiplier approach
- The Cost approach
Bottom Line on Selling Your Real Estate Investment
If you’ve decided to sell your property, check out INVESTimate®® by HomeUnion®.
Using INVESTimate®®, HomeUnion® will determine the ideal price for your property using market-based comps analysis and big data models. We’ll then tap into both our local market infrastructure and our nationwide investor database to find you a buyer.
Selling your home has never been easier!