Selling a rental property has more challenges than selling a primary residence. Often, it is easier and more profitable not to sell it the traditional way. Here are the steps to selling your rental property, even if it is occupied with tenants.
Step 1: What to Do with Your Tenants
Review the lease. Is it a month-to-month lease? If so, give your tenants notice to vacate and when they need to move out. If they and their belongings are not gone by the scheduled date, you can start the eviction process, or opt to sell with tenants.
If the lease is for a fixed term, check for an early termination clause. Early termination means you, the landlord, can break the lease if you need to sell the property. If no such clause is in the lease, your options are limited. You can either:
- Wait for the lease to expire;
- Pay your tenants to vacate; or
- Sell with an active lease
Only investors will purchase occupied rental properties.
Step 2: Evaluate Repairs
Whether your tenants stay or go, a rental property has to be up to par with health codes and regulations. It is your job, as the landlord, to perform regular maintenance and make repairs.
Evaluate the property and assess its damages, if any. Schedule time to make repairs when your tenants are not home. If your reason to sell is because there is property damage, you can sell to an investor who intentionally seeks out properties that need TLC.
Step 3: Clean!
You are going to have walkthroughs with potential buyers. Remember to give notice to your tenants prior to every showing. Ask them to clear clutter and not be present at the scheduled time.
Bad tenants are less inclined to follow your requests, so you may have to pay for professional cleaning and landscaping services.
Step 4: Hire a Realtor
Being a landlord is hard work. If you do not want to sell FSBO, you can hire a real estate agent to manage the sale for you. They will list the property, schedule walkthroughs, and help with sale negotiations.
A few things to keep in mind though:
- Agents/realtors receive a commission of 3% to 6% of the sale price upon closing.
- If your rental has damage, and you plan to sell AS-IS, your property is less likely to sell to a regular homebuyer and more likely to be of interest to investors.
- Tenant-occupied properties will only be purchased by investors.
When your most potential buyer is an investor, you will profit by selling directly to the investor instead of bothering to list the property.
Step 5: To List or Not to List
Identifying your ideal buyer is perhaps one of, if not the, most important step in this entire process. It will save you time and stress, and even prevent you from losing money to identify the target buyer. How do you choose?
You should list your rental if:
- It is vacant;
- In great condition; or
- Needs only minor repairs or quick fixes, which you plan on having done.
You can sell directly to an investor if:
- The rental is tenant-occupied. You’ll need to disclose if they are non-paying tenants.
- The property is outdated or needs major repairs.
- You already tried listing it but it didn’t sell. Failed listings often get the “something must be wrong” label after 30 to 45 days on the market, and consequently sell for less than the asking price.
Step 6: Conduct Walkthroughs
If you are trying to sell, and the lease is expiring, but the tenants still live at the property, ask them about their schedule. Just like with regular listings, and the owners are asked to not be present, ideally your tenants will not be present during showings. However, if you decide to sell to an investor, meeting the tenants may be beneficial since an investor is the only type of buyer who will purchase a rental with tenants. Keep the parties separate though if you suspect there is a risk of bad impressions.
Step 7: Pay Capital Gains Tax
When you sell an investment property, you pay tax on depreciation recapture and capital gains taxes. The amount you are expected to pay depends on multiple factors:
- The total depreciation expense claimed;
- Your tax bracket;
- If you plan to buy a replacement property within 180 days of selling your rental; and
- If you sell to receive a lump sum or installments (via seller financing).
We work with investors who specialize in purchasing rental properties, and you can discuss options with them. Even so, we recommend you also speak with a tax advisor to find out possible deductions and do the math to break even or maybe get a refund.
Final Thoughts
There are numerous reasons to sell a rental property. High equity, high demand, an increase in value, and the house being in good condition all make it favorable to place it on the market.
Other times the best option is to sell to an investor directly, so you can avoid costly fees and repairs. If your rental is occupied with good or bad tenants, your best, if not your only, option is to sell to a real estate investor.
Our investors offer to pay cash, as a lump sum or installment payments, to purchase the property “as-is.” There’s no need for an appraisal or inspection. Plus, you choose the closing date, in several months, 15 days or less, giving you time to handle last-minute items.
