After managing your investment property successfully for several years, the time will probably come to sell the property. To make a swift and profitable sale, you’ll need to assess the local real estate market, attract buyers, and consider the tax ramifications of selling.
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Setting a Price for Your Property
Setting the right price is the most crucial step in selling a property. Price too high and you’ll deter buyers from making offers. Price too low and you’ll raise suspicions among buyers about the property’s condition.
The price you set for your property depends on your pricing power, the level at which you can set your price without compromising demand for your property. You pricing power as a seller depends on the current condition of the local real estate market:
- In a seller’s market: Sellers have the pricing power to set high prices and wait for buyers to outbid one another, potentially driving the price way above the asking price.
- In a buyer’s market: Sellers need to adjust prices to a level that buyers will accept. They may also have to accept prices below the asking price based on their low pricing power, as determined by local market conditions.
Assessing the Market to Determine Pricing Power
To assess the local real estate market and determine your pricing power, consider:
- How many properties are on the market? To assess the supply and demand for local real estate, you need to know the local inventory (number of properties for sale). You can get this data from a real estate agent or from a site such as Realtor.com. The inventory number is most helpful when evaluated in the context of similar data from the past 3–5 years (consult a real estate agent for this info). The higher the inventory number, the lower your pricing power.
- How long have those properties been on the market? Once you have local inventory data, consult a real estate agent to determine how long properties like yours—and near yours—have been on the market. In general, the longer they’ve been on the market, the lower your pricing power.
- What is the overall trend in prices? Consult a real estate agent or a site such as Zillow.com to get a sense of whether prices have been rising, falling, or flat in your area over the past 3–5 years and over the past 3–6 months. If both the long-term data and recent data show rising prices, your pricing power is high. If the long-term trend is up but the recent data suggest a flat or declining market, your pricing power is lower.
- How many new homes are being built? Consult a real estate agent or local chamber of commerce to obtain local home building data. The construction of many new homes usually indicates growth and strong demand for properties in the area. Be wary, though, as high building rates can cause inventory gluts, turning a seller’s market into a buyer’s market and thus reducing pricing power. But if the local economy seems to justify the home-building rate, a seller’s market will likely continue.
Marketing to Buyers
The local real estate market is a powerful factor in determining pricing power, but it’s not the only factor. The housing market is unique among investment markets in that emotion and impression can matter almost as much as prevailing market forces. If someone falls in love with your property, they may buy it at—or bid it up to—a high price regardless of the market. The best way to seduce buyers into buying your property at or above your asking price is to market and present the property as effectively and flatteringly as possible:
- Get great photos: Hire a photographer to take interior and exterior shots of your property. A professional will know how to frame and light your property to make it look its best. You can then use the photos in your print and online marketing materials.
- Write compelling ad copy: Many property listings suffer from dull, generic copy or content that appeals to only one type of potential buyer, such as owner-occupiers. Be sure your listing highlights the features that make your property a compelling prospect for both owner-occupiers and investors. For instance, if you have a long-term tenant, state that feature in the ad as one of your property’s selling points.
- Hold open houses: Buyers will almost never buy property sight unseen, so it’s crucial to get them in the door to see your property. Conduct an open house at least once a week—they’re usually held on Sundays. If you’re working with a real estate agent, have him or her staff the open house—studies show it’s best for the property owner not to be present. It’s also more effective to show a furnished property than an unfurnished property, assuming you’re selling residential property. If you’re showing the property yourself, dress in casual business attire and answer all of the potential buyers’ questions in a friendly, candid manner.
- Polish the property: Do everything you can to make a good first impression on potential buyers. Give the property a new paint job, replace the carpets, hire professional cleaners, mow the lawn, seal the driveway, and so on.
The Tax Ramifications of Selling Your Investment Property
If you choose to sell your investment property, there are a variety of sales strategies you can use, each of which has its own tax consequences.
- Installment sale: The investor defers taxes by receiving part of the payment in the year after closing the sale. This spreads out taxable gains over more than one tax year, which can lower the investor’s tax bracket. Installment sales often work best for sellers who don’t need cash right away but want to reduce tax bills over time.
- Tax-deferred exchanges: The investor sells a current investment and buys a new one of the same type. The government considers the new investment a continuation of the first and therefore doesn’t tax capital gains from the first. Certain limits and conditions apply, but this strategy can work well for investors with substantial equity who’d like to trade up to a bigger investment.
- Serial home selling: This strategy entails buying a home, living in it for two years, and then selling it for a profit (ideally). For investors willing to take big risks and move frequently, the strategy can be very profitable—investors can earn tax-free gains of up to $500,000 for each residence that they buy and sell, as long as the home served as the investor’s primary residence for at least two of the previous five years.
The tax laws for investment properties are different and often more complicated than those for owner-occupied properties. It’s essential to consult a real estate tax professional when selling your property, as laws change frequently.