Investors sell real estate when they change their strategy.
Real estate is generally a long-term investment, whether it is a primary residence or a rental property. The decision to sell investment property can be very different from selling a house, especially when it comes to capital gains and other financial implications. But sometimes personal decisions can influence when an investment property owner wants to sell, says Doug Imber, president and co-founder of Essex Realty Group in Chicago. âEveryone has their own reasons for selling, but generally speaking, there are similar reasons why someone might sell,â says Imber. Here are eight reasons why homeowners should sell their investment property.
There are advantages of the tax code.
Imber says real estate investors looking to sell can take advantage of IRC section 1031, which is a tax-deferred exchange. This allows investors to sell one property and buy another, temporarily avoiding capital gains taxes on rental property. Taxes on this sale may be deferred indefinitely. There are restrictions, such as investors having to find another property to buy in 45 days and then buy that property in the additional 135 days, for a total of 180 days. âPeople sell because they want to move capital from one opportunity to another. And in real estate, it’s often (that) they use section 1031 as part of that strategy, âhe says.
The term of the loan may expire.
Many real estate investors resort to a certain level of debt, and many of them resort to term loans that will not be fully amortized, unlike residential mortgages. Investors can borrow money for five to ten years, and at the end of the loan term, they must decide whether to sell or refinance. Investment loans come with high prepayment penalties, which discourage debtors from repaying the loan early to sell the property. This means that investors can sit down on a property before they sell. âOften people don’t want to waive the prepayment penalty and they wait until the end of the loan term to sell,â Imber said.
Market conditions are strong.
When prices are high, it encourages selling. Imber says that strong stocks can make some people sell even if they hadn’t planned, because they don’t want to wait for the next market cycle. When the condominium market was hot between 2006 and 2007, some people sold, but others waited. In some cases, people who waited got through the Great Recession and had to wait at least five years or more, depending on their local market, before prices rebounded. âInvestors who don’t have the longest investment horizon, who only want to do it for five or ten years, may not want to wait and see when the next cycle comes,â he says.
The other real estate sectors look cheap.
Investors can claim building depreciation on tax returns, says Mark Brodson, president of Resource Commercial Advisors, and some savvy investors can devote part of their real estate portfolio to depreciation in order to reduce tax liability. âIn this case, it makes more sense for them to sell those assets and buy new ones to reverse the depreciation,â he says. Normally real estate assets depreciate over a few decades, but there are complicated ways to speed that up, such as using cost segregation studies to depreciate certain interior parts in as little as five years, he says.
Taxes are going up.
When municipalities increase the assessed values ââof buildings, higher property taxes can be an incentive to sell. âLocal taxes play a huge role,â Brodson says. In a gross lease, landlords have to pay taxes on the rental income they collect, which means that the additional taxes eat away at the landlord’s net operating income if they don’t increase rents. In other types of leases, such as triple net leases, known as NNN, taxes are passed on to tenants and tenants are directly responsible for the higher costs. Either way, it can make it more expensive to own a home, he says.
Rental income is stagnating.
Kelly Crane, chief investment officer for Napa Valley Wealth Management, says property owners need to consider how much of the property’s return comes from rental income versus growth in property value. In places with high real estate values, it is difficult to generate a lot of net rental income. For example, if the rental income is around $ 20,000 per year on a property worth $ 1 million, it might be worth selling, unless the building owner expects a loss. further growth. âWhen I can get a better return on a tax-free municipal bond, which is a passive investment, it’s a good time to sell,â he says. The yield on a non-taxable bonded bond can reach around 5%.
Long-term tenants are leaving.
If long-term tenants are moving out of a building, now is the perfect time to make strategic improvements that could add to the property’s value and make it much more salable at current market values, especially if the market cycle is strong, said Crane. âIt’s hard to do major repairs when the tenants are in there,â he says. Whether or not a landlord sells after major improvements depends on what the building owner can get in terms of rental income after the improvements. âImprovements can help you recognize higher market value when rental income in unimproved condition may be below market,â he says.
Reasons to sell your investment property.
- There are advantages of the tax code.
- The terms of the loan may expire.
- Market conditions are strong.
- The other real estate sectors look cheap.
- The building has reached full depreciation.
- Taxes can go up.
- Rental income is stagnating.
- Long-term tenants are leaving.
Clarified to June 3, 2019: A previous version of this article did not fully identify Mark Brodson.