Top 7 Considerations When Selling a Rental Property

Top 7 Considerations When Selling a Rental Property

Putting any property up for sale comes with a lengthy to-do list, but if you’re considering selling your rental property, you’ll run into more i’s to dot and t’s to cross. 

There are a lot of factors to consider before putting your property on the market. Is it the right time to sell the investment property? Should you invest in renovations to increase the capital asset before listing it? Do you have a tricky set of tenants to work around? 

In this article, we’ll discuss the top considerations you should take into account when selling a rental property.

#1: Define Your Goals

Before anything else, it’s important to define why you’re selling rental real estate; it’s a question you’ll be asked repeatedly. Remember, you’re not just offering up a potential home; you’re pitching a business opportunity to a potential buyer—and they’ll want to know why you want to walk away from it. 

Common reasons for selling rental property include: 

  • Need to free up capital for medical costs, travel, business opportunity, etc.
  • Change in location, such as moving for work or family reasons
  • Investing limited time and energy in a new venture
  • Moving toward retirement and looking to offload the landlord work

In addition to having a solid answer for your potential buyer pool, you need to answer this question for yourself in order to know what variables (such as distance, time, or cash needs) change the calculation of whether holding the rental property is profitable for you. 

For instance, if you’d like to step away from handling the maintenance on a rental, consider whether it makes sense to sell a rental property now or hold onto it for another five years and engage a property management company. 

#2: Know the Rental Market

With inflation emptying our pocketbooks at the gas station and grocery store, it’s no surprise that rents are rising—but this increase predates the current economic downturn. During the 12 months ending December 2021, monthly rent rates increased by an average of 14%—and, in select cities, over 30%—and it’s continued to grow.1,2 

Here are some key factors driving rental rates: 

  • Limited availability – National vacancy rates fell to 5.6% in the second quarter of 2022.3 Compared to nearly twice that amount back in 2009, inventory has been dropping for a decade. 
  • Construction lagging behind demand – To meet the demand for rental housing, we’d need to build 4.6 million new apartments and renovate over 10 million by 2030, according to the National Apartment Association—and we’re nowhere near the path to meet those numbers.4
  • Too few starter homes – We’re at a 50-year low for starter home inventory. So there aren’t enough on the market, and people who’d like to buy are remaining in rentals.1
  • Rising home prices – Home values skyrocketed in 2021, rising an average of 17% nationwide—the highest growth in history.4 
  • Spike in interest rates – Mortgage rates more than doubled this year, from 2.99% for a fixed-rate 30-year mortgage in October 2021 to 6.66% as of October 6, 2022.5 

How do these factors play into your local conditions? You’ll need to familiarize yourself with the rental market and real estate trends to plan wisely or work with a skilled real estate agent to get an accurate comparative market analysis and current market value. In addition, you need to understand the average closing times, available inventory, and the rental vacancy rate in your neighborhood. 

Who said selling your house has to be hard? Definitely not us. Get your offer today!

#3: Decide When to Sell

If you’re investigating how to sell rental property, you also need to consider when to sell a rental property. Before deciding whether now is the right time, consider:

  • What season is best to sell in? Is it worthwhile to wait for it? 
  • Is there a fiscal need to delay until the next tax year? 
  • Should you stop, pause, or go based on predicted market changes? 
  • Will you lose money or will cash flow be impacted by vacant property upkeep if you wait to sell?
  • Do you need to schedule sale preparation based on work or family plans? 

If you don’t have a pressing need for a quick sale, it’s wise to consult with your real estate agent and financial planner before finalizing the timing.

#4: Decide Whether to Sell As Is or Renovate

Does your rental property only need mild cleaning and sprucing up, or does its current condition give you nightmares? If you don’t have the time, cash, or desire to invest in repairs and upgrades for a prospective buyer, you may want to consider an as-is sale. 

But first, do the math—figure out what repairs and renovations are recommended and what return you can expect to see on them. 

Price differences vary depending on property conditions and underlying benefits like location. Still, on average, experts find that as-is properties in need of some work sell for 5% – 10% below traditional sales. For a severely damaged property, you could lose as much as 50%.6

If you opt for selling a house as-is, you can still complete minimal maintenance, cleaning, and repairs that your wallet and schedule can afford—every bit helps when a house is analyzed for market value or appraised.

#5: Set a Wise Price

If you set your price too high, it might sit on the market until it’s defined as a distressed property, and selling distressed property can be a challenge (If you find yourself wondering, “what is a distressed property,” make sure to read up on the topic before you begin the home selling process). If you set it too low, you leave money on the table. Pricing a property to maximize profit and minimize time on the market is a tricky process that’s built on: 

  • A current market valuation based on nearby, comparative property sales and listings
  • Knowledge of market trends and how they play out at a local level
  • Accurate evaluation of projected and historical income and expenses of a rental property

Aside from the objectively “right” price, do you need to hit a price point to:

  • Avoid losing money on selling vs. maintaining the property
  • Fund new obligations or plans
  • Break even or turn a profit

#6: Remember Tenant Rights and Relations

If your residential rental property is occupied, that adds a third party to a contractual transaction that you can’t always control. 

Do you have tenants who bake you holiday cookies and take care of your property like it’s their own, squatters who keep finding eviction loopholes, or something in between? Regardless of how great they are (or aren’t), you’ll need to consider tenant rights and how to best handle them to facilitate a prosperous sale.

Rights vary by state but generally include: 

  • Lease obligations pass to the new owner – As a landlord interested in selling a house with tenants, you have to remember you still have certain obligations to your tenants. If you sell the rental property investment, these obligations are transferred to the new owner, including honoring active leases. 
  • Home safety trumps seller needs – Tenants have the right to a safe and habitable home, and if the sale of the property affects their ability to have this, they may have legal recourse. This may inhibit your ability to take on upgrades or changes to the property prior to listing it for sale.
  • Proper notice to vacate – Tenants have the right to remain in the property under the terms of their lease until it is up—unless they are given proper notice to vacate within the bounds of the lease and state regulations. If they have a month-to-month lease, that usually means at least 30 days’ notice. 

If you have difficult tenants—or if they’re angry about the property sale—you should anticipate the potential for trouble with preparing the property for sale and showing it to potential buyers. Try to do what you can to promote beneficial tenant relations before the process begins.

#7: Prepare Rental Property Disclosures 

So, exactly what do you have to disclose when selling a house? Whether you opt for an as-is sale or not, in most states you’re still legally required to disclose all known property defects and issues. 

And in addition to following your state’s standard residential real estate disclosure regulations, rental properties usually call for a higher stack of paper. Even if not required or common in your jurisdiction, investors may request the following documents from the applicable parties:7

Tenant Information

You’ll be responsible for providing tenant information that includes:

  • Complete current tenant files, including leases, estoppels, and full application documents
  • All additional tenant rules, regulations, correspondence, and communication 
  • A rent roll that summarizes the rental history and status of each unit and current tenant

Property and Expense Records

Records related to the property and work done on it include:

  • Contractor agreements and estoppels for all recurring services 
  • Unit mix for multi-unit properties that identifies rooms and features
  • Recurring utility bills for 24 (or at least 12) months
  • Plans, permits, blueprints, and drawings for improvements or modifications
  • Warranties and receipts for appliances and systems 
  • Maintenance records, bids, estimates, contracts, and work orders for property repairs

Financial Statements:

Investors will also want to look over financial information, such as:

  • Financial forecast statement for the current year 
  • Operating financial statement for the past three years 
  • Balance sheet with capital equipment and depreciation schedules

A Better Alternative for Selling Your Rental Property

Ready to walk away from the rental property owner life or just simply get rid of a property that needs more work than you want to invest?

One way to quickly close a sale on a rental property is to partner with FlipSplit. We’ll pay fair market value for your single-family rental house and take on all costs and renovation work, whether that’s fixing critical issues or updating outdated design, before reselling it at a premium price. 

But it’s not just a happy ending for us. When your property is resold, we split extra profits with you, so you don’t lose out on the earning potential.

Visit FlipSplit to learn more and request an offer on your rental property today.

Sources: 

  1. The Ascent. Why Your Rent Is Going Up. https://www.fool.com/the-ascent/personal-finance/articles/why-your-rent-is-going-up/
  2. ManageCasa. The US Rental Property Market Outlook. https://managecasa.com/articles/us-rental-property-market/
  3. Federal Reserve Economic Data (FRED). Rental Vacancy Rate in the United States. https://fred.stlouisfed.org/series/RRVRUSQ156N
  4. Time. Why Double Digit Rent Hikes Are Here to Stay. https://time.com/6169844/rental-prices-going-up/
  5. Freddie Mac. Mortgage Rates Continue to Fluctuate. https://www.freddiemac.com/pmms
  6. HomeLight. As Is Home Sale: What to Know to Attract Buyers. https://www.homelight.com/blog/as-is-home-sale/
  7. Cordon Real Estate. Selling Rental Properties – Special Documents and Disclosures. https://cordonrealestate.com/selling-rental-properties-special-documents-and-disclosures/#

Reviewed by: Brandon Brown

As a long-time Asset Manager, Investor, Real Estate Agent, and Broker/Owner of BayBrook Realty in Orange County, Brandon Brown is one of FlipSplit’s lead Real Estate experts. Having worked on over 2,000+ real estate transactions, Brandon brings a depth of knowledge that ensures clients are appropriately treated with honesty and integrity. His insights and advice have been published in numerous blogs beyond FlipSplit, and he keeps a close eye on market trends and statistics, which are updated weekly on his social media pages. Outside work, you can find him participating and serving at church, cycling, mountain biking, surfing around Orange County and beyond, and enjoying time with his wife and two daughters.

Ready to Flip Your Home?