fbpx

10 Best Tips for Selling Rental Property in Atlanta

10 Best Tips for Selling Rental Property in Atlanta

It’s no secret that Atlanta has been a hot rental market for years, as many investors have enjoyed rising rents and property appreciation. But, sometimes, it simply comes time to sell.

Investors may choose to offload certain rental properties for a variety of reasons, from diminished cash flow to too much maintenance.

Regardless of reasoning, though, selling a rental property, from out of state or down the street, can be complicated. You’ll need a solid understanding of the following:

  • How to prepare your property for sale
  • How to price your property
  • How to determine when it’s time to sell
  • A few special selling situations

What Should You Do Before Selling Your Property?

Before selling your Atlanta rental property, you’ll want to do a little prep work.

This includes compiling a buyer package, making repairs, and calculating your potential capital gains for tax purposes.

Let’s look at each step:

Compile a Buyer Package

First, compile a buyer package made up of essential documents.

This should include:

  • A copy of the lease and tenant rent roll
  • Financial reports, such as profit and loss (P&L) statements
  • A list of vendors and maintenance history
  • A list of significant repairs or improvements completed in the previous several years

Putting these documents together streamlines the buying process for potential buyers. Essentially, the easier you make it for them to buy your property, the better.

Make Required Repairs

Once you have your buyer package in place, you may need to fix up the property. This maximizes the property’s value, increases your negotiating power, and reduces the chances that a buyer requests repairs.

Start with structural and mechanical repair. These fixes tend to be more expensive, but they are critical to safety.

Top concerns may include:

  • HVAC systems
  • Electrical
  • Pipes
  • Plumbing
  • Roofing
  • Water heater

After the crucial repairs come more cosmetic fix-ups. The exterior is the first glimpse potential buyers get of the property, so it’s usually prudent to start there. For example, you might need to fix cracks in walls, add some paint, take care of wood rot, repair or replace window frames and doors, and more.

Inside, you might need to add fresh paint, fix holes and dents in walls, replace scratched moldings, replace lighting, and so on.

Top it off with some landscaping to enhance the property’s curb appeal and attract more buyers!

Calculate Your Potential Capital Gains

Selling a rental property for more than you bought it for can cause you to incur capital gains. Your capital gains have tax implications.

To calculate your capital gains, you’ll need to know several pieces of information:

  • Initial cost basis: Purchase price + escrow-related fees + improvements
  • Any adjustments to your basis, such as depreciation expense
  • Sale price

The capital gains formula is:

Capital Gain = Sale Price – Cost Basis

Your cost basis is the initial purchase price plus any closing costs and related fees. That said, certain events may require you to increase or decrease your cost basis.

For instance, adding a new room or roof can increase the property’s value, increasing your cost basis. On the other hand, the cost basis can decrease through things like depreciation.

As for the tax rate:

You’re taxed at your ordinary income tax rates if you sell the property within a year. Holding it longer than a year before selling may allow you to enjoy lower long-term capital gains rates.

How to Price Your Rental Property for Sale in Atlanta

selling rental property in atlanta

After preparing your property for sale, you must price it appropriately. Too much, and it won’t sell. Too little, and you miss out on potential profits.

Below, we’ll dive into three formulas that will be helpful in pricing your property:

  • Calculate cap rate
  • Cash-on-cash return
  • After repair value (ARV)

Calculate Cap Rate

Capitalization rate, or cap rate, is the rate of return investors can expect to earn on the property in question.

Here is the cap rate formula from the seller’s point of view:

Cap Rate = Net Operating Income / Current Market Value

Net operating income is the expected annual income the property will generate. You can calculate this by subtracting all property management expenses from the gross rental revenue.

The current market value is just the most up-to-date value of your property.

A higher cap rate can attract buyers since they can pay a lower price for great potential returns. It is essentially predicting a higher return for the investment in the property.

Calculate Cash-on-Cash Return

Cash-on-cash return is another ROI investment, like cap rate. The difference is that it measures the cash returns relative to the cash invested.

This is one of the most vital metrics for evaluating real estate. It helps investors understand how much cash they will end up with — not just revenues.

Here is the cash-on-cash return formula:

Cash-on-Cash Return = Annual Pre-Tax Cash Flows / Total Cash Invested

Annual pre-tax cash flows are equal to the following:

(GSR + OI) – (V + OE + AMP)

Where:

GSR = Gross scheduled rent

OI = Other income

V = Vacancy

OE = Operating expenses

AMP = Annual mortgage payments

Total cash invested is the cash the buyer puts into the property. Keep in mind that this is not necessarily the purchase price. For example, if an investor buys a $100,000 property with a $20,000 down payment and $80,000 mortgage, $20,000 is the total cash invested.

Determine the After Repair Value (ARV)

The ARV measures how much a property would be worth when fully repaired.

Here is the ARV formula:

ARV = Current Property Value + Value of Repairs/Renovations

Home flippers look at ARV to estimate their profit potential after fixing and flipping the property.

Rental investors find ARV useful for prioritizing repairs based on potential incremental rental revenue increases. Similarly, ARV helps you pick which repairs and upgrades are worth it before selling.

Selling Your Rental Property at the Right Time

Timing your property sale right involves accounting for market factors and personal preferences. Here are some situations where selling might make sense:

Your Property Has Appreciated

No need to hold your property forever. If it has appreciated since you invested, you can sell it to enjoy your profits. You could then reinvest those profits into a new property or keep them.

Of course, research the local market before selling. You may want to wait until signs of a slowdown so you can sell high while minimizing lost profit potential.

No More Depreciation Deductions

Depreciation can save real estate investors substantial sums on their annual tax bills. Once you run out of depreciation for a property, your taxes could jump, negating some returns.

You Aren’t Earning Sufficient Returns

All investments have risks. You might lose money on a property, leading you to sell it and find a property with better potential returns.

Think this over carefully, though. Many investors see losses early on before eventually becoming profitable. You should figure out why your property isn’t earning enough returns — it might be a fixable problem.

You Want to Exit Real Estate

Investors exit real estate for any number of reasons.

For example, an investor may believe they’re too heavily weighted in real estate. They may want to sell a property and invest some of the proceeds in the stock market or another asset class.

Or, in another scenario, an investor may be retiring. They might want to cash out their real estate wealth.

Some Atlanta investors exit real estate because they have no desire to continue managing properties. That’s valid, but investors should first consider working with an Atlanta property management firm. The right property manager handles all the hard work, allowing the investor to enjoy the fruits of their labor.

Special Situations

Here are a few special considerations when selling an Atlanta rental property:

Selling With a Tenant

Before listing your property on the MLS, consider reaching out to your tenant and see if they’re interested in purchasing the property.

This can be a good idea if you have a strong relationship with a tenant who wants to eventually own their property, whether as a home or their own investment property. It saves time and money you’d otherwise spend making a traditional sale — especially when it comes to marketing the property and vetting buyers.

If you sell to a tenant and they can’t get traditional financing, you can offer them seller financing if you own the property outright. Under a seller financing agreement, you essentially serve as the lender. Of course, this comes with risks, such as a chance the buyer defaults.

As a result, many sellers use seller financing as a short-term solution until the buyer can get traditional financing elsewhere.

One other thing to keep in mind: Tenants who have the chance to buy the property may start making more requests for repairs and maintenance ahead of time so they don’t have to pay for them later. The better your relationship with your tenant, the less likely they’ll abuse this when they shift into a buyer mindset.

Selling at a Loss

Selling at a loss is a bit different in terms of taxes. Your losses are deductible against ordinary income — with certain limitations on the amount you can deduct. You may be able to carry these losses forward to future years if you max out loss deductions in a particular year and have losses left over.

More information on capital gains and losses can be found in IRS Topic No. 409 Capital Gains and Losses.

Also, you may need to add back deductions you took for depreciation. This is called depreciation recapture and could cause you to owe taxes despite selling at a loss.

1031 Exchange

A 1031 exchange comes from Section 1031 of the US Internal Revenue Code. It allows real estate investors to defer capital gains taxes by investing property sale proceeds into another property of equal or larger value. The investor may need to maintain similar or higher loan amounts as well.

These 1031 exchanges can be an excellent way to keep more of your capital, allowing you to invest in higher-value properties and potentially grow your portfolio faster.

Final Thoughts on Selling Rental Property in Atlanta

Whether you’re selling to invest in a new property or exiting real estate, selling your Atlanta rental property could be a smart personal and financial decision. Do the necessary prep work, price your property appropriately, and account for taxes.

If that seems like a lot, Evernest is in your corner. Not only can we handle all the hard work (including the steps laid out above)…

Get Started Buying Homes With Evernest

Whether you’re selling one home or one hundred, you don’t have to go it alone.

If you’re ready to sell your first (or next) investment property, here are 3 steps to get started today:


Ready to speak with our sales team?

Start the conversation!
How did you hear about us?(Required)