Tennessee has seen immense population growth recently, and Nashville is one of its fastest-growing cities.
This population explosion has helped many Nashville rental investors enjoy property appreciation over the past few years. If you are among these investors, the thought of selling your property may have crossed your mind.
But selling your property can be just as complex as buying. To help, we put together this guide on selling your rental property in Nashville. We’ll cover the following:
Read the full guide below:
Before selling your Nashville rental property, there’s some preparatory work to complete. You must put together your buyer package, make repairs, and calculate your potential capital gains for taxes.
Let’s look at each of these steps in more detail:
Start by putting together a buyer package of essential property documents. This should include:
Putting these items together helps buyers evaluate many pieces of critical information in one place. Buyers appreciate this — making the process as easy as possible never hurts when selling your Nashville rental.
Next, you will need to repair and upgrade the property as needed. This maximizes the property’s value and attracts more buyers, increasing your sale price and smoothing out the process.
Start with structural and mechanical repairs. These can be expensive but are critical to safety and offer the highest potential returns. Here are some repairs in this category:
After the structural and mechanical repairs come cosmetic and aesthetic fixes.
Start with the exterior — it’s the first thing buyers see, so it’s vital to getting more leads in the door.
You might need to:
Similarly, freshen up the property’s curb appeal to pull in more buyers with some landscaping.
After that, look at the interior. Some potential interior fixes to make include:
Selling a rental property for more than you bought it can cause you to incur capital gains. You will most likely owe taxes on these capital gains.
Here is the capital gains formula:
Capital Gain = Sale Price – Cost Basis
Cost basis is your initial purchase price plus closing costs and related fees.
You may need to adjust the cost basis to account for certain events, too.
For instance, renovations can increase the property’s value and, therefore, its cost basis.
On the other hand, items like depreciation can lower your cost basis. The IRS will want you to “recapture” the depreciation you wrote off while owning the property.
After calculating your capital gain, you must determine your tax rate.
The IRS taxes your gains as ordinary income if you sell within a year of purchasing.
If you wait at least one year before selling, you may enjoy lower long-term capital gains rates. Depending on your ordinary tax bracket, this rate can be 0-15%.
After the prep work, you must price your property. Three formulas help you do this:
These can vary widely depending on which Nashville neighborhood your property is in. Know not just your property but the surrounding area as you calculate these.
Capitalization rate, or cap rate, measures the rate of return an investor can expect to earn on a property. Cap rate excludes financing, making it good for apples-to-apples comparisons between properties.
Here is the cap rate formula from the seller’s perspective:
Cap Rate = Net Operating Income / Current Market Value
Net operating income is the annual income an investor can expect a property to generate. Here is its formula:
Net Operating Income = Gross Rental Revenue – Property Management Expenses
The current market value is your property’s most up-to-date value.
Cash-on-cash return measures the cash returns relative to the cash invested. It’s better for evaluating the profit potential a property could bring an investor.
Here is the cash-on-cash return formula:
Cash-on-Cash Return = Annual Pre-Tax Cash Flows / Total Cash Invested
Here is how to calculate annual pre-tax cash flows::
(GSR + OI) – (V + OE + AMP)
GSR = Gross scheduled rent
OI = Other income
V = Vacancy
OE = Operating expenses
AMP = Annual mortgage payments
Total cash invested is the amount of cash the buyer puts into the property. If an investor buys a $100,000 property by putting down $20,000 and getting an $80,000 mortgage, $20,000 is their total cash invested.
ARV tells investors how much a property would be worth when fully fixed up.
Here is the ARV formula:
ARV = Current Property Value + Value of Repairs/Renovations
ARV is crucial for house flippers. It helps them estimate the profit potential from fixing and flipping a property.
Rental investors you’re selling to can use ARV to prioritize repairs by potential incremental rent revenue increases. You can use it to prioritize your own repairs, too.
It’s often a good idea to sell your rental property once inventory begins to hit the market. You want to sell when values are still high, before that inventory takes its toll.
Let’s look at some signs it’s time to sell your rental property:
Nashville’s housing market started to cool in late 2022. Home prices are still rising year-over-year, but the number of homes sold is falling. Homes are also staying on the market a bit longer. Greater Nashville REALTORSⓇ also believe the market’s cooling.
Many investors consider selling when they run out of depreciation deductions. This is one of the largest tax deductions for many investors, so their returns might drop when they can’t take more depreciation deductions.
Investing in anything carries risk. You may earn lower returns than you had hoped, or you could even be in the red. Selling may make sense — especially if you found another property that looks promising.
Be careful, though. Losses are not always a reason to sell. It can depend on the underlying problem. Figure out why your property isn’t earning sufficient returns before selling.
Some exit real estate because they don’t want to own or manage properties anymore. That’s a valid reason.
However, Nashville investors should consider a Nashville property management firm before selling. The investor enjoys the rental income and property appreciation without the legwork.
Here are a few special considerations when selling a Nashville rental property:
Before listing your property on the MLS, ask your tenant if they want to buy it.
This can work well if you and your tenant are on good terms and they’re looking to own a property as a home or investment. They save time and money looking, and you save time and money marketing the property.
You can offer your tenant seller financing if you own the property outright, and they don’t qualify for traditional financing. This comes with risks, such as the risk the buyer defaults. Weigh these against the time and money savings when deciding if selling to your tenant is the right choice.
Remember that tenants may request more repairs and maintenance while that’s still your responsibility. The better your relationship with your tenant, the less likely they’ll abuse this when they start thinking about buying.
Losses from real estate property sales may be deductible against ordinary income, with certain limits. You may be able to carry excess losses beyond these limits forward to future years. Read IRS Topic No. 409 Capital Gains and Losses for more information.
As mentioned, the IRS may require you to add back depreciation deductions through depreciation recapture. This could cause you to owe taxes despite selling at a loss.
Section 1031 of the US Internal Revenue Code lets real estate investors defer capital gains taxes by investing sale proceeds into another property of equal or higher value. The investor may also need to maintain similar or higher loan amounts.
The 1031 exchange can be a great tool for investors focusing on growing their real estate portfolios. The realized gains and tax savings combined could offer a lot more investment capital — perhaps enough to get multiple properties or a far more valuable property than the previous one.
Selling your Nashville rental property could be a smart decision, whether your property has appreciated, you found a better investment, or you want to retire from the real estate market.
Perform the necessary prep work, calculate the financial metrics above to price your property appropriately, and keep tax consequences in mind.
If that seems like a lot, Evernest can help. You can leave the hard work to us — we’ll help you prepare your property and maximize your sale price.
Just fill out our seller’s form to get started.
Taylor Streitmatter is Evernest’s Director of Brokerage. His diverse expertise includes sales, operations, and brokerage management.
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