Profile picture for guthriejp

Looking to sell my rental, as a rental - need advice

I am going to sell my single family rental house.  It is occupied.  I lived in it 3 of the last 5 years so I will not have any capital gains.  I need pointers as to how to price it, market the sale (sans RE Agent), and legal issues.  The current occupants are on contract for over $1,500 /mo and thru Apr 09.

 

Thanks for any help!

  • August 20 2008 - US
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Answers (20)

Profile picture for sunnyview
Look at Zillow for your house's comps and at the value range that they list. Then try this calculator to see what an investor might look at when they pencil out your property.

http://www.ushousingmeltdown.org/home-price-floor-calculator.aspx

It's not perfect, but it might give you a start as to the investment value of your house. If the investment side doesn't look strong, you may want to consider targeting the traditional home buyer instead of an investor.
  • August 20 2008
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Profile picture for JimSulli456

What are your operating expenses?  Taxes, Insurance, Maintenance, Utilities?  Take the Gross Scheduled Income X the vacancy rate.

 

Example:  We'll use a 5% vacancy rate for your area.

 

($1500 X 12) X .05 = $900

 

$18,000 - $900 = $17,100 Gross Operating Income

 

Gross Operating Income - Operating Expenses = Net Operating Income

 

From the Net Operating Income, you will be closer to finding what an investor will pay for the home.  You need to check your area to see what the average Cap Rate is for your area.

 

My area, the average is around 9%, but I won't buy something less than 10% cap.

 

So if your Net Operating Income turned out to be $10,000, I would want to see a price of $100,000.

 

If your area has an average of an 8% cap rate, and your NOI is $10,000, than you can expect $125,000.

  • August 21 2008
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Profile picture for carolagdyr

OK...I as well might sell my rental, but I have not lived in it for 2 of the past 5 years...have tenants at least until 7/09 but probably until 7/10. Unless the market changes, I will not have capital gains at all as bought in 2006. However...would it make sense (IRS close your eyes) to go "off paper" for 6 of the months I would need to get to 2 years...I have a PO Box so not sure how risky it would be, if it would be worth it, what the IRS looks for etc...I have taken such a real estate hit, would like to soften the blow moving forward....

  • August 22 2008
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Profile picture for sunnyview
You can always ask your tenants if it would be ok to pay their electricity or water bill for the last 6 months of their lease to get the residency requirement covered along with the PO Box. Or offer to "rent" space back from them for the 6 months for when you come into town on business. It can be risky, but I have heard of people that have done it. Trust your gut and pencil it out to see if you think it is worth it to you to take the risk.
  • August 25 2008
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Profile picture for wetdawgs

Would it be worth it to go off paper to get 2 of the last five years?  

two questions:

 

1.  Will there be capital gains?   2006 to 2008 in most market the answer will be no.  If that is the case, you don't need to worry about it.

 

2.  How do you like jail food?   The taxes you don't pay by committing fraud are the taxes the rest of us must make up by being honest.

  • August 27 2008
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Profile picture for abbyzz1

Don't forget that even though you meet residency requirements you still have depreciation recapture for the years you rented your house.  That rate is 25%.  Doesn't matter if you didn't take depreciation -- it's imputed as far as the IRS is concerned.

  • August 31 2008
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Profile picture for abbyzz1

Don't forget that even though you meet residency requirements you still have depreciation recapture for the years you rented your house.  That rate is 25%.  Doesn't matter if you didn't take depreciation -- it's imputed as far as the IRS is concerned.

  • August 31 2008
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Profile picture for John12377

You can try craigslist if you are looking to save money but I would recommend a Realtor.  If you hire a Realtor the home is put on the MLS and there you can let other investors know what the rents are and other operating expenses are.  Alot of investors who buy rentals use the MLS almost exclusively.  Let me know where you are and I'll try to find you a Realtor who'll treat you right if you are interested.

  • September 23 2008
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Profile picture for carolandchris

At what point is the depreciation recouped? I would assume at the sale of the house or is it on the following tax return if I move back in in July 09? I'm not even sure what the advantage of depreciation is in the first place really...just holding on to the property until your tax bracket is lower and paying less taxes then?

  • September 28 2008
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Profile picture for plarusa

Is it true that this "3 out of last 5 years" clause is beeing changed in 09? I recall reading something to that effect.

  • October 03 2008
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Profile picture for carolandchris

What is the differance between 24 out of the last 60 months and 2 years out of the last 5 years as noted above...it is true, in this market and for me it will be a non issue as I will only lose money anyway...just trying to put the stops on how much...

  • October 07 2008
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Profile picture for Verbal

About the depreciation, you should take it even if it would not be advantageous when you sell.  This is because what is recaptured is what you COULD have taken, not what you did take. 

If you have not taken the depreciation, go to a CPA who prepares taxes for real estate investors and ammend you previous returns.

If you still have a loss with the basis reduced by the depreciation, do not move back in.

You can sell it as an investment property and you can deduct the loss as a capital loss.  You can not do this with your primary residence.

 

  • October 08 2008
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Profile picture for carolandchris

Thanks...it is still confusing to me but I will discuss it all with my accountant when I see him in February. Tenants are leaving in July 09 so I will have a little time. Buying this house was the single biggest mistake I have ever made and not selling it a year later was the second. It is like a bad relationship that I am tethered to....

  • October 08 2008
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Profile picture for carolandchris

About the depreciation....my tenants are moving in July 09, it can't get here fast enough. When they move and if I don't move anyone back in including myself...can I still sell it as not my primary residence as it won't be and take the loss as a capital loss as indicated by Verbal above? This is providing I can sell it in the first place. This has been once expensive mistake.

 

Thanks again for all of your help.

  • October 13 2008
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Make sure you market it as an occupied rental with a tenant in place!

 

Investors will take note.

  • October 30 2008
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Either negotiate with your tenants to move say in the next 2 months--January may be a better time to sell. Or wait till lease is over. Try not to sell with tenants inside--you will be penny wise and $ poorer!

  • October 30 2008
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When an investor buys a SF rental it is for one main reason--cashflow. Determine what monthly payment can sustain a $200/mo or a $100/mo, etc cashflow at an acceptable rental rate minus taxes & insurance. Keep in mind every "landlord" has different cashflow goals though.

Now you can figure the amount of the mortgage plus a downpayment, for a total purchase price. The maximum downpayment an investor is willing to pay usually has to do with taking into account a "cash-on-cash" return (ROI %). The cash-on-cash return helps to determine how quickly you get paid back the downpayment.

I'm not sure what to tell you on marketing it "tenant occupied" except definitely don't bother trying to sell to an occupant. Best of luck.
  • November 01 2008
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I guess the question is what are your goals in selling this property.  If you just need to get rid of it, well then it has to priced very aggressively for another investor to purchase the property - as prior posters said, the investors will just look at the potential cash flow of the property.  Further, investors have many many properties to choose from now so their offers will end up being low as they are looking for a deal.  Lastly, it is hard to get financing for investment properties now as well so that shrinks your buyer pool even more.

 

If you need to get fair market value for the property, I would recommend selling it after the tenant moves out - that way the property can be marketed to a homeowner.  

 

Good luck with it !

 

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  • November 02 2008
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Arriving late to this thread, but there are a couple of questions hanging and this might help:

 

a) there is no difference between 2:5 years and 24 months:60 months unless you imagine the IRS calculates years as Jan 1st to December 31st only. So if you move into a property on Jan 1st, there is no difference, but if you move into a property on December 1st, do not expect your one month residency to count as a whole tax year, you will need another 23 months to qualify for a year's occupancy.

 

b) My understanding of the change in the 2 out of 5 rule taking effect Jan 2009 can be explained by the following example (please bear in mind I am not a CPA, other factors may impact your personal tax situation and this is not tax advice):

 

a) OLD RULE (still current): you and your spouse bought a house in 2000 and rented it out for 5 years until 2005, when you moved in and used it as your primary residence.  2 years+ later, you sold it and made $500,000 profit.  In effect, occupancy by owner wipes out previous rental period. 100% of gain would be covered by exemption under tax loophole.

b) NEW RULE: (from Jan 1st 2009) same as above except the closing date for the sale is Jan 1st 2009. Now your gain is not covered by exemption. The value of the gain during the time in which it was rented will be a factor. You will not be able to claim all of the gain as an exemption, only the gain during the last 2 years owner occupancy period. BIG DIFFERENCE.

 

As it's new, I'm not quite sure how it's going to be applied, but if it's anything like the European model on which it seems to be based, calculating the taxable portion of the gain is going to be extremely complicated. I suspect it's the CPA Lobby that got this change through since it is absolutely impossible for a lay person to calculate, more work for the CPA.

 

What you might want to start doing to help yourself is to have an appraisal done at any time the status of your property changes from rented to owner occupied, or visa versa. This may not be needed at the time the appraisal is done, but do it and file it away, because without it, I don't see how you are going to be able to prove how much of the gain on the house happened over the last 2+ years of your occupancy, which would be exempt, as opposed to the previous period of the rental, when the gain would be taxable. 

 

Of course in current market, most of the gain would have been before the last 2 years, in which case this could work against you, but in a rising market, it could be claimed that more of the gain happened over the last two years than the previous 5 years.

 

I repeat, I am not a CPA and this is not tax advice. Talk to your CPA.

  • December 07 2008
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That meant to say, "if you move into a property on December 1st, do not expect your one month residency to count as a whole tax year, you will need another 11 MONTHS to qualify for a year's occupancy.". Sorry for confusion.

  • December 07 2008
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