Real estate can make a great investment. The monthly rent that you receive each month on a rental property can help you bring in a regular income. With real estate typically appreciating over time, you can make money month after month and then again when you are ready to sell the property.
However, selling a rental property is not the same as selling a primary residence that you live in. Here are some things you need to know about the process.
1) Your tenant may have the first shot
In some states, a landlord has to offer the tenant the first right of refusal. That means that before you put the house on the market to receive offers from others you need to offer it to the tenant that is currently living in the house. When you notify your tenant that you will be selling the property, you will need to provide them with the sales prices and disclosure about the property.
The tenant then has a set time period to consider if they would like to make an offer on the house. If the tenant makes an offer that you are happy with, you saved yourself time and trouble in trying to sell the house. However, if the tenant declines to purchase the property, it can be listed on the open market. When you receive an offer on the house, the tenant will then have a second chance to purchase the house by matching or beating the current offer that you have.
2) Help your tenant rent to own
If you have a good tenant that is interested in purchasing the property, but does not have the means to do so through a traditional mortgage lender, you could assist them by writing up a rent to own contract with a real estate attorney. This is a way to allow your tenant to continue living in the house while they pay over the market price on rent in order to have money apply to a down payment. When the tenant is ready, you will be able to close quickly since the tenant is familiar with the house.
3) You are responsible for capital gains tax
When you sell a rental property, you will be required to pay capital gains tax on the profit that you made on the house. When you sell a house that you live in, you are able to avoid some of this tax, but you cannot do that with an investment property, unless you reinvest the funds. This is called a 1031 exchange.
In order to take advantage of a 1031 exchange, you need to follow strict rules so talk to a tax advisor before proceeding forward with this option.
If you are not able to come to an agreement with your tenant about the price of the house, you can sell to another buyer. Proceed with caution when you do this to try to reduce the tension between you and your tenant. You need your tenant to continue taking care of the house while they live in it and accommodate showings as they are scheduled.