The Columbus, Ohio, real estate market has grown steadily over the past few years. These trends sped up as housing heated up in 2020-2021. As a result, you probably thought about selling your rental property in Columbus before the market cools off.
If so, you’ll want to read this article. We’ll cover all the essentials of selling a Columbus rental property, including:
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 Columbus rental property, there’s some prep work to do.
This includes the following steps:
Compiling a buyer package
Making required repairs
Calculating your potential capital gains for tax purposes.
Let’s take a look at each:
Compile a Buyer Package
A buyer package contains documents and information buyers need to decide if they want to buy your property.
Documents to include in your buyer’s package should include:
A copy of the lease and resident 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 this together makes the buying process easier. That attracts more buyers and accelerates the process. As a result, you could have more money in hand on a shorter timeline.
Make Required Repairs
After compiling the buyer package, fix up the property. Doing so boosts the property’s value, improves your negotiating power, and speeds up the transaction.
Start with structural and mechanical repairs. These fixes tend to be expensive but critical to safety. Without these, it can be hard to sell a property.
Prioritize repairs like:
Electrical
HVAC systems
Pipes
Plumbing
Roofing
Water heater
After critical fixes are value-boosting cosmetic repairs. Start with the exterior to boost the property’s curb appeal and pull in buyers. This might involve:
Checking the sump pump
Cleaning and clearing out gutters
Fixing cracks and dents in walls
Fixing or adding caulk to doors and windows
Taking care of wood rot
Touching up paint
Also, do some landscaping and wash the exterior to make your property pop.
As for the interior, you might need to:
Fix cracks and dents
Fix plumbing
Repaint walls
Repair and replace window and door frames
And more.
Calculate Your Potential Capital Gains
You might incur capital gains if you sell for more than you bought.
To calculate your capital gains, you’ll need to know:
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 cost basis plus those adjustments mentioned. For example, repairs and improvements may increase your basis.
After calculating the gain, you’ll need to know the tax rates to use:
Short-term capital gain: Incurred if selling a year or less after buying. Uses your ordinary tax rates.
Long-term capital gain: Incurred if selling longer than a year after buying. Offers lower tax rates.
How to Price Your Rental Property for Sale in Columbus
Some of the preparatory steps increase your property’s value and, therefore, the price you can charge.
But pricing a property is still a bit complex — and financial formulas can help you hone in on a good number.
Below, we’ll explore three formulas useful for pricing your property:
Calculate cap rate
Cash-on-cash return
After repair value (ARV)
Calculate Cap Rate
The capitalization rate, or cap rate, calculates the return rate an investor can expect to earn on an investment property.
Here is the cap rate formula from the seller’s point of view:
Cap Rate = Net Operating Income / Current Market Value
The current market value is your property’s value when you calculate the cap rate.
As for net operating income:
Net Operating Income = Gross Rental Revenue – Property Management Expenses
Calculate Cash-on-Cash Return
Cash-on-cash return measures the cash returns compared to the cash invested.
This metric helps investors understand how much cash they will receive — not just revenues. Therefore, it’s one of the most vital metrics for evaluating real estate.
Here is the cash-on-cash return formula:
Cash-on-Cash Return = Annual Pre-Tax Cash Flows / Total Cash Invested
Here is the pre-tax cash flows formula:
(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 amount of cash the buyer invests into the property. Keep in mind that this is not necessarily the purchase price. Instead, it’s often the down payment.
For example, if an investor buys a $150,000 property with a $30,000 down payment and $120,000 mortgage, $30,000 is the total cash invested.
Determine the After Repair Value (ARV)
ARV measures a property’s potential value when completely repaired.
Here is the ARV formula:
ARV = Current Property Value + Value of Repairs/Renovations
Home flippers use ARV to estimate their profit potential and determine if the repairs are worth the cost.
Rental investors use ARV useful to prioritize repairs based on potential incremental rental revenue increases. You can use ARV in the early stages of preparing your property for sale similarly — picking which repairs offer the highest returns compared to their costs.
Selling Your Rental Property in Columbus at the Right Time
Timing your property sale can make a big difference in your profits, tax implications, and even ease of closing future deals.
So once you’ve prepared the property for sale, consider selling when one of the following matches your circumstances:
Your Property Has Appreciated
Did your Columbus property appreciate? Nothing wrong with selling it if you want to take your profits.
That said, you should consider lining up another potential deal before selling your existing one. As you’ll see later, certain pieces of the tax code could stretch those gains further if you qualify.
No More Depreciation Deductions
US real estate investors can generally deduct depreciation for 27.5 years. This is one of the largest deductions investors can qualify for, so returns can drop significantly when it runs out. As a result, some investors plan to exit their property when depreciation runs out.
You Aren’t Earning Sufficient Returns
No investment guarantees returns. Despite your best due diligence, your property might not be earning enough to justify holding it. Selling the property and finding a new one can be worth it in certain situations.
However, don’t sell without investigating why returns aren’t sufficient. There may be an underlying issue in the property that, when fixed, increases your returns to a justifiable amount.
You Want to Exit Real Estate
Some investors are simply over real estate. Maybe they’ve grown to dislike hunting for and managing properties. Perhaps they’re retiring after a long and lucrative real estate career.
Ultimately, that’s your choice. But before exiting real estate, investors should consider working with a Columbus property management firm. The right firm will take on all the parts of real estate you don’t like or don’t have time for. At the same time, they’ll work their hardest to let you continue enjoying steady rental income.
Special Situations
Here are a few special considerations when selling a Columbus rental property:
Selling With a Resident
If you and your resident are on good terms, selling your property to them can streamline the process and cut costs—especially on marketing. If your resident has a strong desire to continue living in the property or start their own portfolio, you have some extra negotiating power.
You can offer seller financing if the resident doesn’t qualify for traditional financing and you own the property outright. Keep in mind the risks, though. If the buyer defaults, you could see substantial losses.
Weigh the convenience of selling to your resident with the risks before making a decision.
Selling at a Loss
Selling your property for a loss could offer you a tax deduction with certain limits. Plus, you may be able to carry losses forward to future years if you can’t use the full deduction in the current year. Keep in mind that you may need to add back depreciation deductions, which can make what looks like a loss into a gain.
IRS Topic No. 409 Capital Gains and Losses offers more information about capital losses.
1031 Exchange
US Internal Revenue Code Section 1031 lets real estate investors defer capital gains taxes by investing their property sale proceeds into another property of equal or higher value. The investor may also need to maintain similar or higher loan amounts as well.
This can be a great tool for investors seeking to grow their portfolios since you can only use it if the next property is equal to or higher in value. All those tax savings could help your capital gains go further. You could put down payments on more properties, accelerating your real estate portfolio growth.
Final Thoughts on Selling Your Rental Property in Columbus
Selling your Columbus property may be a good decision as the market cools off. You could take profits if your property appreciated and put those gains towards growing your portfolio or retiring from real estate.
Keep in mind the work involved in selling, though. You must make necessary repairs, calculate several financial metrics to price your property, and look over the tax implications before selling.
All of that comes before marketing your property, vetting buyers, and closing the deal.
If that sounds a bit overwhelming, you’re not alone. Evernest can take on the hard work for you. We’ll help prepare the property for sale and get it in front of hungry property buyers.
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:
Subscribe to our podcast: The Evernest Real Estate Investor Podcast—for all things real estate investing, being a landlord, growing your portfolio, and more.
Find a new property: Make sure you sign up for our Pocket Listings to get notified of all the deals that come across our desk daily.
Get an investor-friendly agent: We can help with that—we would love to help you sell your out-of-state rental property investment.
Source: This content was originally written for Evernest and published at Evernest.co.
