Buying and selling real property is central to being a real estate investor. Strategic decision-making is key to excellent asset management, and knowing when and how to let go of investments is a critical step in maximizing your bottom line. This act is also called “disposition,” which the pros at Marketplace Homes help investors with frequently.
What is a real estate disposition?
The term “disposition” refers to the sale of a property. For example, our brokerage assists our investors with small-scale and large-scale dispositions. We can help our clients sell one property or a lot of homes at the same time. The disposition process may look different depending on the property owner’s route, and each has its benefits and considerations.
The Disposition Process
Different circumstances call for various disposition methods. If you’re on no specific timeline, you may sell a property on the open market and test it to get top dollar. You may also be short on time and want a sure thing, which makes it wiser to sell directly to an investor. You may also exchange your investment or a “like” property through a tax-free 1031 exchange.
- Selling on the open market requires the most preparation. The listing agent would set a listing price and negotiate with buyers as offers come in. The investor also needs to prepare the home for showings and make any necessary repairs to make it pass inspections.
- If you decide to sell directly to an investor or do a 1031 exchange, there are no showings or marketing necessary since the deal happens between already decided parties.
No matter what route you take, each choice has its ups and downs. However, when you follow the advice of your real estate agent and financial advisor, you can make the best decision about when to cash out or cut your losses.
Real Estate Investing Disposition Pros And Cons
Every decision has a positive and negative effect, but working with a real estate expert can minimize risks and maximize benefits. Overall, selling at the right time and an acceptable price are two key factors determining whether the disposition is to the investor’s benefit. Here are the specifics.
The Pros of Real Estate Disposition
In property management, getting enough cash flow and profits from your rental properties is critical to success. Acquiring your property at the right purchase price maximizes your chances of having a favorable outcome when you sell too.
1. You can avoid paying capital gains tax through a 1031 exchange.
- While an open market sale is one of the most common disposition strategies, capital gains taxes apply to any property that isn’t a primary residence. A 1031 exchange allows the property owner to defer their taxes by using the sale proceeds for like-kind property.
- Do you like tax breaks? So do we. We like them so much that we compiled a list of other investor tax deductions and credits.
- Tip: You may also avoid some capital gains tax through seller financing. To learn more about this method, talk to a financial advisor.
2. You avoid paying more bills related to the property.
An investment costs you every month in property taxes, payments to insurance companies, and other maintenance expenditures. You may also be a borrower responsible for mortgage payments and utilities, regardless of occupancy. Selling the property frees you from these responsibilities.
3. You can buy low and sell high.
Restoring a distressed property like a foreclosure can have some awesome returns, especially when you don’t overspend during the renovation process. The property’s fair market value ends up being enough to recoup what you spent and give you a considerable profit that helps you advance in your investment career.
4. You let go of a property that doesn’t serve you anymore.
You may think that commercial real estate is right for you. Still, then after further review, you prefer multifamily or residential, or you may want to explore other asset classes like real estate investment trusts (REITs) instead. That’s ok. Your journey as an investor will have many unexpected destinations, and letting go of a property you don’t want to manage is good for your business.
The Cons of Real Estate Disposition
Selling real estate also has some risks and considerations. Buying low and selling high is the ideal scenario, but unavoidable or unexpected situations can lead to investors making decisions that are outside the ideal. However, by keeping close tabs on both long and short-term investments, you can maximize your shot at getting the best deal when you sell.
1. There are always risks that can affect your gains.
Sometimes market conditions degenerate quickly. To cut your losses, you may sell lower than you want, which can lead to financial loss. Unexpected events like a natural disaster, rising crime rates, or other adverse market changes can mean that what was once a promising property can become a significant financial risk the longer you hold it. Nevertheless, the faster you let go of known risks, the better off you’ll be in the long run.
2. Under certain circumstances, you can owe capital gains taxes.
If you don’t exchange a like-for-like property, you can’t do a 1031 exchange. To avoid paying a lot on income taxes, investors must prepare the amount they’ll owe for tax time after cashing out. Prepare your taxes with a tax professional to ensure you don’t underpay on capital gains during the year.
3. In open market deals, some deals can fall through when a buyer requires financing.
If you test the open market to get top dollar, you can encounter buyers that need a lender. Higher interest rates make it harder for buyers to qualify, which can lead to deals falling through if the buyer happens to make a typical mortgage mistake.
- Tip: To avoid the stressors of open market sales, sell to another investor who can give you a no-nonsense all-cash offer. Buyouts are also great!
4. It isn’t easy to sell on the open market with residents in your rental.
Occupancy can make selling an investment on the open market tricky. If you’re renting out a family home, it can be difficult or impossible to arrange showing times. There may also be times when the tenant is unwilling to cooperate with home staging and cleaning before each showing. This may be one of the most challenging aspects of selling a rental investment.
Real Estate Disposition Pros And Cons
Selling a property or multiple properties under the right conditions is a win-win for investors. Working with a realtor who has connections with other investors is an excellent strategy for gaining quick access to timely buyouts. They can also advise you on what type of property would suit your investment preferences.
Alicia Persson is the real estate content writer for Marketplace Homes. She has several years of experience working in real estate teams that specialized in investments and property management. Before she joined MH, she was a freelance writer for 7 years, providing real estate and home living content for boutique digital marketing agencies.
She is a proud University of Virginia master’s graduate and enjoyed her undergraduate years at the University of Mary Washington. When she is not writing, she plays keytar and does female lead vocals in a local 90’s band or spends time with her amazing family.