If you want to sell your property, take the acquisitions side and just reverse it! The process is a mirror image. Do homework on financing and due diligence on your properties. You don’t want to have surprises. The top two killers of great real estate deals are time and surprises. By having a system, you can avoid both pitfalls.
If a buyer rolls up the property and sees that half the electrical system is faulty and you don’t know that, then that's grounds for what's known as a re-trade or a discount on the acquisition costs. They will put a value on what it's going to cost to fix, and the additional risk of the fact that they had to uncover it themselves and you didn't disclose it. Then, the buyer thinks, What else are they not talking about? You want to avoid grenades like that—grenades being surprises—so they are more comfortable with buying the property. You have to do your own due diligence on your property.
What is involved in selling rental properties? It happens in two phases: preparing to sell and the marketing and selling of the property.
Phase 1: Prepare to Sell
I’ve identified five steps for the preparation phase of selling an asset. Here they are!
Step One: Getting the Property Ready
This step starts once you’ve closed on the acquisition of the asset. This is so complex, really, that I recommend reading something like the book Purple Cow by Seth Godin, because it's a great resource for positioning your property for resell. The reason I say this is because my mantra is as soon as you close on the property, you want to set it up for eventual resell. This means the following.
1. Keep excellent records, especially of income.
2. Address any significant issue of repair as soon as possible. This is true especially of the structure of the building. Repair anything that impacts resale value; maintain the property as best you can.
3. Keep captial on hand. Your investment properties should not be a piggy bank. That is, don’t depend on the money you make from these. Set yourself up for a quarterly distribution. If you keep a healthy amount of money on hand, you'll be better off. You’re getter off because you need to be able to handle a few vacancies and still be able to pay your mortgage.
With regard to selling, you want to make sure that you're always thinking about how to best position this property to make it most attractive. That means maintaining it, having sufficient capital reserves for improvements, and being very diligent in your bookkeeping.
Side note about maintaining properties: There’s two main reasons for operating your property at it's best use: cash flow and resale value. You want to be able to keep the units rented at the highest price and for the longest possible period of time to increase cash flow. With regard to resale value, not only does maintaining a high resale this pad your own income through collecting rent but it also this correlates directly to the resell value. An investor is going to ask to review the past 2-3 years of operating history to see how much income is generated over a longer period of time (as opposed to the most recent 12 months). They like seeing consistency in cash flow and consistent increases in income. You always want to bump your rent or minimize expenses when possible.
In summary, increasing rent or minimizing expenses has a two-fold impact: it immediately increases cash flow in your pocket and it increases the value of the resell down the road. Remember that selling real estate starts when you buy the property.
Step Two: Establish sustainability.
Typically, once you’ve got sufficient capital, you want to have a few years of operating history to show a new investor that the cash flow is sustainable. This is good for whoever is going to finance the investor.
Step Three: Make asset aesthetically pleasing.
Make it aesthetically pleasing? This means window dressing the property, making it look good! Keep these renovations within reason by painting the real estate, fixing major landscape issues, and the like. You goal here is to maximize the visual appeal, because when people do a site visit, the visual aesthetics make the sale. This is like buying anything else that's important to your everyday life. Like a car, for example: if the upholstery is ripped and the paint is faded, you're less likely to buy a car (even if the engine is shot!). People believe that the outside of an object represents the inside, so make sure that the outside looks great as a bare minimum standard. The tasks I'm talking about here are affordable, mind you, so don't fret too much about your investment costs here—they’ll pay off when you sell.
Step Four: Do your due diligence.
The same due diligence you did on the asset in the acquisitions process, you want to do on this side of things, the disposition of the investment. By doing this, you can highlight key points for the property for potential investors. For example, if you've got a 95 percent occupancy rate for the last few years—that's great! You want to showcase that in a spreadsheet you use to verify the income. Basically, the same acquisitions spreadsheet I use for acquisitions (see above), I'll use for selling an asset. I'll take two or three years worth of income and expense data in a spreadsheet format. Then, I'll pair it with bank statements and verified income. Together, that makes a profit and loss history of the property.
You want to do this whether or note you sell the asset yourself, whether or note you hire a broker to do it for you. You want all this financial history because at the end of the day, someone wants an income producing property. They know that they're buying not only the dirt, but the business itself.