When selling a real estate investment, you are likely concerned about “when” and “at what price” you can sell. However, what is actually important is the amount that remains in your hands after the sale. After deducting the remaining loan balance, various expenses, and taxes, there are cases where you are left with less than you expected.
In this article, we have summarized the essential points to keep in mind when selling for those who own condominium units or are considering purchasing them.
Note that an “exit strategy” refers to a plan to secure profits when ending an investment, such as by selling the property.
How is the selling price determined?
The selling price of an investment condominium is evaluated primarily based on “profitability,” which anticipates future rental income, and “asset value,” which influences rental demand and the condition of the building.
Profitability is estimated by dividing the annual net income (the amount remaining after deducting expenses from rental income) by the yield expected by investors. For example, if the net income is 1 million yen per year and the expected yield is 5%, the estimate is 20 million yen (calculation example).
Asset value involves factors such as location, distance from the station, building age, management status, and the status of the repair reserve fund.
Confirming the amount remaining in your hands
The approximate net proceeds are calculated as “Selling Price – Selling Expenses – Remaining Loan Balance – Taxes, etc.”
For example, assuming a selling price of 15 million yen, a remaining loan balance of 12 million yen, and expenses of approximately 650,000 yen, the net proceeds excluding taxes would be 2.35 million yen (this is a hypothetical calculation example).
A situation where the remaining loan balance exceeds the selling price is called an “underwater mortgage” (or negative equity), and you will need to provide the shortfall from your own funds.
Also, for investment properties, you perform “depreciation,” which treats the decrease in building value as an expense. Consequently, the amount deducted from the purchase price (acquisition cost) when calculating taxes at the time of sale becomes smaller. Therefore, even if you sell for less than the purchase price, it may be considered that a profit was made, and taxes may be incurred.
It is reassuring to get estimates from real estate companies and check with a tax accountant before selling.
Three perspectives on the timing of the sale
Consider the timing of the sale from the following three perspectives:
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Financial/Tax conditions: The time when the selling price exceeds the remaining balance (you can pay off the loan), the time when the ownership period exceeds 5 years, etc.
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Property condition: Before rent decreases, vacancies become prolonged, or large-scale repairs occur, etc.
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External environment: Market conditions, interest rates, lending trends, etc.
There is a mechanism where the tax rate on capital gains decreases if the ownership period exceeds 5 years as of January 1st of the year of the sale (the tax rate for long-term capital gains is lower than for short-term capital gains). However, it is important to consider the timing comprehensively, not just based on taxes.
Since tax rates and systems are subject to change, please check the latest information from public sources such as the National Tax Agency. For individual tax judgments, please consult a professional such as a tax accountant.
How to choose a buyer
Buyers can be broadly divided into two categories.
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Selling to an investor while occupied: This is a method called an “owner change.” The buyer judges profitability based on documents such as a “rent roll” (a list of rents and contract terms).
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Selling to an end-user after vacating: This can be considered if the property becomes vacant due to a tenant moving out. The floor area, location, and building management become the conditions.
If the property becomes vacant, compare not only which option sells for a higher price, but also the net proceeds, including the decrease in rental income during the vacancy period and the cost of restoring the property to its original condition.
In addition to “brokerage,” where a real estate company looks for a buyer, there is also a method called “purchase,” where a real estate company buys the property directly. While it is easier to convert to cash quickly, it is generally considered that the price may be lower than with brokerage.
Sales process and preparation while holding
The sale proceeds in the following order.
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Requesting an appraisal (having a real estate company provide an estimated price)
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Signing a brokerage contract (a contract to request a real estate company to sell the property)
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Sales activities (recruiting buyers)
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Sales contract
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Settlement and handover (receiving payment and paying off the loan)
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Tax return (if a capital gain is realized, etc.)
By estimating the net proceeds at the appraisal stage and confirming the final amount before the sales contract, it becomes easier to avoid a shortage of funds.
Regardless of which buyer you choose, you can prepare for the following while holding the property.
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Regularly check the status of the management association (long-term repair plan, repair reserve fund)
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Check the remaining loan balance every year and compare it with the estimated sales price
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Keep documents such as sales contracts, rent rolls, and income and expenditure data
Daily checks will affect the future sales price and net proceeds.
In this main section, we explain in further detail the content that could not be fully covered here, including tax rate tables, comparison tables for investors versus owner-occupiers, and a list of required documents.
