1. Traditional Sale

What it is:
A traditional sale involves listing the property on the open market through a real estate agent or selling it directly to a buyer.

Example:
Sarah owns a rental property that has appreciated in value. She lists it with a real estate agent, complies with state-mandated disclosure requirements, and sells for a profit.

Why it works:

• Provides full liquidity upon closing.
• Works best in a seller’s market with high demand.

Key considerations:

• Capital Gains Tax: Properties held for more than one year are taxed at long-term capital gains rates (0%, 15%, or 20%, depending on income).
• Depreciation Recapture: The IRS may recapture depreciation deductions at a maximum rate of 25%, but the actual rate depends on the investor’s income.
• 1031 Exchange Eligibility: Investors planning to reinvest in another property may use a 1031 exchange to defer capital gains taxes (explained below).

2. 1031 Exchange (Tax-Deferred Strategy)

What it is:
A 1031 exchange, under IRS Section 1031, allows investors to sell an investment property and reinvest the proceeds into a new like-kind property, deferring capital gains taxes.

Example:
Mike sells a rental property for $500,000, reinvests the full amount into a larger apartment complex, and defers $80,000 in capital gains taxes.

Why it works:

• Preserves capital for reinvestment instead of paying taxes upfront.
• Enables investors to scale portfolios and upgrade properties.

Key considerations:

• Strict Timelines: Investors must identify a replacement property within 45 days and complete the purchase within 180 days.
• Like-Kind Requirement: The replacement property must also be used for investment or business purposes (e.g., a rental property cannot be exchanged for a primary residence).
• Qualified Intermediary (QI) Required: Investors cannot take direct possession of proceeds—a QI must hold the funds to comply with IRS rules.

3. Seller Financing (Owner Carryback Notes)

What it is:
Instead of selling for cash, the seller acts as the lender, allowing the buyer to make payments directly over time instead of securing a traditional mortgage.

Example:
Linda sells her rental home for $300,000 and structures a 10-year, 5% interest loan with the buyer. Instead of receiving a lump sum, she collects monthly payments with interest.

Why it works:

• Attracts buyers who may not qualify for bank financing.
• Generates passive income for the seller through interest payments.

Key considerations:

• Due-on-Sale Clause Risks: If the property has an existing mortgage, the lender may demand full repayment upon sale.
• SEC Private Lending Rules: Large-scale seller financing may fall under state lending laws and SEC regulations for private lending.

4. Lease Option (Rent-to-Own Model)

What it is:
A lease option allows a tenant to rent the property while having the option to purchase it later at a pre-agreed price.

Example:
A tenant leases a home for $2,000 per month, with $300 per month credited toward the purchase price. After three years, they exercise the option to buy for $270,000.

Why it works:

• Generates higher rental income, as tenants typically pay an upfront option fee.
• Attracts tenants who may later convert to buyers, reducing vacancy risks.

Key considerations:

• Option Fees Are Typically Non-Refundable: Most agreements require tenants to pay 2-5% upfront, forfeited if they don’t purchase.
• SEC Considerations: If marketed as an investment opportunity, the deal could be classified as a security, requiring SEC compliance under Regulation D.

5. Selling to an Investor (Off-Market Sale)

What it is:
Selling directly to another investor—often at a discounted price—for a quick, all-cash closing.

Example:
John needs to liquidate his rental property quickly. An investor offers 80% of market value, closing within two weeks, with no financing contingencies.

Why it works:

• Fast closing with no appraisals, banks, or inspections.
• Avoids real estate agent commissions and listing fees.

Key considerations:

• Lower Sale Price: Investors typically discount offers to account for risk.
• Wholesaling Laws Apply: Some states require a real estate license to assign contracts for profit.
• Title & Closing Must Be Handled Correctly: Always involve a title company or attorney to prevent legal issues.

6. Refinancing Instead of Selling

What it is:
Instead of selling, investors can refinance the property, pulling out equity as cash while retaining ownership.

Example:
Maria owns a property worth $500,000, but she still owes $200,000 on her mortgage. She decides to refinance with a new loan that covers 75% of the property’s value (75% of $500,000 = $375,000). From this amount, the bank first pays off her existing $200,000 mortgage. The remaining $175,000 is given to Maria as cash, while she keeps ownership of the property.

Why it works:

1️⃣ Accesses capital without triggering capital gains tax

• If Maria sells the property, she might have to pay capital gains tax on the profit.
• Instead, by refinancing, she gets cash from the property without selling it, so there’s no capital gains tax to pay.
• This allows her to use the money tax-free for investments or personal expenses.

2️⃣ Retains ownership to benefit from future appreciation and rental income

• If Maria sells the property, she loses ownership and won’t benefit if the property increases in value later.
• By refinancing instead of selling, she still owns the property and can:
  • Sell it later for a higher price if it appreciates.
  • Continue renting it out and collect rental income.
• She gets both cash now and potential future profit.

Key considerations:

• Cash-out refinances typically have higher interest rates than traditional purchase loans because they are considered riskier for lenders.

The lender is giving the borrower extra cash based on home equity, which increases the loan amount and potential risk of default.