Don't trust rental property sellers?
I am browsing the market for more rental properties -- but I don't trust rental property sellers at all - especially if they are investors.
When someone posts a real estate ad....."Fantastic cash-flow property! Cash cow! This house needs little work, renovations already done and tenants are in it. Long term tenants too!"
My first question is why is he/she selling the property if it is a money maker? Why would any sane person walk away from cash flow or even a rental property?
I can understand why someone sells a home - layoff, divorce, moving, etc. But anyone selling a "rental property" sends up red flags.
This applies to anyone selling a rental property.
Anyone want to add what I am missing here?
You ought to ask for the actual expenses and income behind the property for the last couple of years. Hopefully, they'll deliver them to you if they are confident in their listing. When you get to the reason for selling a property, many folks sell so they can get cash, and with this cash, they can use it for capital expenditures in other units, they can use it to acquire newer/higher-level units, perhaps the seller is looking to sell it so they can just have cash on hand to spend. You never really know the underlying reason to sell the property unless you see the actual numbers - which can confirm whether the unit was actually performing or not. I suppose you can also look to the public record to see if the property is in jeopardy or not.
I did email him and asked to see his expenses and income. No reply yet. But I doubt he needs the cash when its a monthly long term cash cow. But good points.
Selling rental properties is almost along the same logic as someone is trying to sell me their money. Why would anyone sell their money and advertise...."I got 10 ten crisp 100 dollar bills. It's legitimate cash - not counterfeit! It can be used to buy anything!"
Ok great - so why don't you use the money to take your wife out to dinner or use it as a down payment on a car? Why are you selling me your money? *shakes me head*
Selling a home or a car --I can wrap my head around, but not a rental property that produces income.
Your point definitely makes sense to me. For what it's worth, I do intend to sell rental properties one day (even the ones that are performing well) in order to pool resources for purchasing a larger property. However at the time, I'm not able to fund a larger property (and am hoping that some appreciation and cash flow on smaller properties will help me get there).
@Todd Hensy some may say why keep dealing with renters that may be a headache when you can make a better return or same with less headache.
#4 All Forums Contributor
- Plymouth, MI
Steps to why a great rental is sold: (one of many scenarios)
1 - REI buys property for cash flow
2 - Property is owned for enough years to pick up appreciated equity
3 - Property is worth more to the owner investor now as a flip than a rental based on net profit at sale.
4 - REI sells property to another investor (obviously not you) that appreciates the quality of the property and the cash flow that new investor can get.
5 - Seller takes cash back and profit from sale and buys either bigger property or multiple properties.
6 - New acquisition(s) cash flow more than the original property.
Joe’s post summarizes the reasons they might sell very well.
While they might be selling for a legit reason, you’re right to never take their word for it. You’re going to have to run your own numbers, and see if the deal still makes sense. Between that and a home inspection, you should be able to see if the seller’s reasoning holds water
Seller's sell for any number of reasons:
The first property I bought was owned by a 95 year old lady. Her daughter and grandson were managing the property and grandma got the rent. Grandson and daughter we sooooo happy to sell.
Next group of properties, divorced couple, man out of country with new young wife, ex-wife stuck managing rentals in her seventies...really happy to sell.
Next group, ill, 84 year old owner with kids in medicine and law who didn't want poorly maintained rentals.
Next triplex, inherited property owned by OOS children of original owner.
Purchasing apartment buildings, even from "reputable" brokers, will often understate the true expenses of a building.
Like pretty much any industry.... “buyer beware”
I have a 3 unit I've owned for nearly 6 years where I'm getting $500+ per door monthly. If I were to sell at current market value, I could walk with about 9 years worth of profit all at once to reinvest or put into a retirement account (if I were older). Also, I could get into private lending with that money. Great reasons to sell in my opinion.
Interesting points. I feel more comfortable with the stock market where I know the playing field is even. Dealing with RE sellers is frustrating because I don't know if they are hiding something from me. Turns out the house has termites....now that's why he is selling his cash-cow.
#4 All Forums Contributor
- Plymouth, MI
Originally posted by @Todd Hensy:
Interesting points. I feel more comfortable with the stock market where I know the playing field is even. Dealing with RE sellers is frustrating because I don't know if they are hiding something from me. Turns out the house has termites....now that's why he is selling his cash-cow.
Seriously? That's what you got out of all of this? The Stock Market is a better choice?...because it has a level playing field? There's nothing level about the stock market at all. However, if you understand REI, you can level your REI playing field.
The first houses I got were sold with tenants in place by a widow (from the Red Hat Society). Her husband handled the REI, and she didn't understand it. More than that, the accumulated returns set them/her up for retirement so she wanted to sell off all the properties, so she didn't need to manage them...and could spend her time doing the RHS things.
What's more, I got a great deal on them because she was a motivated seller (and not because the properties had problems). Both were great properties for years...then I sold them for a profit, and invested the proceeds in a larger investment with a larger cash flow.
I hate the stock market, you have zero control on the direction of your investment. EVERY property has something wrong with it!
#1 Personal Finance Contributor
- Rental Property Investor
- East Wenatchee, WA
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#1 Personal Finance Contributor
- Rental Property Investor
- East Wenatchee, WA
Originally posted by @Todd Hensy:When someone posts a real estate ad....."Fantastic cash-flow property! Cash cow! This house needs little work, renovations already done and tenants are in it. Long term tenants too!"
This applies to anyone selling a rental property.
This is a wholesaler. That's why they're not getting back to you. Myself nor any true LL I know would ever word our for sale listings this way.
When I investigate other markets to possibly invest in, I check CL to see how many of these garbage 'listings' are out there. Some markets are absolutely saturated with owner carry RTO investor special cash cow BS. I know within minutes whether to pursue that market or...NOT.