Rental Property Investor · Boise/Portland · Member since 2017 · 709 posts · 742 votes
Inspected one of my rentals recently (flew in from out of state) and hadn’t even got my foot in the door (with my PM at my side) when the tenant begged me to sell the house to him. He was sincere and forthright. I dismissed it because I’d never thought about such and it wasn't on my radar screen. Honestly, it just took me off-guard.
Having second thoughts now.
The house is located in Boise and has increased $70,000 in value in the past three years. My LTV is 20%. Cashflow is $875.
Any thoughts? Recommendations?
BTW - He's on permanent disability (unnoticable) and his income benefits are perpetual. Great family. Very positive and friendly.
Would you buy the property again at its current price?
If the answer is no, sell it.
But before you pull the trigger, start looking for a place to reinvest the funds. There is nothing worse for your overall return than jumping out of an investment to lock in yield and then having your funds sit in a checking account earning nothing.
@Matthew McNeil. This is a good situation for you. It is interesting that you are at 80% to LTV. Did you recently purchase or refinance the property?
He looks like a motivated buyer, perhaps you can get him to pay the closing costs, which is extremely rare in this market. That would help with your profit margin.
I would change my mindset a little, as an investor everything is for sale and you should be looking at your exit strategies on at least a yearly basis. So if you get a number that makes sense for your goals you are ready to sell. Same idea for buying as well
I would sell it to him on owner financing. I had this happen to me once and I told the tenant that I wouldn't sell it to him this year. I started to think about it and went back to them and offered to sell it. They told me that they had already found a house to buy.
If they truly have the funds to buy a house they probably will. So, if you don't sell it to them you will probably loose them as a tenant
I agree with some of the previous posts. If you have a motivated and able buyer, that's a good opportunity to investigate further into your options. The way I see it, at some point you will find another deal worth investing in and will need funding for. If this home has already increased in value and you have someone who loves the property enough to pay, it's kind of a blessing in disguise.
I would start searching for the next investment opportunity that will give YOU motivation to sell and use the money you've made on it and now you'll have one less step of finding a good buyer.
Would you buy the property again at its current price?
If the answer is no, sell it.
But before you pull the trigger, start looking for a place to reinvest the funds. There is nothing worse for your overall return than jumping out of an investment to lock in yield and then having your funds sit in a checking account earning nothing.
@Matthew McNeil any time someone asks to buy one of my properties, I always give them an offer price. If I have little interest in selling, then the price is just higher. If you can sell above market without agent fees, why not do the deal?
Let me make sure I understand this...you have an appreciating property, in your backyard, that is cash flowing for you, and your LTV is low. Really? Unless there is a newer and better property awaiting, this is my definition of a home run investment. Not only is it generating current income for you but future as well. This is the stuff of investor dreams!
And, you even inspected your rental??? You're a rock star!
I assume you are doing this REI thing to make money.... if you sell him the house, can you use that money to make more money than if you kept it? The bottom line is that house is a tool to make money... so if you can sell that tool to acquire other tools to make even more money, you sell... if you can't, you don't, IMO.
Kudos to you for flying in to town to inspect your rental.... that kind of follow through is what separates the very successful RE Investors, from the rest.
Investing is always about current and future because the past is already done with.
Past: You realized $70k in appreciation and have had great cash flow.
Current/Future:
- Do you think appreciation will continue at the same rate?
- Have you depreciated the improvement on your taxes? Do you have many years left of depreciation?
- You are an out of area investor, are there other locations where you think your investment money would perform better going forward?
These are the kinds of questions I would be asking myself to decide if I wanted to sell and possibly 1031 exchange into a property in another market. Sounds like you have a great investment as it is, so I think you will be a winner no matter what you decide!
@Matthew McNeil. This is a good situation for you. It is interesting that you are at 80% to LTV. Did you recently purchase or refinance the property?
Parick, a few years ago a lender introduced me to Recasting which I've done several times and now use it as part of my long term strategy. That's how I lowered my LTV. I do this on all my properties.
I would sell it to him on owner financing. I had this happen to me once and I told the tenant that I wouldn't sell it to him this year. I started to think about it and went back to them and offered to sell it. They told me that they had already found a house to buy.
If they truly have the funds to buy a house they probably will. So, if you don't sell it to them you will probably loose them as a tenant
Thanks David. The "owner financing" idea would be new for me. I've been building my portfolio for the past 10+ years and I've never entertained the idea primarily because I've read pros and cons about it - and the cons seem to outweight the pros. Just new territory for me.
Let me make sure I understand this...you have an appreciating property, in your backyard, that is cash flowing for you, and your LTV is low. Really? Unless there is a newer and better property awaiting, this is my definition of a home run investment. Not only is it generating current income for you but future as well. This is the stuff of investor dreams!
And, you even inspected your rental??? You're a rock star!
Thanks Patricia! Sometimes we tend to miss the obvious. Its all about perspective and you've reminded me of it. I'm walking around my house today telling my family that I'm a rock star, I'm a rock star, I'm a rock star. I'll print out your post and frame it!
Investing is always about current and future because the past is already done with.
Past: You realized $70k in appreciation and have had great cash flow.
Current/Future:
- Do you think appreciation will continue at the same rate?
- Have you depreciated the improvement on your taxes? Do you have many years left of depreciation?
- You are an out of area investor, are there other locations where you think your investment money would perform better going forward?
These are the kinds of questions I would be asking myself to decide if I wanted to sell and possibly 1031 exchange into a property in another market. Sounds like you have a great investment as it is, so I think you will be a winner no matter what you decide!
Thanks Kevin. Appreciation probably won't continue at that rate. No improvements to depreciate because I buy newer homes. 20 years left on the purchase depreciation.
1031 Exchange into another market you asked. I've exchanged a few properties in past years so I'm very comfortable with all that. I'm reseaching buying some TKs for the first time. That's all new for me and I'd need to absolutely and fully get my head, heart and strategy around that before I pulled that trigger. I'm leaning that way though...
I stopped reading at 875$ cashflow . Heck no I wouldn’t sell it . Don’t slaughter your cash cow or cook your golden goose
I'm getting various feedback on my post here; all of which is good and based on each member's personal perspective, but your quick and to-the-point post resounded with me. Thanks!
@Matthew McNeil Let him know your ideal price, and if he is still interested have him provide a pre qual and take it from there. If you can sell at a premium I would do it.
I've helped facilitate a few of these deals for a reduced commission and they feel great for everyone when they work.
My advice if you do it - #1 - get them to get pre-approved by a lender by a certain date. You recommend the lender so you can find out how solid they are.
Many of these deals would be great but don't end up working for a very simple reason (lack of finance approval), but they get dragged on for an unnecessary amount of time before that easy detail is revealed.
I've helped facilitate a few of these deals for a reduced commission and they feel great for everyone when they work.
My advice if you do it - #1 - get them to get pre-approved by a lender by a certain date. You recommend the lender so you can find out how solid they are.
Many of these deals would be great but don't end up working for a very simple reason (lack of finance approval), but they get dragged on for an unnecessary amount of time before that easy detail is revealed.
Thanks Stacey. What you wrote regarding the tenant's inability to get financing is my primary concern. I think he wanted me to carry the loan for 30 years, but I'm not interested in getting into a business relationship with someone that long.
I would sell it to him on owner financing. I had this happen to me once and I told the tenant that I wouldn't sell it to him this year. I started to think about it and went back to them and offered to sell it. They told me that they had already found a house to buy.
If they truly have the funds to buy a house they probably will. So, if you don't sell it to them you will probably loose them as a tenant
Thanks David. The "owner financing" idea would be new for me. I've been building my portfolio for the past 10+ years and I've never entertained the idea primarily because I've read pros and cons about it - and the cons seem to outweight the pros. Just new territory for me.
Matthew - Just this week at our local REI meeting in Nashville, Matt Reed came to give a presentation on Lease to Own options. He is based out of Ohio (also a member of BP), and might have some great information for you to look into. Here is also a podcast he did too. https://www.realestateinvestingmastery.com/159-lea....
I don't want to derail the thread, but would love some more information on recasting.
The terms to negotiate in any sort of owner carry are: price, downpayment, term, amortization, interest rate and fees/penalties including a pre-pay. I'm sure your tenant would love a low rate, 30-year fixed loan. But they're not in a position to secure that kind of deal, and it's not favorable for you to be the one to extend that opportunity.
The loan can be amortized over 30 years but due in 5 years (balloon payment), at which point the tenant would need to have the ability to refinance or otherwise buy you out.
The consequences for inability to refinance or lack of performance could allow you to keep money and get your home back, or re-negotiate (condition and more hands-on effort required to foreclose are risks there, even if you have a strong team involved).
If you consider doing this, you might bring in an expert to help negotiate with the tenant and set up the deal. It would need to be one who can advise on other ways to make this smooth and as passive as possible. I don't try to set the tenant up to fail, I work more to protect you and make sure if they do fail, you're in as favorable of a position as possible.
The terms to negotiate in any sort of owner carry are: price, downpayment, term, amortization, interest rate and fees/penalties including a pre-pay. I'm sure your tenant would love a low rate, 30-year fixed loan. But they're not in a position to secure that kind of deal, and it's not favorable for you to be the one to extend that opportunity.
The loan can be amortized over 30 years but due in 5 years (balloon payment), at which point the tenant would need to have the ability to refinance or otherwise buy you out.
The consequences for inability to refinance or lack of performance could allow you to keep money and get your home back, or re-negotiate (condition and more hands-on effort required to foreclose are risks there, even if you have a strong team involved).
If you consider doing this, you might bring in an expert to help negotiate with the tenant and set up the deal. It would need to be one who can advise on other ways to make this smooth and as passive as possible. I don't try to set the tenant up to fail, I work more to protect you and make sure if they do fail, you're in as favorable of a position as possible.