Renter wants to buy

7 Replies

Hello! 

I have a townhouse that is rented under a 2 year lease with the renter's intention to extend 5 more years. However the renter just approached us and asked if we'd consider selling the rental to them. We weren't intending to sell but now it's an interesting thought and I'm wondering how best to proceed. 

I currently have 3 properties all in the Portland, Oregon market. This one has 230K in equity and a 550/mo cash flow on a 4.75% 30 year mortgage. If I refinanced at 3.25% that my lender is offering me, I could get that up to 850/mo, which is what I was starting to work on until the renter approached me. My taxable amount would be 125K from appreciation, plus depreciation recapture of another ~60K on this property so this would force me to either pay a LOT of taxes or do a 1031 exchange which is a world I know nothing about and is frankly terrifying. 

So, I have a couple of questions- is there anything unique about selling to a renter? The rent is $2400 a month and there are 14 months left on the lease so I'm losing a lot of guaranteed income by selling, however I feel like I could buy multiple properties in cheaper markets with the amount of cash this will free up, which will probably replace the $850 a month cash flow by a multiple. 

I expect our market will continue to appreciate through the summer as well so delaying is in my favor in that aspect. One attractive thing about selling is that this community is due for a major special assessment in the next 3-5 years and the HOA fees are already high and increasing 15-20% per year. I believe the next project due is re-roofing and then painting.

I'm worried about not being very diversified as well being all in on one market, my whole portfolio here is about $2M in market value, and if I were to invest elsewhere I'd probably want to spread it out among 3-4 different areas to help spread out risk. 

I'm also wondering if you buy a property in another country, if that is covered under 1031 exchange or not? The 1031 scares me as it takes me an average of about 1 year and looking at hundreds of properties to find just one, so the short timeframe feels impossible to find several in other markets to use up all of the funds.  

Does anyone have any opinions on the best way to go here, and/or any experience selling to a renter and potential pitfalls? 

Thanks everyone :)

Hey @Ciarraghe G. , I know it might not seem like it but you have a great problem.  I think you should sell but here are some thoughts to think about.  Are you wanting strong cash flow or are you looking to grow your portfolio?  If you recycle your $230k in equity, you could a $1M property.  That will give you more depreciation, equity pay down, etc.  Especially with interest rates being so low right now, it would be a great time to get some long-term debt.

If you end up selling to your tenant, you should work with a real estate attorney to draw up the contract between you two.  That way you won't need to pay for an agent.  

As far as a 1031, you will work with a 1031 intermediatory and they will walk you through the process.  I recommend using Tonia Butler here in Portland.  Also, I know someone that does 1031s through a Delaware Trust.  That way you can put your money in that fund and not have to worry about purchasing a specific property.  You will still get all the 1031 benefits too.  If you want more info I can introduce you to him. 

@Brad Hammond Haha, a good but extremely stressful problem! It's been keeping me up at night for sure. 

I'm not sure what kind of investor I am, truly. I'm just trying to find a way to retire as fast as possible with no debt and plenty of money to live on without working, so good cash flow is important (to pay down debt or make further investments) and so is appreciation (or at least not retraction) so that I don't run the risk of being under water and losing everything. 

I'm very risk averse (I'm a CPA). So I'm my own worst enemy when it comes to investing, I'm much too careful on the front end and extremely easily spooked out on the back end. I've walked away or exited early from dozens of deals/investments which all would have been fantastically profitable if I'd been less risk averse. 

My model so far has been A quality SFR, and I have very high income and credit standards that tenants have to meet to qualify for my rentals.

That's all partly why I'm trying to go to other cities as I am trying to spread out my risk. The Delaware trust thing is scary to me because you're locked in- the more I read about it the riskier and more painful it sounds. I need lots of exit options to feel comfortable I guess. That's why SFR always feels "safe" to me because it's easier to sell if necessary since the market is so broad. That's partly what's kept me away from multi-family, they're harder to sell if you have to get out fast.
I'm assuming when you reference a $1M property you're talking about a multi family? I also think of multi family as a lower quality tenant which may or may not be reality. 

@Ciarraghe G. , One real positive in doing a 1031 when you are selling to a tenant is that you can negotiate a flexible or extended closing date with them.   This can greatly extend your time frames for finding a good replacement.  You do have only 180 days after the closing of the sale to complete the exchange.  But that is after the sale.  If you feel comfortable with the sale going forward.  And your tenant can give you another 60-90 days before closing That wouldn't get you to your year average. But it would get you closer :)

You cannot 1031 from US property outside the country except for a couple territories - USVI Guam and Northern Marianas Islands.  @Brad Hammond s idea of using a delaware statutory trust as a back up position for your 1031 is a good one as well.  

@Ciarraghe G.

I’m assuming that if you are a CPA that you haven’t lived in the property in the last 5 years otherwise you’d use that tax exemption after selling and duck the taxes entirely.

Having your renters buy it is a great opportunity, you can have the property under contract and start searching for your purchase. Many buyers and sellers are familiar with 1031 in the commercial space and writing offer subject to a 1031 is very common.

I would make sure your tenants qualify to buy it, which sounds like they do. Last thing you want is to get into contract on another property and then have the tenants not perform....

Delaying the tenants closing allows for you to have extended period of time to identify your properties, which you can even get in contract on, but not close for a regular 1031.

@AJ Shepard This has always been a rental property, I've never lived in it and never wanted to, too many people too close together. It's also very far away from my job so it's never been an option, regardless. 

We do need the renter to give us a preapproval letter but she was getting her stuff together so we should hopefully have all ducks in a row, although things can always fall through no matter how good things are set in place at the start. Anything can happen. 


Originally posted by @Ciarraghe G. :

@AJ Shepard This has always been a rental property, I've never lived in it and never wanted to, too many people too close together. It's also very far away from my job so it's never been an option, regardless. 

We do need the renter to give us a preapproval letter but she was getting her stuff together so we should hopefully have all ducks in a row, although things can always fall through no matter how good things are set in place at the start. Anything can happen. 


There is also the concept of a reverse 1031 if you have the funds for it, little bit more expensive but nice when you know you are going to sell a property and a good deal comes up, takes a lot of the timing aspects away and the pressure.  Just another option.