Selling my rental before the lease is up

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Selling my rental before the lease is up

Cody Smith
Realtor · Panama City Beach, FL · Member since 2018 · 122 posts · 63 votes

Hey BP, thanks for stopping by my post!

I have a bit of a moral dilemma. I have a current LTR that I have gained about $80,000 in equity since purchasing. I began exploring STR properties recently, and after much research, I am interested in purchasing a vacation rental, a condo on the Emerald Coast. I have decided that I am interested in selling my current rental ($700/mo dirty cash flow) and using the proceeds to purchase one of these STR at the beach. The proceeds would cover my down payment and other costs associated. The property should appreciate over time due to location and demand, and should bring much more monthly income than the LTR, something very important to me as I prepare to transition out of the Army in two years.

My dilemma: I placed a new tenant with a 12 month lease on my LTR on May 1st.

I would like to give them first opportunity to purchase the property if they would like, but I’m not confident they will since this is an interim home for them until they build a home in a couple years. If they don’t want to, I would be selling and forcing them out 2-3 months into their new home and new lease. My lease does state the landlord can break the lease with 30 days notice to the tenant.

I feel bad for having to possibly put them out after just settling in, but if I am going to make this move on a STR, I do not want to wait until their lease is up for fear of interest rates and prices rising even further.

What would you do?

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Nathan GesnerBusiness Member
Moderator
Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
4y
Quote from @Cody Smith:


My dilemma: I placed a new tenant with a 12 month lease on my LTR on May 1st.

I would like to give them first opportunity to purchase the property if they would like, but I’m not confident they will since this is an interim home for them until they build a home in a couple years. If they don’t want to, I would be selling and forcing them out 2-3 months into their new home and new lease. My lease does state the landlord can break the lease with 30 days notice to the tenant.

I feel bad for having to possibly put them out after just settling in, but if I am going to make this move on a STR, I do not want to wait until their lease is up for fear of interest rates and prices rising even further.

What would you do?

If you sell a rental, the existing lease transfers with the sale. Any buyer will have to honor the existing lease or negotiate something different with the renter. In other words, your Tenant is safe until their lease expires next year.

I think you're making a mistake. You have a really good investment and should keep it. If you want to invest in something else, consider cashing out some equity with a line of credit or - even better - sacrifice and save up. I also think it's a mistake to take a proven property and invest that money into something unproven like a short-term rental in a really inflated market. I was looking at the Emerald Coast myself but the prices are ripe for a correction and short-term rental performance has been higher than average for the past two years, so you can't really predict how something will perform in the next 1-5 years.
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  • Jared Baker
    Hartford, WI · Member since 2016 · 162 posts · 50 votes
    4y

    Hi Cody,

    Why do you need to kick them out?  I can understand as a seller you want to make sure you have the most people interested in your property when you sell to get maximum value.  When I bought my triplex tenants were in place and MTM and they stayed there until they wanted to leave.  As the seller you can put look for a buyer that wants to keep them there.  I can image a new investor or even an experienced one would be okay with cashflow on day one, assuming the numbers work out, with a tenant already in place.

    Like you mention, I would offer it to the tenants first.  If they are not interested in purchasing then list, but perhaps put in a note with your agent (if that's how you sell it) that you are looking for someone that wants to keep the tenants.  If you are part of any investing groups, perhaps someone would be quick to pick it up.

    1Reply
  • Cody Smith
    OP
    Realtor · Panama City Beach, FL · Member since 2018 · 122 posts · 63 votes
    4y

    @Jared Baker Thank you for the response! I should have clarified a little more. The property is a nice single family in a desirable neighborhood. I only cashflow like I do because of when I bought and my current mortgage amount. This house would likely sell to someone as their primary residence. The house could slightly cashflow at market price, but I highly doubt any investor would put $50k down on it for the little cashflow. Plus, I think I would get significantly more interest if listed as a primary residence for someone.

    0Reply
  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    4y
    Quote from @Cody Smith:


    My dilemma: I placed a new tenant with a 12 month lease on my LTR on May 1st.

    I would like to give them first opportunity to purchase the property if they would like, but I’m not confident they will since this is an interim home for them until they build a home in a couple years. If they don’t want to, I would be selling and forcing them out 2-3 months into their new home and new lease. My lease does state the landlord can break the lease with 30 days notice to the tenant.

    I feel bad for having to possibly put them out after just settling in, but if I am going to make this move on a STR, I do not want to wait until their lease is up for fear of interest rates and prices rising even further.

    What would you do?

    If you sell a rental, the existing lease transfers with the sale. Any buyer will have to honor the existing lease or negotiate something different with the renter. In other words, your Tenant is safe until their lease expires next year.

    I think you're making a mistake. You have a really good investment and should keep it. If you want to invest in something else, consider cashing out some equity with a line of credit or - even better - sacrifice and save up. I also think it's a mistake to take a proven property and invest that money into something unproven like a short-term rental in a really inflated market. I was looking at the Emerald Coast myself but the prices are ripe for a correction and short-term rental performance has been higher than average for the past two years, so you can't really predict how something will perform in the next 1-5 years.
    The DIY Landlord Book4.7248 Reviews
    WebsiteView Page
    5Reply
  • Suann Lester
    Member since 2021 · 1 post · 1 vote
    4y

    I appreciate Nathan G.'s response. This post was a listed as moral dilemna so, do the very best by your tennants and wait for the right deal. 

    1Reply
  • Cody Smith
    OP
    Realtor · Panama City Beach, FL · Member since 2018 · 122 posts · 63 votes
    4y

    @Nathan G. Thank you so much for the response! It is very important to me to see all aspects of a potential decision, especially any reason why it might be a mistake.

    I definitely understand where you're coming from when saying it may be unwise to let go of a property that is performing well. My thought process is to increase the amount of income I have now to better prepare for when I leave the Army. Looking at a conservative, affordable type condo at the beach that I know people will always travel to seems like a safer purchase than other STR options, STRs being important to me because of the increased cash flow.

    I understand your mention of the inflated market in that area as well, I am definitely seeing it during my search. I guess I am just thinking about long term stability because of the type of property. In my head, I would be trading something stable with small cash flow for something stable with greater cash flow.

    Does that make sense? Are there pieces of this I’m not taking into consideration? Thank you again for your insight.

    1Reply
  • Layne T.
    Investor · Ft. Lauderdale, FL · Member since 2019 · 71 posts · 50 votes
    4y

    Hey @Cody Smith

    I think his point was (and I tend to agree) hold on to the property as long as it's not being a PITA (good property good neighborhood good tenants) and build the real estate portfolio with creative financing (including HELOC, etc.) and enjoy the appreciation from TWO properties not just one (the new STR). Also, AirBNB's can be finicky. You'll be happy you have stable cash flow coming should another black swan type event like Covid hit again.

    Great questions and research though!

    1Reply
  • Cody Smith
    OP
    Realtor · Panama City Beach, FL · Member since 2018 · 122 posts · 63 votes
    4y

    @Layne T. Right, I totally understand where you all are coming from! I've said for a long time I would never sell this property because of its performance and the fact I financed it with a VA loan, so I essentially have no money in it except the occasional repair. Maybe I am getting a little too excited with shiny object syndrome. I can't thank you guys enough for providing a counter argument and additional things to consider, it really does make me think harder about the decision.

    What are your thoughts on using a HELOC as funds for a down payment? I have two properties (LTR and primary residence) that both have equity, I have just been weary of using a HELOC that costs additional money to use as a down payment. I picture a HELOC for something like a BRRRR that I can use to pay the HELOC back asap versus paying for it longer term in addition to the cost of the loan.

    0Reply
  • Michael PorchePro Member
    Rental Property Investor · Boise, ID · Member since 2017 · 220 posts · 101 votes
    4y

    @Cody Smith I would probably do what you are doing. But before I did, I would look to see how much more funds I would be getting by buying this property on the emerald coast. I would put it through my STR Analyzer, which considers every cost. do the comps of the property I am buying to get as a detailed revenue projection I can. Then see if it's worth it. I would want to be making double minimum before I would say yes. Maybe more since it would be from an LTR to STR... so maybe 3X as much as a minimum.

    1Reply
  • Dave Skow
    Lender · Seattle, WA · Member since 2014 · 2k+ posts · 899 votes
    4y

    1)sell to the tenants - provide them with a seller  credit if they need one ...2) sell to new buyer  with caveat that the tenants  are allowed to stay until  their lease expires

    1Reply
  • Jerry W.Pro Member
    Moderator
    Investor · Thermopolis, WY · Member since 2012 · 4k+ posts · 4k+ votes
    4y

    @Cody Smith, this is a nice problem to have. I have been investing intentionally and unintentionally for over 40 years now. In looking back, all of us wish we had bought more properties. I know this sounds corny, but I sometimes put my real estate investing in terms of raising a herd of cattle. I understand that sometimes you have to sell some off to buy more. However if you can just add one or 2 to the herd instead of selling some off why not do that? I very often regret the ones I sold more than the ones I did not get bought. If you really want to have financial security in retirement then add don't just switch. If that is your only option then you may have to. Push yourself and come up with something creative. When I look to sell a property I often think what property is my biggest headache? Not what is my best property? Can you get a second mortgage? Can you get a HELOC, can you borrow from a relative using this house as collateral? You have other options you have not explored. Upsize your thinking and goals. Don't sell a good property to buy a great one, own a good property and a great one! Good luck either way bud. Thank you for your service.

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