My California Rental, sell now?
Realtor · Sacramento, CA · Member since 2019 · 61 posts · 21 votes
I have a rental in CA where I live that I bought 2 years ago. Now that I’ve joined BP I realize it’s not a good rental investment (thanks to the calculators-although I pretty much knew).
I just signed new renters to a lease mid-October but I can see 1. It’s not a good rental.
2. Our market has all the indicators we may see a drop before long in prices.
Luckily it’s CA and in 2 years I saw a $50k appreciation at least.
Question is can I sell now legally and then if so how do I keep the tenant from being pissed at me and doing damage. I have a $2500 deposit and they had excellent credit so I’m hoping that’s enough and if I try to help them find a place. (I’m a realtor here so that might help).
Thoughts - Suggestions??
@Kelly Pierce i was actually the tenant in a similar situation not too long ago. It is difficult being in those shoes and having the home sell out from under you. it's invasive, it's stressful, and it's expensive. The good news is California properties tend to sell quickly if priced right, although you know the real estate market better than I do in your specific property's area.
Cash for keys is not a bad option if you think you can come to an agreement with the tenants. Waiting out the lease isn't always in your best interest, especially if you think the market is softening. It may be worth it to offer them something like their deposit back in-full immediately, along with moving costs (idk $300 for a moving truck?) and an extra $1000 toward their new rents/ deposits (just throwing something out there, i'm sure you can find what works for you to offer them). Get creative if you need to. But showing that you're willing to work with them will go long and far when it comes to them working with you on the sale (them accommodating showings and open houses).
I read a horror story on BP not too long ago about a tenant that knew his rights, and followed them, but would do things just to make it uncomfortable. example, he would be in solely his bath robe for showings. It seems ridiculous but its not uncommon... or illegal, so tread lightly. Cali is very tenant-friendly, so if you go this route, make sure to consider the tenants and their needs. Even if just for the purpose of protecting yourself.
@Kelly Pierce Welcome! The new lease signed in October has to be honored by the new owners. The tenant can choose to find a new place if they wish but would need to get out of lease from new owner. Almost 5 moths have lapsed since the last lease was signed so not too hard on tenants or new owner. Yes, you can sell legally. Pissed off tenant you will know in time. Good luck and keep us posted.
@Kelly Pierce if you are wanting to sell the property prior to there being a decline in value in your property/market you can do that, however, remember the lease must be honored. We're in California and the right of renters here is much stronger compared to the rights of landlords.
You can definitely try to move them prior to selling by asking them to move, doing cash for keys prior to the end of lease date, finding them a new place and accommodating them or trying to evict based on them breaking the lease agreement. Remember the California laws benefit the tenant not you the landlord.
In your situation I recommend you either wait until their lease expires or you sale the property which the new owner will take over the lease. You may not get what you want out of the sale with the tenants in place that is why many investors here in California try to sale as soon as the lease is over and the unit can be delivered vacant.
@Dylan Vargas & @Michael Tripp Thank you both, you summed up exactly what I was thinking. Unfortunately with prices here this one won’t go to another investor so it will become an owner occupied. Meaning no one will want or be able to afford a tenant in it as they will be paying less than the new owners payment will be.
Guess I’ll just wait to put it on the market 30-60 days before the lease is up. That’s when I have to notify the tenants anyway.
@Kelly Pierce i was actually the tenant in a similar situation not too long ago. It is difficult being in those shoes and having the home sell out from under you. it's invasive, it's stressful, and it's expensive. The good news is California properties tend to sell quickly if priced right, although you know the real estate market better than I do in your specific property's area.
Cash for keys is not a bad option if you think you can come to an agreement with the tenants. Waiting out the lease isn't always in your best interest, especially if you think the market is softening. It may be worth it to offer them something like their deposit back in-full immediately, along with moving costs (idk $300 for a moving truck?) and an extra $1000 toward their new rents/ deposits (just throwing something out there, i'm sure you can find what works for you to offer them). Get creative if you need to. But showing that you're willing to work with them will go long and far when it comes to them working with you on the sale (them accommodating showings and open houses).
I read a horror story on BP not too long ago about a tenant that knew his rights, and followed them, but would do things just to make it uncomfortable. example, he would be in solely his bath robe for showings. It seems ridiculous but its not uncommon... or illegal, so tread lightly. Cali is very tenant-friendly, so if you go this route, make sure to consider the tenants and their needs. Even if just for the purpose of protecting yourself.
Thanks Sasha and yet certainly not my intention to hurt them - they are good people. I may consider the cash for keys option. Would want them out before listing if possible.
I have been in that situations with tenants lots of times, what worked best for me is to just talk to the tenants, tell them where you are and ask them what would work for them?
Or my next option is to just ask them how the lease is working out for them, and ask if they had and thoughts about moving? I have had tenants tell me they would really like to move out right now they just didn't know how to tell me.
if that happens all your problems are solved.
I have a rental in CA where I live that I bought 2 years ago. Now that I’ve joined BP I realize it’s not a good rental investment (thanks to the calculators-although I pretty much knew).
I just signed new renters to a lease mid-October but I can see 1. It’s not a good rental.
2. Our market has all the indicators we may see a drop before long in prices.
Luckily it’s CA and in 2 years I saw a $50k appreciation at least.
Question is can I sell now legally and then if so how do I keep the tenant from being pissed at me and doing damage. I have a $2500 deposit and they had excellent credit so I’m hoping that’s enough and if I try to help them find a place. (I’m a realtor here so that might help).
Thoughts - Suggestions??
You have no reason to worry about the tenant. They are protected by a lease and the new LL would have to abide by the lease. You can inform them that you will be selling but they are still liable for the lease. They can’t just leave. Now if they want to leave it owns up your buyer pool to regular buyers not people who want rentals or people that can wait for a lease to come up for renewal and go from there. Just like the tenant. If they destroy the property that’s the new owners problem. If they destroy the property while you own it they would be liable for damages just as if they were if you weren’t selling.
You really are not obligated in any shape to find them a place or do anything at all. The lease is still a legal binding document. It would be no different if they leased a car and the lender they used was bought by another lender. Their check instead of going to Kelly Pierce Land Mogul it will go to New Giant Landlords Corporate Management Team.
You can handle the sale yourself if you’re a agent.
I have a rental in CA where I live that I bought 2 years ago. Now that I’ve joined BP I realize it’s not a good rental investment (thanks to the calculators-although I pretty much knew).
I just signed new renters to a lease mid-October but I can see 1. It’s not a good rental.
2. Our market has all the indicators we may see a drop before long in prices.
Luckily it’s CA and in 2 years I saw a $50k appreciation at least.
Question is can I sell now legally and then if so how do I keep the tenant from being pissed at me and doing damage. I have a $2500 deposit and they had excellent credit so I’m hoping that’s enough and if I try to help them find a place. (I’m a realtor here so that might help).
Thoughts - Suggestions??
Thoughts: My thought is how can you state that a RE that appreciated $50k in two years is not a good rental investment unless you were trying to imply it was a great rental investment. I do not know what your LTV and purchase price was to be able to calculate ROI or COC but you made an average of $25K/year in appreciation. I suspect your ROI is over 25% annual unless you have a low LTV. Do you know what the average cash flow is for the cheaper Midwest properties? Their average rent is maybe half of what you made via appreciation per year. Use the 50% rule to get to maybe $500month prior to debt service. They are probably doing great if their real cash flow is as high as $200/unit and most will barely have any positive cash flow.
Suggestion: keep the property realizing that historically CA ROI is near the tops in the nation and you have already experienced why this is the case. Remember that RE appreciation has a tight correlation with rent appreciation. Remember you are prop 13 protected. if you have a fixed loan then all large costs are fixed. Remember you get to write off the depreciation. Remember that every month that the tenants are paying your mortgage that they are paying a significant amount toward your equity (assuming not an interest only loan).
Good luck
@Kelly Pierce i think you can come up with some unique incentives to get them to move, outside of just finding a new rental, which i suggest you do anyways.
Just come clean to them that you are going to sell the property. You could even give them the first right to a lease option where you will sell to them after a year or two.
My guess is that a good incentive is to flat out agree to pay their moving cost. Yes you lose some upfront, but you would have less worries of property damage.
Thanks Dan Heuschele for your post. Sorry for the delay in getting back to you. YES you are correct CA appreciation is A++. I did have a couple good years but locally here there is a fear our prices may not be stable - of course I cannot predict the future and since this post I've heard a few sides to the predictions. I feel like a buy & hold should have cash flow and mine has none and not even any $$ to cover capital expenses or repairs. This is why I felt it was not a good one to hold. I would prefer cash flow and if I get appreciation call it a bonus. Obviously I still have a lot to learn but most investors in this area seem to be selling this year - I'd like to move into Multi-family myself.
Thanks Dan Heuschele for your post. Sorry for the delay in getting back to you. YES you are correct CA appreciation is A++. I did have a couple good years but locally here there is a fear our prices may not be stable - of course I cannot predict the future and since this post I've heard a few sides to the predictions. I feel like a buy & hold should have cash flow and mine has none and not even any $$ to cover capital expenses or repairs. This is why I felt it was not a good one to hold. I would prefer cash flow and if I get appreciation call it a bonus. Obviously I still have a lot to learn but most investors in this area seem to be selling this year - I'd like to move into Multi-family myself.
I have been hearing about the high prices of Cal RE for 30 years but it keeps rising. No one knows what the market will bring in the future but this also holds true of the higher cash flow markets.
What historically has happened is that CA RE keeps appreciating faster than inflation and the low appreciation markets may, if they do well, keep up with inflation.
I am surprised that after significant appreciation that you are not cash flow positive. I suspect you made some of the typical newbie errors and have learned from them.
The lease has to be honored or get the tenant to agree to a mutual release from the least. I do not think moving expenses will suffice to entice the tenant to move. Moving is a hassle. Why would someone choose to do that for just the actual cost. I recommend you test the water to see if there is something reasonable that you can do to get the tenant to release you from the lease but expect that you may need to wait for the lease to expire before you can get them to vacate.
Good luck.
I own a couple of rentals in West Sac. Rather than sell, I'm doing a cash out refi. After payments on the loans, both houses are a little above break even (after all expenses and w/ vacancy and cap ex). There's enough cash to buy multiple (and much more profitable) properties in other states and keep 2 CA properties that will continue to appreciate. I did sell an Oak Park property last year because it doubled in value. Should have kept it.
@Kelly Pierce. I just found this post and wanted to check in on your further thoughts and plans regarding your property since the lease is coming up...I have eye-balling small multi-res in the Sacramento-San Francisco corridor and also up to Chico...cap rates (5% or so vs 4%-3% in SF) have kept me from pulling the trigger.
I see you have/had an interest in moving into multi-family and would like to know if you plan on going out of state or staying in California.
@Jim Watson like you approach with refying...what states are you targeting?
@David S. I would love to stay here as I currently manage my own. Just don’t know if the returns will be there. Currently not seeing something I’d want.
@Kelly Pierce We talked a while ago. I wonder if you ever got around to do the calculation? As you may recall I was planning a 1031 exchange and am now in escrow for the sale of my CA property. I did the calculations over and over and even with small multi-family in CA it just does not add up. I am going the turnkey route. As I said when we talked it is most important to ask yourself what your desired outcome is. If you want good cash flow with high-quality properties I can't find it in CA and I believe we have reached a peak in CA. I wish you good luck and if you like to talk again, let me know.
Now would be a good time to at least consider selling and diversify.
There are many 1031 exchange alternatives. Some involve no management responsibilities at all. Best of luck to you.
CA is a different beast compared to the rest of the US market. I own several rental properties in Los Angeles. Initial cashflow is always a challenge but rents always go up... and property value will always appreciate at the end (higher % than most markets). Even after the last bubble crash which was the worse ever... value still came up higher than before.
Just out of curiosity... How negative is your cashflow? Is the property a SFR... and when was the last time you raised the rent? I believe you can raise the rent up to 10%max annually on SFR... and 4% max on multi units under rent control.
I have maxed the annual rent cap on all my underperforming properties... which in some cases ultimately made tenants move. A blessing in disguise which allowed me to capture market rents. Now all my properties are cash flowing.
@Alvin Uy technically my property with the mortgage is not cash flowing but it is covering actual expenses. There was just no extra for maintenance and capital expenditures when I made this post. At this point I've made an agreement to raise the rent 10 percent beginning at the new lease period coming up in Oct. and the tenants have agreed to it. Basically if I calculate capital exp and maintenance etc. the way you should on the BP calc., I still need to raise rent another $200 in order to "cash flow" around $200. When I bought the home I didn't understand or know about these calculations and because CA appreciates so well and I knew I could cover them rent, it felt like a good buy. In the almost three years since I bought it I've probably gained $50k-$70k in value. So not terrible for sure. Wish there was a calculator for IRR
If you are seriously leaning towards selling it, I would be upfront with the tenants as soon as possible........ they may want to start looking way before the lease is totally up and you can always offer to sell the house to them....
@Alvin Uy technically my property with the mortgage is not cash flowing but it is covering actual expenses. There was just no extra for maintenance and capital expenditures when I made this post. At this point I've made an agreement to raise the rent 10 percent beginning at the new lease period coming up in Oct. and the tenants have agreed to it. Basically if I calculate capital exp and maintenance etc. the way you should on the BP calc., I still need to raise rent another $200 in order to "cash flow" around $200. When I bought the home I didn't understand or know about these calculations and because CA appreciates so well and I knew I could cover them rent, it felt like a good buy. In the almost three years since I bought it I've probably gained $50k-$70k in value. So not terrible for sure. Wish there was a calculator for IRR
There are so many investors on BP that would favor cashflow vs appreciation... especially those who do not invest or understand the uniqueness of CA market. In my honest opinion, I would keep the property if I were you. Your cashflow issue is temporary... rent will always rise as there's a shortage of housing in CA (ironically due to rent control in my opinion). You may find cash flowing properties OOS now but those may not necessarily experience the same opportunity to appreciate as much down the line compared to CA properties... nor would you get the same amount of cashflow you may expect (the grass always seems greener on the other side). OOS investing will pose its own sets of issues. I would rather have both cashflow + appreciation.
At the end of the day, this is an "investment" property for you... With the $50-$70k you gained, I say you are currently on the upside on an overall "investment" perspective. I never regretted keeping any of my CA properties... but I do know many CA investors that regret selling their properties. Now I'm leveraging the crazy equity I've built up to buy more (even considering OOS now that Im better positioned). I would look into a cashout refi or HELOC instead of selling if I were you... Perhaps re-invest that equity for cashflowing ones OOS to balance out your cashflow deficiencies.
Have you thought about selling directly to the tenants? If they have good credit and you had reviewed their bank statements to make sure they had enough for the deposit, maybe there is a deal to be had for both parties. If you do the deal, you save on the commissions.