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Kicking around selling a house to a tenant

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schwack schwack
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3:13p, 3/23/22
AG
We have a house that has a great tenant. Older person who is interested in buying it. We aren't in the market to sell our rentals, but told them to make an offer & we'd consider it knowing we can always say no.

It's a historic house (meaning old). It's very nice & sturdy with no issues we know of. That said at some point it will need a new roof (about the only thing we didn't have to do when we got it but its definitely not new & the estate we bought from had no records of how old it is), it needs some driveway work eventually & has giant old trees that will become a problem at some point. We owe nothing & have had it long enough that it is 5 months short of recouping all of it's money. Everything: purchase price, renovations, etc.

Considering that we are back to basically zero & it's 100% equity at this point, so we're thinking about it. Rent is $1200 but it would take years to get what we would make on it in one fell swoop - not to mention no more tax, insurance, lawn care bill for those years.

Thoughts?



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htxag09
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3:45p, 3/23/22
AG
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hopeandrealchange
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3:51p, 3/23/22
The big question for me when I think about selling rental properties is what would I do with the proceeds.
I can't find a better investment. And the thought of the tax consequences and repaying the depreciation always makes me decide to keep them.
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Diggity
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In reply to hopeandrealchange • 4:32p, 3/23/22
AG
hopeandrealchange said:
The big question for me when I think about selling rental properties is what would I do with the proceeds.
I can't find a better investment. And the thought of the tax consequences and repaying the depreciation always makes me decide to keep them.
this was my thought
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Agilaw
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4:46p, 3/23/22
AG
I think it would depend on the sale price. Most markets are still really good for Sellers. At $1,200.00, with taxes, insurance, upkeep, and possible capital expenses on the horizon, I would definitely look at numbers on a sale.
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schwack schwack
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5:51p, 3/23/22
AG
We have only owned the house for 5-6 years. The market here - even though nothing like big cities - is really high for this area right now & there's a shortage of nice properties. Realtors are constantly asking if we want to sell anything and we don't but this particular house would probably be the first that we would want to sell at some point.

We would probably 1031 it add some money & put it into some acreage or a nice, newer brick house with tons less maintenance. But, yes, it is harder to find investments.


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mwp02ag
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10:24p, 3/23/22
AG
Could you finance it for them and maintain some cash flow?
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Medaggie
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1:33a, 3/24/22
I think it depends on the market and if its a cash flow vs appreciation.

Most of my properties are in the Austin market and have sold 3 properties in the past 10 years obviously with regrets. I doubt I would ever sell again in Austin and if I needed the money, I would just do a refinance and pull the money out.

If its a cash flow market, I would sell and use the money elsewhere.
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CS78
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8:19a, 3/24/22
I've never regretted keeping one but I have regretted selling them. But, reduced maintenance and headache can be extremely valuable.

I have a couple I want to sell but they are going to sit right where they are until the longterm tenants move. It's just too easy to sign renewals and keep collecting rent.
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schwack schwack
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In reply to CS78 • 10:03a, 3/24/22
AG
Quote:
I have a couple I want to sell but they are going to sit right where they are until the longterm tenants move. It's just too easy to sign renewals and keep collecting rent.
Agree. This person is a great tenant, but it's obvious she's looking to buy, so we'll probably lose her when she finds something. That said, the house is PACKED with her things that she's perfectly curated to the space & it is really very nice, so I see why she would like to stay put and not have to pack up. We have not received an offer yet.

It is great if you can keep tenants long term & just keep getting that check. We bought a house last year with a nice family with good jobs in it that had been there 3 years already. We did a few exterior things, had a huge leaning tree removed that made them (and us) nervous & replaced a 17 year old HVAC unit with a new, efficient unit (which they greatly appreciated) - the inside is DATED, but we're not touching it until they move. We will need to do a couple of rent increases to get them up a bit, but they already know that. They were surprised we didn't raise it when we took over because, honestly, we didn't want to have to do the work on it yet & they are happy with it the way it is, but it created a huge amount of goodwill. They can stay as long as they like - I hope it's years! I am not looking forward to removing 80's wallpaper everywhere.
Quote:
But, reduced maintenance and headache can be extremely valuable.
That's the thing with this house. It's historic - upkeep is higher & any changes have to be approved. Not too much of a hassle, but still it can be a lot more expensive - but the neighborhood is great.
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schwack schwack
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In reply to mwp02ag • 10:08a, 3/24/22
AG
Quote:
Could you finance it for them and maintain some cash flow?

I'm pretty sure she's a cash buyer - just sold her old house in Manor.... but we'll see once/if she makes an offer. But yes - for her I would probably owner finance.
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mwp02ag
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11:48a, 3/24/22
AG
Man likes CS, I regret selling the ones I've sold, but I can see why this makes a good candidate to sell due to the upkeep. Our primary is a 111 year old sfr turned duplex and later triplex. Even with all new mechanical systems and foundation it blows my mind how much upkeep she needs. The name of the game is turn four houses into a hotel right?!?

Conversely, If you were to refi, do some renovations/repairs could you increase rents and still have some cash for another deal?

Rents have to go up over the next few years at a minimum, cash flow today will grow and help maintain purchasing power as inflation roars. In my mind everything needs to boil down to purchasing power and how to maintain it.
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mwp02ag
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11:49a, 3/24/22
AG
PS, I really appreciate you posting this. It's thought provoking and I like to learn from you guys.
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schwack schwack
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In reply to mwp02ag • 2:40p, 3/24/22
AG
Quote:
could you increase rents and still have some cash for another deal?

Not really. We are at the highest rents here already in a town of around 18-19,000 population where there are no real high pay jobs. This particular house is already renovated with updated kitchen & bath, flooring, HVAC, etc. - it is really nice.

Just weighing selling right now when things here are amazingly high vs some monthly income & with that, all the maintenance, tax, insurance, hassle, etc.

I am very thankful for advice I get on this forum!


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CS78
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3:58p, 3/24/22
And, what would you do with the cash?

I still have some 5/1arms I need to pay off. Once that's done, I plan to sit in a permanent holding pattern of a mix of fixed 30 year loans and free and clear houses.

Knowing me, if I sold anything after that, it would just be new boat time.
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schwack schwack
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In reply to CS78 • 4:23p, 3/24/22
AG
Quote:
And, what would you do with the cash?

That is the "problem". We are free & clear on everything & several of our rental properties are recouped, so all equity at this point.

I guess if we sold this one, we'd attempt to 1031 it into something else. We'd have to add money but would look for something with less maintenance: newer brick house - no more 100+ year old wood siding & paint - or maybe more land. We really go back & forth on it. I guess if they offer us an incredible deal, we'll take it. If they low-ball, we won't.

Our plan all along has been to have them all back to zero and sell them off one per year as we need or want to. Want to avoid giant gains as we get older and don't want to pour it into more property. We are old already & in no hurry to start the selling process because we like the monthly income & still self-manage.
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mwp02ag
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In reply to CS78 • 6:32p, 3/24/22
AG
CS78 said:
And, what would you do with the cash?

I still have some 5/1arms I need to pay off. Once that's done, I plan to sit in a permanent holding pattern of a mix of fixed 30 year loans and free and clear houses.

Knowing me, if I sold anything after that, it would just be new boat time.
This brings up an interesting quandary I have been worrying about. What will lending look like for investors as we enter a rising rate market? Say I have a brand new 7/1 arm on an investment property, if it can reset up to 2 points higher per year not to exceed 10% and rates are over 10% I'm not going to refi that property again am I?

I tried like hell to get a 30 year fixed but the Ability to Pay rule is not kind to self employed individuals early in their career. We killed it last year but expensed everything we could and can't meet DTI on this monster cash cow we call a home.
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mwp02ag
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In reply to schwack schwack • 6:36p, 3/24/22
AG
Sit and think on each for a bit, play out each scenario in your head exactly how you would want it to go. Which thought feels better?
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jamey
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10:06p, 3/24/22
AG
When I considered what to do with an inherited house that's paid off I looked at the sale price going into the stock market with average returns vs annual rental returns minus consideration for new roof, AC general upkeep, plus appreciation...minus the hassle of renting


I thought the cash in the stock market sounded better especially if it's money I can just let grow for a while
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hopeandrealchange
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In reply to jamey • 6:46a, 3/25/22
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one MEEN Ag
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In reply to schwack schwack • 9:41a, 3/25/22
AG
I don't think this tenant is going to offer you a price that the open market will fetch. Statistically, its just not probable that the one person who will pay the top dollar for the house is the one already renting it. Just keep that mind, if this is a nice house and nice houses are rare in your area-you could easily be writing a 20,000 check of goodwill to this tenant. Them offering you a price will be an emotional play based upon how they've been a good tenant+ a 'fair market price' that is a 10% undershoot.

One thing to keep in mind is that mortgage rates have skyrocketed lately. You might see a slow down in potential buyers+ lower income buyers having to balk because the interest payments are just too much.
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one MEEN Ag
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In reply to jamey • 9:50a, 3/25/22
AG
jamey said:
When I considered what to do with an inherited house that's paid off I looked at the sale price going into the stock market with average returns vs annual rental returns minus consideration for new roof, AC general upkeep, plus appreciation...minus the hassle of renting


I thought the cash in the stock market sounded better especially if it's money I can just let grow for a while
My rule of thumb is that if you're not interested in cashing out a fully paid off house, and finding 3 more homes to get mortgages on, seeking out the best homes, and create cashflow then to just sell the original house. Its a money mindset. When its a fully paid off house, you expect it to to work like the stock market. Just set it and forget it. Everything is an inconvenience. When your leveraged, debt forces you to be disciplined and it changes your expectations. This is a part time job at the very least.

Also, inherited homes also have huge emotional attachments. These tenants aren't just 'not taking care of a home.' They aren't taking care of the house your "grandpappy built and your parents grew up in."

For straight up comparison of renting a paid off home to a long term tenant versus the stock market, there are very few homes that outpace the stock markets. Even these little bitty homes in california that went from 100,000 to 5 million in 40 years still get dwarfed by putting 100k in the stock market for 40 years. You have to be levered to make real estate growth work. Now from a retirement standpoint, having 3-4 rentals fully paid off is nice mail box money.
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schwack schwack
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In reply to one MEEN Ag • 9:52a, 3/25/22
AG
Agree & they haven't offered yet, so not sure if they've changed their mind or are waiting for us to give them a price first but we aren't gonna do that. We were clear that we're not looking to sell but would consider it. We know where it would list & probably what it would get on the open market, so we definitely won't sell ourselves short. If it doesn't happen we are fine with holding it.

We can always rent this house with no problem. We've never lost a month rent in between tenants & no one has left due to any issues. The first tenant was elderly, ill & went to live with relatives, the second bought a house & now this one looks like she will do the same. Each rental so far has been word of mouth and finalized before the tenant moved out - past tenants of ours or friends of current ones.

You are right about interest rates but with this particular sale, I'm about 100% sure it will be a cash deal since she just sold her house in Manor.
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one MEEN Ag
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In reply to schwack schwack • 9:57a, 3/25/22
AG
schwack schwack said:
Agree & they haven't offered yet, so not sure if they've changed their mind or are waiting for us to give them a price first but we aren't gonna do that. We were clear that we're not looking to sell but would consider it. We know where it would list & probably what it would get on the open market, so we definitely won't sell ourselves short. If it doesn't happen we are fine with holding it.

We can always rent this house with no problem. We've never lost a month rent in between tenants & no one has left due to any issues. The first tenant was elderly, ill & went to live with relatives, the second bought a house & now this one looks like she will do the same. Each rental so far has been word of mouth and finalized before the tenant moved out - past tenants of ours or friends of current ones.

You are right about interest rates but with this particular sale, I'm about 100% sure it will be a cash deal since she just sold her house in Manor.
Sounds like this place is worth keeping in all honesty. Once you get through the temporary pain of tree removal, and a new roof, whats the timeline on the next big capex project? Air conditioner about to croak or will it have a few more years?

And cash deal sounds great. Just don't accept rubles.
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schwack schwack
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In reply to one MEEN Ag • 10:37a, 3/25/22
AG
Quote:
Air conditioner about to croak or will it have a few more years?

The HVAC is 5 years old, all electrical & plumbing was redone. Nothing else big on the horizon.

The only reason to consider this is if they REALLLLLLLLLLY want it.
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AggieGunslinger
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1:22p, 3/28/22
AG
We just sold our last two. Maintenance was becoming an issue on 1 and the other is in a very desirable neighborhood so getting out now and moving the money to something else was a win.

I will miss the income but not the headaches,
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schwack schwack
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In reply to AggieGunslinger • 7:39a, 3/29/22
AG
Quote:
moving the money to something else was a win.
Where did you put it?????
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AggieGunslinger
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7:43a, 3/29/22
AG
Pais off our cabin in broken bow
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schwack schwack
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In reply to AggieGunslinger • 8:14a, 3/29/22
AG
Great use of the money!
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schwack schwack
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11:28a, 12/18/24
AG
Old post with updates. We never sold the house that I originally posted about, but I did mention this other one in the comments:
Quote:
We bought a house last year with a nice family with good jobs in it that had been there 3 years already. We did a few exterior things, had a huge leaning tree removed that made them (and us) nervous & replaced a 17 year old HVAC unit with a new, efficient unit (which they greatly appreciated) - the inside is DATED, but we're not touching it until they move. We will need to do a couple of rent increases to get them up a bit, but they already know that. They were surprised we didn't raise it when we took over because, honestly, we didn't want to have to do the work on it yet & they are happy with it the way it is, but it created a huge amount of goodwill. They can stay as long as they like - I hope it's years! I am not looking forward to removing 80's wallpaper everywhere.
They've been in there all this time with some relatively small rent raises along the way & no more major expenses for us - so it was still working - UNTIL we discovered that the wife was keeping some kids daily. Our lease does not allow that, nor does our insurance. So we gave them a 3 day notice to cure it or move.

They understood & it was discussed very amicably. They immediately stopped keeping the kids & asked if we'd sell to them. We've always dreaded the renovation on that house - so many cosmetic issues needed for us to get market rate & we've been content with the arrangement because they were never late and are nice people. Would take a lot of time to recoup those improvements if we'd had to do them and a lot of work on our part.

We worked out an owner finance deal for them. Decent down payment, 10 years with a penalty if they refinance within the first 5 years - after that, no penalty & we hope they do. Price was fair - a hint below market for the condition and a bit above current interest rates. If they put in the time & effort, they will make great money selling at some point. The neighborhood is good & houses are getting renovated.

Quick close & now theirs! They are happy. She's back to babysitting & he's thrilled that there is a 30 year transferable warranty on the HVAC we put in & they will have a paid off house in 10 years. We are happy to still have it making money for us with no hassle. It's a first for us, so we'll see.
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NoahAg
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In reply to schwack schwack • 4:50p, 12/19/24
I'm interested in how you arranged this deal. I'm so risk averse, LOL, that when I decide to sell I'm not sure how I could seller finance for someone. Who drew up the contract for you?

How "decent" of a down payment, if you don't mind? Are you saying their note with you is 10 years?

Anyway, congrats on the deal!
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Matsui
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In reply to schwack schwack • 5:02p, 12/19/24
AG
Awesome update.
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schwack schwack
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In reply to NoahAg • 11:10a, 12/20/24
AG
Quote:
I'm interested in how you arranged this deal. I'm so risk averse, LOL, that when I decide to sell I'm not sure how I could seller finance for someone. Who drew up the contract for you?

How "decent" of a down payment, if you don't mind? Are you saying their note with you is 10 years?

Anyway, congrats on the deal!
Thank you!

We basically arranged it ourselves. We have a closing company in town that we work with a lot on traditional buying/selling. Very easy process & low cost - especially on this where there are no realtor fees. There is an attorney on staff & 2 great people that shepherd the deal thru & arrange all the paperwork, title, tax stuff, recordings, etc. thru closing at their office. We went from offer to closing in less than 2 weeks.

The note is 10 years. We used the standard Family Residential Contract with the Seller Financing Addendum and added some additional terms like a penalty for early payment & late fees. If they refinance in years 1-5 they have to pay us a percentage penalty. Year 6 that goes away because we make most of our interest in the first 5 and would really like to be completely done in 5, but if we have to carry it for 10, that's OK, too.

They have to provide us with receipts every year of paid insurance (listing us) and paid property tax.

We only considered this because they have been great, responsible tenants of the previous owners & ours for several years. Never late. Not sure I'd risk owner financing on an unknown person, but we have friends that do it & it seems to work out for them. This is a very affordable house for them & not a huge "loan" for us to offer. It's a nice, 50's brick build in a great neighborhood. If things go south, we'd just get it back.

edit: down payment was 10%
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