Selling and Buying Investment Property with Tenants Onsite
Buying your first investment property is a massive undertaking and has a learning curve. One of those elements is when you're ready to sell your property and purchase a new one. However, sometimes you will still have tenants living in your old property or even in the new property you're looking to buy. Please find out how to navigate both these situations in our blog.
Selling and buying investment properties is no small feat, especially if you have tenants onsite.
The current real estate market is booming and recent sellers typically sold their homes for 99% of the listing price, according to the National Association of REALTORS®. In some cases, you have a rental property that you want to sell quickly while also looking for a new investment property. However, you might have tenants with active leases in your old property.
Depending on your state, tenants have important protections that agents and landlords have to navigate. Of course, having comprehensive knowledge about these regulations makes selling the property less hectic.
Selling The Rental Property
There are many reasons to sell an active rental property. For example, if you’re moving to a different area, it might make sense to sell the rental to help avoid the hassle of having a long-distance tenant.
Once you decide to sell your property, you will need to inform the tenants. In almost all cases, selling the property does not automatically terminate a lease agreement. You should want the tenants to feel respected so that you're not managing conflict during the sale of the property.
Removing Month-to-Month Tenants
Tenants that pay month to month agree to "no cause" termination. In other words, a landlord can terminate the agreement without giving a reason, so long as they give 30 days' notice (or at least one rent-paying period, depending on your state's laws). Once a landlord provides notice, it's up to the tenant to hand over their keys and leave.
Nullifying Fixed-Term Leases
A typical tenant arrangement takes the form of a lease. Most leases go for one or two years, which can make moving with an active lease difficult. Therefore, if the tenant has a fixed-term lease, the landlord or agent will need to arrange an early move-out.
Option 1: Wait it Out
If you have time on your hands, the path of least resistance is to simply wait until the lease expires. However, the landlord should inform the tenant early on that their lease won't be renewed so that they have plenty of time to make other arrangements.
Option 2: Buy Out Your Tenant
Landlords may be able to get their tenant out early by offering to compensate them for the trouble of finding a new home. This option may help the tenant cover the cost of a first, last, and a deposit on a new place, simplifying their transition. As an agent you might also research the price of a move to determine how much money your client should offer your tenants.
Option 3: Make an Arrangement
Many landlords make successful arrangements when selling a rental property. Look into transferring the tenant's lease to the property's new owner if it's successfully sold. Ensure that all parties (the buyer and the tenant) are completely on board with the new arrangement to avoid issues down the road. This may include allowing the buyer to perform a tenant credit check or criminal background screening.
In some cases, a tenant may be an ideal buyer. Consider a financing arrangement that lets the tenant invest their monthly rent into the purchase of the property.
Option 4: Evict Your Tenant
As a last resort, your client may have to consider eviction if the tenant has violated the terms of their lease.
Listing and Showing an Occupied Unit
Once your client and their tenant have come to an arrangement, it's still too early for your client to wash their hands of landlord responsibilities. There are a few things to do during the selling process.
Tenants may or may not be understanding of your need to show the unit while it's occupied. A tenant might refuse to clean the apartment or leave during a showing, which can complicate your marketing or staging. In most states, you need to give at least 24 hours notice before showing the apartment to potential buyers. Don't hesitate to make an informal arrangement with the tenant—a token of your appreciation in the form of a gift certificate can motivate a tenant to cooperate with your sale.
Finalizing the details
Handling these situations can be difficult for both the landlord and the renter, so these steps can help make the process less tense and easier for both tenant and property owner. Once you've determined the best course of action and everyone agrees, you can rest assured knowing you've done your due diligence when it comes to selling a rental property with tenants on site.
Buying Your Next Investment Property
Now that you've sold your previous rental unit and are ready to level up to your next investment property, you'll want to thoroughly prepare before deciding. If you're buying a unit with tenants already in it, the first step is to take a look at their lease agreements. If you are not comfortable with what is outlined in these leases, speak with the seller and negotiate changes before you buy your new property.
Also consider the following factors when you're buying a new investment property:
Planning and Research
It pays to know as much as you can about the rental home's state, city, and county. Therefore, it would help to research state regulations, real estate trends, the job market, and population demographics.
Condition
Since you're buying a new rental home, a fixer-upper probably won't be your best choice, since it takes more work, time and money than a home that needs only minor care. Even if you're comfortable buying an "ugly duckling," you'll need to know the cost of repairs as well as how long those repairs would take. Each month the home stays empty as you make improvements is a month of lost rental income. Look for a property where you can renovate and improve the value quickly in order to refinance.
Location
The location of a rental home is just as important – if not more so – than the home itself. A property in an undesirable area will be more difficult to rent and bring in less money each month than a home in an attractive location. That's why it's essential to buy a home located in a good and safe neighborhood where curb appeal is high. A good school district is also an important consideration since it will help your rental home appeal to families.
Costs and expenses
Research what costs and expenses you'll have as a landlord. Use your estimated monthly income and fees to determine your net rental income. This number represents how much profit you'll make after your expenses. The following are just some of the expenses you're likely to encounter:
- Insurance
- Closing costs
- Renovation
- Maintenance
- Property taxes
- Property management assistance
Average rent in the area
The amount of rent you'll be able to charge should roughly line up with the area's average. That way your rent is competitive, and you'll be more easily able to find and attract renters. Start with the average rent in the neighborhood and work from there. Consider how your rental home is worth more or less than similar neighborhood homes and why.
The 1% rule
It's generally a good idea to follow the 1% rule when buying a rental home. This number represents each month you should bring in a minimum of 1% of the home's purchase price, plus additional costs you incurred, such as repairs. Of course, this rule isn't iron-clad. However, you may find a home in an expensive popular neighborhood, but try to limit your costs by keeping your monthly mortgage payment at or below 1% of your investment. This method ensures you're not having too much money going out.
Property management
Some property owners prefer to handle issues such as collecting rent and arranging for repairs themselves, while others hire a property management company to take care of these matters. Most of these companies charge about 10% of the property's monthly rent, and some landlords think this is an unnecessary expense. In contrast, others believe it's money well spent to avoid the time and effort involved in dealing with these issues.
Risks
As you map out your finances, make them flexible enough to handle some things that can go wrong. Risks associated with rental homes include the following:
- Rental market - You have more trouble renting the home out than you've anticipated.
- Closing costs - The need for expensive repairs increases the amount of money you'll spend when buying an investment property.
- Problem tenants - Tenants who habitually pay their rent late or not sometimes result in eviction proceedings. Tenants may also leave your home and property in poor condition resulting in a loss of time and money for repairs, delaying when you can find new tenants.
