If you are a real estate investor, there will likely be times when you will want to sell an investment property while you still have tenants living there. Cash flowing properties can be a fantastic way to build wealth, but so can selling your existing cash flowing property in order to free up equity to buy better ones.
Selling your property while tenants are living there can be tricky, but there can also be some advantages. After all, what investor wouldn’t like to purchase an investment property that cash flows and potentially appreciate from the second they close on the deal?
Be sure to follow these guidelines when selling your property while tenants are living there to maximize your return on investment and save everyone from potential headaches.
Have All Your Paperwork Up To Date
Having everything documented and ready to go will make your property more appealing to potential investors. Make sure you have copies of the leases, Profit and Loss Statements, recent tax returns, copies of utility bills, insurance statements, and receipts for any maintenance and repairs completed recently. This takes the guesswork out of what kind of ROI the investor can stand to make and will make the process easy for everyone.
As with anything else, sellers must disclose any relevant information about the property and that includes information regarding tenants. Make sure you properly disclose everything concerning leases on the building including rent amounts and time left on the leases, and of course any savvy buyer will research market rents when evaluating properties.
It is also important to understand how current rents will affect the value of the property. If tenants are paying less than market rents, it may be attractive to an ambitious investor who wants to create value by getting rent up to market level. A building already at market rents is valuable too, but will attract a different type of investor.
Consider Status of the Leases
Sometimes the building may be more valuable if you can deliver it vacant, or make renovations before the sale. You may consider not renewing your tenants’s leases. If that is the case, make sure you give tenants the proper notice that they will not have the option to renew.
On the other hand, a building already full of high quality tenants paying market rents can be extremely valuable to potential investors. Bottom line, consider the status of the leases on the building so the new buyer will have an opportunity to get the building into positive cash flow as soon as possible.
Understand Your Building’s Status
New York has some unique laws that pertain to certain Brownstones. Your building may be designated as an SRO, or Single Room Occupancy. These buildings tend to sell at low prices, but do not generate much income as rents are typically quite low.
While SRO’s are generally unpopular among investors, they can be extremely attractive to a motivated buyer who wishes to convert the building to a multifamily unit. The legal process to do this can be tricky to navigate, so make sure you are aware of all the details when listing your property.
Rent control can be another potentially sticky issue. Rent controlled apartments have restrictions on how much the rent can be raised every year. When listing your building it is crucial to know your building’s status and have the registration current with the DHCR.
Today’s investors often live several states away and buy properties sight unseen. The time to prepare to sell your property is the day you buy it. If you purchase a fixer upper, for example, as soon as you get it move in ready, you should make it part of your standard operating procedure to get professional photography or even videography of the interior and exterior of the building. This way, if you plan to sell it later, there will be a set of listing photographs showing the property in a state of pristine cleanliness. Obviously it will have to be disclosed that tenants are currently there, but a great set of photos goes a long way to making a quality listing.
Be Respectful of Your Tenants
Tenant/Landlord relationships have a tendency to get prickly, which is unfortunate because if it was any other business, tenants would be treated as the valuable clients that they are. Landlords should always, and especially when selling the building, treat the tenants respectfully.
As a landlord, you do not have to always tell tenants you are selling, but you must let them know if you will be showing the inside of the property to potential buyers. Also, if an investor wishes to purchase a property without tenants, you can negotiate a deal with the tenants to buy out their lease. The important word here is “negotiate” not harass or pressure, that is both unethical and illegal.
If you get started in the business of investing in New York City Brownstones, eventually you will find yourself selling one with tenants still living there. Remember to follow these guidelines, and the process will be seamless for all involved.
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Authored by: Stanley Montfort
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