Sell portfolio of SFR to investors, or sell individually to Owner/Occupants?

Question

I have a portfolio of 4 SFR, 3 in Metro Atlanta Georgia area, 1 in Quad Cities Iowa area. I'm thinking about selling them all.Why am I selling?

- I recently got into STRs, and I like that business better. Plan to 1031-exchange into an upscale STR.
- One SFR had a tenant just move out, another is going through an eviction, so with half of the portfolio vacant, it's decision time.

I'm trying to decide whether to sell them as a portfolio (at least the 3 Georgia ones as a portfolio, Iowa would probably have to be sold separately), or get the other 2 empty, fix them up and sell them all to retail homebuyers.

I have been approached in the past by investors who want to buy the Atlanta portfolio, but they always want to buy at a discount. I get that, investors get a deal and I get the convenience of selling them all at once. However, I'm starting to think I can get much more selling them individually to owner/occupants. Here's why:

While rents have increased, the home values have increased even more. So, the Georgia home values are way above the 1% rule.
House 1: Market value: $280k. Market rent: $1945
House 2: Market value: $250k. Market rent: $1685
House 3: Market value: $210k. Market rent: $153

So, if I have to reduce the prices to meet the 1% rule in order to sell the portfolio to an investor, that's a steep discount! I think it might be worth the trouble to fix up the other two and sell them all to retail homebuyers. That is, unless investors are now willing to pay more than the 1% rule used to dictate.

I know it will cost some time and money to get them vacant and fixed up, but the alternative seems to be to leave 10s of thousands of dollars on the table. I'm a broker, so commissions aren't a factor, and there's no loan on the Georgia properties.

What do you guys think? Am I missing something?

Chris Martin · Answer

Regarding "However, I'm starting to think I can get much more selling them individually to owner/occupants." I've listed my properties on MLS (via broker - I am not a broker) and sold to OO in 2024 and 2023. I have no regrets.

Selling by portfolio or selling the LLC is not currently in favor.

My 2 cents.

Matthew Hull · Answer

Rather than 1031 exchange, have you considered rent to own? Get buyers on board (maybe someone who doesn’t yet qualify for a mortgage, but is financially prepared to purchase). Have them sign a lease (rent) and then sell them the right to purchase (own) after a 2 year period (priced at estimated appreciation). The purchase of the rights would be non-refundable and would go towards the purchase of the home (in essence, a down payment). They would have immediate control and responsibility for improvements and maintenance.

What you’d get?

1) A down payment up front of $15-$30k per property (or whatever they can afford that you’d accept).

2) Rent (not applied towards purchase) - covers your mortgage, but no more maintenance or management fees, etc.

3) A windfall of the balance of the purchase price at the end of the term.

Bonus: if they want, they can apply additional funds towards the balance of the purchase price on top of rent.

Cash on cash on cash.

You don’t get as much leverage right away, but you get SOME immediate leverage and you’d have much better cash flow.

Also, title doesn’t change hands and if they back out, there are no refunds - they just terminate their lease and away you go and find another buyer.

I am only spouting something I heard on BP Rookies podcast, so I haven’t done this. However, depending on your goals, the concept may be a boon for you.

Dave Foster · Answer

@Mike McGee. The process you are referring to is what we call a consolidation exchange, where you would sell multiple properties to buy a  larger property. Selling the properties to investors as a portfolio would actually help with the time frame requirements of the 1031 exchange.  But you would have to balance that against taking a discount by selling as a portfolio.  You can still combine them in the 1031 even if they're sold as individuals.  The purchase just has to meet the timelines for each sale.

When you sell multiple properties each one is looked at as an individual exchange. Once you sell the first property you have 45 days to identify a replacement property and 180 days to complete the exchange and have taken title to the replacement. So if you're looking to sell all of them to purchase one, you would have to make sure all of them sell within that same time frame as the first property that gets sold. Any property unsold would affect the amount of proceeds you would have to reinvest with and cover less of the replacement expenses.

Josh Bowser · Answer

Hey Mike - I'd take a look to see how fast things are moving in the individual neighborhoods. I'm seeing renovated inventory sit, then trade well below list in a large portion of the ATL metro.

In theory, it would make more sense to maximize value through the retail route and enter a combined exchange, but finding the right buyer for all three in GA + 1 buyer in Iowa could be a better return on brain damage.

Good news is there is still a lot of cash out there seeking yield.

Sell portfolio of SFR to investors, or sell individually to Owner/Occupants?

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