Renter wants to buy

[Ciarraghe G.]

Hello! 

I have a townhouse that is rented under a 2 year lease with the renter's intention to extend 5 more years. However the renter just approached us and asked if we'd consider selling the rental to them. We weren't intending to sell but now it's an interesting thought and I'm wondering how best to proceed. 

I currently have 3 properties all in the Portland, Oregon market. This one has 230K in equity and a 550/mo cash flow on a 4.75% 30 year mortgage. If I refinanced at 3.25% that my lender is offering me, I could get that up to 850/mo, which is what I was starting to work on until the renter approached me. My taxable amount would be 125K from appreciation, plus depreciation recapture of another ~60K on this property so this would force me to either pay a LOT of taxes or do a 1031 exchange which is a world I know nothing about and is frankly terrifying. 

So, I have a couple of questions- is there anything unique about selling to a renter? The rent is $2400 a month and there are 14 months left on the lease so I'm losing a lot of guaranteed income by selling, however I feel like I could buy multiple properties in cheaper markets with the amount of cash this will free up, which will probably replace the $850 a month cash flow by a multiple. 

I expect our market will continue to appreciate through the summer as well so delaying is in my favor in that aspect. One attractive thing about selling is that this community is due for a major special assessment in the next 3-5 years and the HOA fees are already high and increasing 15-20% per year. I believe the next project due is re-roofing and then painting.

I'm worried about not being very diversified as well being all in on one market, my whole portfolio here is about $2M in market value, and if I were to invest elsewhere I'd probably want to spread it out among 3-4 different areas to help spread out risk. 

I'm also wondering if you buy a property in another country, if that is covered under 1031 exchange or not? The 1031 scares me as it takes me an average of about 1 year and looking at hundreds of properties to find just one, so the short timeframe feels impossible to find several in other markets to use up all of the funds.  

Does anyone have any opinions on the best way to go here, and/or any experience selling to a renter and potential pitfalls? 

Thanks everyone :)