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 :)

[Brad Hammond]

Hey @Ciarraghe G., I know it might not seem like it but you have a great problem.  I think you should sell but here are some thoughts to think about.  Are you wanting strong cash flow or are you looking to grow your portfolio?  If you recycle your $230k in equity, you could a $1M property.  That will give you more depreciation, equity pay down, etc.  Especially with interest rates being so low right now, it would be a great time to get some long-term debt.

If you end up selling to your tenant, you should work with a real estate attorney to draw up the contract between you two.  That way you won't need to pay for an agent.  

As far as a 1031, you will work with a 1031 intermediatory and they will walk you through the process.  I recommend using Tonia Butler here in Portland.  Also, I know someone that does 1031s through a Delaware Trust.  That way you can put your money in that fund and not have to worry about purchasing a specific property.  You will still get all the 1031 benefits too.  If you want more info I can introduce you to him.