Is selling my house then renting it back from the buyer smart?

Question

I'm trying to do something a bit unconventional.

I'd like to sell my house to an investor now, then rent if from them for about a year (give or take a month or two). We're currently building a house and can float both, but I would love to get access to the equity in my current residence sooner than next year when our new home will be finished. HELOC is an option, but I would prefer to sell to an investor and keep occupancy while renting from them.

Has anyone done this? Are there any cons that I'm not thinking of?

I think of it about like a HELOC but also a hedge against if the market turns in the meantime. Not likely to happen, but just a hedge. Thanks!

Todd Rasmussen · Answer

@Levi Eubanks

It's not unheard of, however usually not for a year. You will limit your pool of buyers to people who can afford to buy your home and can afford to maintain other living arrangements for a year.

Aaron Gonzalez · Answer

@Aaron Bress I Work for a Institutional Fund and we do just that to homeowners that want to do exactly what your goal is (access that equity now). As an inside source I can tell you its a great option, biggest con as the homeowner is that we do have a target rent so you may go from a 1,200/mortgage to a 1,600.00+ monthly payment. I would ask a local PM what the premium rent is there and ask yourself if that's something your willing to pay to rent back your home for that year.

Eliott Elias · Answer

Do you need access to the full amount of the HELOC to make this work? This is what I'm thinking

1. Cash out just the equity you need, and pay it off. Cheaper than renting your house most likely

2. Maybe work out a leaseback agreement where you stay in the property for free until your new home is built?

Ari Newman · Answer

@Levi Eubanks I used this strategy in 2019 with another investor and also added an Option to buy back.  I used my 1031 funds and purchased her home below market value.  I gave her a Master Lease so that she continued to rent to her tenants and paid me rent.  I also gave her an option to buy back $5K below the purchase price AFTER 365 days.  That would allow me to exchange out of the property into my next one.  If you'd like to discuss more feel free to send me a DM.

Ari

Scott E. · Answer

I am seeing this more in my area... so much more actually that I think some people are using it as a strategy to sell their homes for more money.

Just going to throw this concept out there as it may help you to sell for more.

Let's say you think your house is worth $500k if you sell it as-is, move out, and hand over the keys.

Well what is your house worth if you sign a 1 year lease back at the rate of $4,000 per month where you pay all utilities? At a 6.5% cap rate, now your house is "worth" around $740,000 to an investor who is looking for a 6.5% cap rate.

I don't know if there are any legal issues with this strategy. And I'm definitely not suggesting you deceive a buyer. But it's something I've seen people doing more with residential single family homes, and it is fascinating to me.

Jason Andler · Answer

I know a lot of people who have done this. Or worse, sold their house and tried to find an apartment to move into for 6 months then move into their newly built home. I never really understood it and always thought there would be a better way. I understand that the construction loans typically require a 20-30% down payment that most people don't have readily available and I assume this is why you want access to the equity in your home now. If you have a 401k have you considered taking a loan out against it? I did this last year and the cost to get the loan was negligible plus all the interest you pay back to the 401k, not a bank or other institution. The money you take out will not be affected by any market gains or losses, so its really what you feel most comfortable in.

Some other options could be withdrawing money from any other investment accounts you may have and talkting to a variety of lenders. You may be able to find someone that will give you a loan with a lower down payment for a higher interest rate, then you can refinance after the build is complete (although with rates going up this may not be the best idea either)

I saw someone else mention that if you sell to an investor, your rent will likely be significantly higher than your current mortgage. Think of it from their perspective, they likely need to pay more for the house than you did, taxes and interest rates are both likely higher for them than you, and they won't be incentivized to buy unless they are making a profit.

I'd be interested to see if there is a more creative solution that someone on here can think up. Again, I haven't had to cross this bridge myself but it just seems like there should be a better way.

Levi Eubanks · Answer

@Aaron Bress you're right. That's a consideration, for sure. The real decision point is if we HELOC, we're paying interest, but if we sell, we're missing out on appreciation.

Aaron Bress · Answer

This is definitely do-able. In Utah we just put the terms in the purchase contract and it’s part of the agreement before close. One potential downside for you is if the market appreciates a good bit over those 12-14 months. You might wish you have held that extra time. In salt lake and park city SFHs are appreciating 2-3% per month. So something to think about but definitely do-able.

Levi Eubanks · Answer

Thank you all! This has been valuable to read each of your different approaches and thoughts on the strategy. We've got some homework to do but it sounds like a real possibility with pros and cons on each side.

Levi Eubanks · Answer

Totally, if their plan was to owner-occupy. My dream scenario would be to sell to an investor that wanted to have it in their SFH portfolio moving forward.

Is selling my house then renting it back from the buyer smart?

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