Rental Property with Adjacent Vacant Scenario

[Peter D.]

My wife and I recently purchased a house and rehabbed it and it is currently renting out for the same amount as the mortgage payment. When we purchased this property, it was run down and had major issues to fix and there was an additional .34 acre parcel of land included with the purchase that is located next door. This vacant lot is wooded and undeveloped and we have been receiving offers for purchase of this vacant lot that we do not use. We are considering selling this empty lot for additional cash flow, however, I worry that by doing so will devalue the rental property when it comes time to sell. The rental property parcel sits on about the same size lot (.33 acre). The value of the rental property does include this additional vacant lot acreage on the original listing. The current renters love the rental house and have made it clear to us that they would like to purchase it from us. The neighborhood is quiet and charming and I assume the investor wanting to buy the vacant lot will most likely either hold for a while or build on it soon.

[Ricardo R.]

@Peter D. Selling the lot next door to your rental property may 'de-value' it but it may also help to increase the vaule over-time as well. I'll give my advise based on my understanding of the sitution so hopefully, I understand it correctly: You bought an investment property with a structure (house) on it but which also includes an additional .34 acre lot next to it which is included in the deed and you now want to SPLIT the undeveloped .34 acre from your property and sell it sepearately, do I have that correctly? 

If so, then what I would do is- 1) You mentioned 'wooded' lot, so depending on how much wood we are referring to, I would seek and get bids for selling the wood (I dont imgaine it would be much if anything at all cosidering .34 acres) additionally, you don't want to get rid of every tree; 2) When you split, you can certainly put restrictions in the new deed, i.e. any future structure being build most be between 1,000-1,500 sq.ft., must be single-family use... etc., etc. 

Depending on how many restrictions and what restrictions you put in the new deed (if any) it may decrease the value of the new lot BUT... it may not especially if those restrictions are congruent with the types of properties in the area AND doing so will then ensure that whoever puchases the lot next door to your existing investment property won't be able to build something that will decrease your property value, in fact if you do it properly the restrictions should help INCREASE your property value on the lot you retain. -- So really, yes any value you loose on the split, you should make up for in ensuring that the property next door (whenever it is built) is not run-down and of a certain caliber. 

So the above, is directly in response to your question/strategy BUT, I would certainly consider NOT SELLING THE LOT NEXT DOOR... especially since you said you're seeking 'additional cash-flow' -- if you sell, it won't be recurring cash-flow instead it will be a one-time infusion of cash into your bank account and then its done AND you won't have much control on what happens next door aside from what restrictions you have placed in the deed... why not instead of selling consider... offering it as a 'ground lease' whereas, the person seeking the lot is allowed to build on the lot but then will pay you rent for the use of the land... this would be similar to some commercial agreements or even mobile homes where the tenant owns the structure but you own the land on which it sits on.. it's also quite similar to how McDonalds and some other franchise businesses operate it's how they are able to ensure that the properties being built are built and operated in accordance with their vision, if a tenant does not build it or operate it 'correctly' then the Landlord will have leverage in ensuring that it is rectfied... because after all you do still own the land and may terminate lease if the terms are violated. 

Offering the lot as a ground lease will certainly remain on the market for longer and may take awhile to find a tenant and you ofcourse would not be getting as much of an upfront cash-infusion as if you sold it outright HOWEVER, you can draft up any agreement you want i.e. $XX,XXX upfront and then $xxx per month or per year... whatever, the options are endless here on the agreement side and the additional benefit is there is NOTHING for you to upkeep because again the Tenant owns the structure, lastly if there is a default and your agreement allows it you may assess penalties to ensure it does not bring down your existing property's value, and beyond penalties if the default continues you can foreclose on the structure... the structure is your security. 

Just food for thought, I sent you DM on BP, if you are able to assist I would great appreciate it. I hope this helps. 

[Peter D.]

Thank you Ricardo for the great advice! We are leaning towards selling the vacant lot since we feel the rental property will retain most of its value. When we purchased the rental property I believe the transaction at the title office included both lot parcels, both the lot with the rental property and the adjacent vacant wooded lot. Does this mean that if we wanted to sell the vacant wooded lot that we would have to refinance this lot parcel from the mortgage? Or is there an easier and simpler way to do this through with title company? Buyer is requiring to use their own title company and is willing to pay all costs and fees associated with the vacant lot purchase.