What To Do if Tenant Wants To Buy Your Rental?

[Billy Zhao]

Here is a high-level description:

It's SFH in a pretty decent neighborhood. The cash flow is about <$100/mo. The home appreciated very well in the past 13 years since I owned the property, averaging about 7.6% per year increase. It probably will continue to appreciate for a while.

I did a cashout refi on the property but still have a substantial amount of equity in it (45%) thanks to the appreciation.

Should I do a 1031 and find some other better cashflow properties or keep this one? If the tenant is asking for seller financing (assuming he has the ability to pay) should I try that to make some more money on the interest side?

If you had prior experience please let me know. Thanks!

[Joe Villeneuve]

I would have sold this property a long time ago if the CF was less than $100/month.  If you have the equity you say you do, you are losing money by the minute the longer you keep this property.

Let's look at the numbers:

1 - I'll give you an even $100/month in CF, so that means you have $1200/year (my teeth hurt saying that) in CF...as long as all goes perfect.

2 - 45% equity means nothing.  What is the equity in the number that matters...in $$$$$?  Let's assume the property value is $100k, that means you have $45k in equity.

3 - It will take you (if all goes perfect) 37.5 years of CF to equal the equity you have now...in locked up cash.

4 - Let's say you sold the property, took the equity out in liquid cash, and after all expenses/fees/closing costs/etc...you were left with $30k.

5 - Let's then say you took that cash an used it as 20% DP on new property (or properties).  The new PV would then be $150k.

6a - Based on the same ratio of CF to PV (although I'd have to kill myself if I only got $100/month in CF), you would have $150/month in CF.

6b - You should find a property that has a CF a lot less dangerous than $100/month...like $300/month.