Tenant wants to buy property... thoughts?

[Garrett Cannizzo]

I have a great tenant in one of my SFH rentals who asked if I would be interested in selling the property to them. The tenant has been in the property since February 2020 and pays rent on time every month, and sometimes even early. They have taken excellent care of the property both internally and externally. This property was fully updated before the tenants moved in and is in great shape in a very desirable area. Cash flow is around $425/month and the property has appreciated significantly over the past 3 or 4 years, though I would be surprised if that can continue at the same rate. I am reasonably confident I can get at least another $100/month if I had to find a new tenant given the increase in demand in that area. I also have very favorable private financing on this property and probably have approx. 45% equity in the property.

I obviously wouldn't let the property go for anything less than FMV and would of course make them honor the terms of their 12 month lease, so I don't miss out on guaranteed cash flow. Selling to them would likely allow me to avoid the normal closing costs/expenses, however I am not convinced selling at this point in time is the right move given the cash flow generated from this property and the difficulty I have had the last several months finding other rentals. Selling would generate cap. gains unless I could find something for a 1031. Would be interested in hearing everyone's thoughts.

[Sean T.]

@Garrett Cannizzo you laid it out nicely above.I think it is really simple, if you sold it for FMV and collected all remaining burden on the lease would you find a better deal than this and have the ability to execute on it? If yes, sell. If no, hold. The numbers should drive it and obviously you know the numbers.

I've had this come up and I tend to notice issues pop up when it comes times to actually close.  Financing takes longer, inspections can yield issues, asks start to begin.  I am certainly not saying it wouldn't go smoothly but approval to lease and approval to buy and put money down can present challenges. 

Your point on the 1031 is great.  I am personally actively buying(put something under contract today actually) but it might take a while and that can be additional risk to consider as well.

Good luck either way!  Would love to hear what you decided!