Selling a Tenant-Occupied Property Is Not Easy Right Now

I get a call at least once a week from an agent who either wants to sell me an investment property or asks if I have clients looking to buy one. Usually, the story is pretty similar. The seller owns a property with tenants in place, the lease still has time left, and the seller does not want to wait until the end of the lease to sell. Sometimes they cannot get the property vacant, and sometimes they cannot afford to keep paying while waiting.

Have you been here as a listing agent?

This is one of the toughest markets I have seen in a long time for justifying an investment property purchase. That does not mean investment properties are bad. Real estate can still be a great long-term investment. But right now, the numbers have to be looked at honestly because many investment properties do not pencil out on cash flow alone.

Let’s look at a real-world example. A buyer is looking at a condo priced around $550,000. The HOA is about $600 per month, and the rent is around $3,200 per month. If the buyer puts 25% down, that is about $137,500 down. By the time they include closing costs and reserves, they may have close to $150,000 into the property. The all-in monthly payment may be around $3,800, depending on the rate, taxes, Insurance, HOA fees, and other costs. That means the buyer could be roughly $600 in the red right out of the gate. That is the part that scares people. But that is not the whole picture. Even though the buyer may be negative $600 per month, they are also paying down principal. In this example, that may be around $385 per month in loan paydown. There may also be tax benefits, as they can write off mortgage interest, property taxes, insurance, HOA fees, and other rental-related expenses. Of course, every buyer needs to talk to their CPA, as tax benefits depend on their situation. Then you have appreciation. If the property appreciates at 4% per year, that is about $22,000 in annual appreciation on a $550,000 property. Add in principal reduction of roughly $4,620 per year, then subtract the $7,200 annual negative cash flow, and the property starts to look a lot better on paper. You could be looking at something close to $19,000 in annual benefits before repairs, vacancies, and other costs. If we estimate another $2,500 per year for expenses, the net benefit may be around $17,000 on roughly $150,000 invested. That is about an 11% return. Not bad.

But here is the catch. A lot of that return is based on appreciation, and that is where the argument gets harder in today’s market. Cash flow is tight. Insurance is higher. HOAs are higher. Repairs are higher. Rates are higher. And buyers are much more cautious than they were a few years ago. This is why a tenant-occupied property can be tough to sell right now. The buyer is not only buying the property. They are buying the lease, the tenant, the rent amount, the condition of the property, the restrictions on access, and the risk that the numbers may not improve fast enough.

Now, there is a flip side.

If interest rates drop 1%, that could save the buyer around $250 per month. If rates drop 2%, that could save closer to $500 per month. On top of that, a lower rate also means more of the payment goes toward principal. A 1% lower rate could increase principal paydown by roughly $80 per month, and a 2% lower rate could increase it by around $160 per month. That starts to change the math quickly. Then add rent growth. If rents increase by 3% per year, that $3,200 rent could become about $3,296 after year one, $3,395 after year two, and $3,497 after year three. Now we are starting to see more. If the property is negative $600 per month today, rates eventually drop enough to save $250 to $500 per month, and rents slowly increase over time, that property may go from negative to close to break-even, or even positive. A small rent increase, a lower payment, and more principal reduction can change the entire conversation. That is why the timeline matters so much.

A property that looks ugly as a short-term investment may look very different as a 5-year, 7-year, or 10-year hold. The buyer has to be able to handle the short-term pain, but if they can, the long-term upside can be real.

When I get these calls from agents, one of the first questions I ask is this:

What does your client owe, and what is the property worth? That question matters. Sometimes the seller has one of those beautiful 2.5-3.5% or lower interest rates, and there may be another way to structure the deal. In some cases, I may buy the house or condo myself, or one of my investment groups may have an interest. We will pay the realtor commissions and buy the property subject to the existing mortgage. And yes, if I like the property and loan enough, I may even overpay a little. That may sound strange, but the rate matters. The loan balance matters. The payment matters. The tenant matters. The lease matters. The seller’s urgency matters. The more information we have, the more ways we may have to solve the problem. So, calling me is not a big deal. Asking if I have buyers is also not a big deal. But what is a big deal is not asking the questions that may actually get your client’s property sold. Call me every time. By the way, the house I live in right now came from an agent who does not even use my services. She called me and said, "I need to sell this house this week." Was I a buyer? Maybe. Did I have buyers? Maybe. Was there a solution? Yes, because she picked up the phone and asked. That is the point. Should you be sitting around hoping the MLS magically sells a tenant-occupied property with tight cash flow and a lease in place? No. Should you know if your seller has a low interest rate? Yes. Should you know what they owe? Yes. Should you know if the loan can create an opportunity for a subject-to purchase? Yes. Should you know whether the rent is below market? Absolutely.

Do you have an investor who wants that $550,000 condo but needs it to cash flow closer to $3,800 per month in rent? Maybe. Does your client understand the long-term profit potential of buying, renting, and holding real estate? Probably not! Investment property conversations are not simple right now. The old days of throwing a rental on the MLS and having investors fight over it are not exactly here today. Buyers are sharper. Payments are higher. Cash flow is tighter. And nobody wants to buy a headache unless they can clearly see the reward. But opportunities still exist. They just require more questions, more creativity, and sometimes a phone call to someone who may know how to structure the deal differently.

So, if you have a seller with a tenant-occupied property, do not just ask, "Who wants to buy this?"

Ask better questions.

What does the seller owe? What is the current interest rate? What is the payment? How much longer is the lease? Is the rent below market? Can the tenant stay? Can the buyer assume, wrap, or buy subject to the existing loan?

Would an investor overpay for the financing because it is valuable? Those are the questions that may turn a difficult listing into a real solution. And if you do not know where to start, call me. I may be a buyer. I may have a buyer. I may know an investor. Or I may simply help you figure out whether the deal makes sense. In this market, the agent who asks better questions wins.

Interest Rates

Bad day yesterday! Good day today! Nothing to write home about! The Strait of Hormuz is open, and oil is flowing, or is it? LOL! Time will tell. 

Loan Programs Snapshot

• Government loans (FHA/VA/USDA): in the 5s –
• Conventional (≤ $832,750): low 6s
• High-balance: mid to high 6s
• Jumbo: Mid 6s
• Bridge Loans 7.75-7.99

Additional options:

• Bank statement loans (10% down+)
• P&L loans (20% down, no bank statements)
• 0% down options (620+ score)
• DSCR loans (15% down)
• Buydowns Available (3/2/1, 2/1, 1/0)
• Private Money loans – Hard Money
• Construction Loans
• 203K loans
• Commercial Loans
• Fix and Flip Loans

Rates subject to change without notice. 

Condo Update

Good news:

• Treana  –  off the naughty list!

Bad news:

• Palisades -  25730 Armstrong Stevenson Ranch CA 91381 – Critical repairs   – Deferred maintenance  – reserves  –  Insurance!  Yes, they hit just about every bad thing you can!  LOL!

We love your Non-Warrantable Condo loans!!

Need help checking a condo? Call me, and we can look it up in real time.

Also:

Full California "naughty list" available here:

https://mikemeena.com/non-warrantable-condos/

Let's Connect

If you or your clients, friends, or family need guidance, I'm here.

📞 661-291-2222 (Direct)

📞 661-714-6258 (Cell)

📞 661-260-2970 ext. 2222 (Office)

📧 Mike@AugustaFinancial.com

Sincerely,