Better to Sell An Investment Property Occupied or Vacant?
Updated: Jul 5, 2022
I get this question all the time, specifically in Baltimore City. An investor contacts me to move their rental property. "To achieve the best net number possible, should I sell my property with the tenant in it, or sell it vacant?”
When you sell a vacant that was once a rental, the hope is that you can capture two audiences : investors wanting a rental (or even a flip opportunity) and homeowners looking to occupy. Whether or not you can capture the homeowner audience will depend on the location of the house.
When you sell an occupied rental, you can only capture one audience : investors; and your charge is to sell a business. It’s not just about the property, but also the tenant in place, the lease terms, and the performance of the rental.
Don’t read this and think : “A vacant property captures two audiences; an occupied property captures one. Two is better than one; I’ll vacate the property.” Not so fast. Not every vacant captures two audiences. And some occupied rentals are very attractive business opportunities.
Is it a good business opportunity? This will mostly boil down to the location of the property and the monthly net number. Let’s start with the income. What is the monthly rent? Is it the highest rent possible for that house in that area, or close to it? Is the tenant paying? If the tenant isn’t paying, there’s no income, and I can already tell you, it’s not a great business opportunity. If the tenant is paying, let’s look at the expenses to determine our net number.
What are the monthly hard costs going to be? Some investors purchase cash, others purchase using a conventional loan. Let’s assume there’s a loan involved. What would the monthly mortgage be to an investor purchasing with 20% down? What are the property taxes on a monthly basis? What is property insurance on a monthly basis? Account for at least a $50 monthly reserve for maintenance, too. Now take the monthly rent and subtract all of those fees. What’s the monthly net number? For Baltimore City row houses, I find investors get interested when the monthly net number is close to $400. If your rental isn’t generating close to that number, it may not appeal to the investor audience.
What else? The monthly net number is important to investors. That’s the immediate, small picture. But there’s also the big picture. The big picture extends beyond this month and this year, it’s about tenancy duration and upkeep. The best case scenario is a healthy monthly net number, a tenant that has been in the property for a long period of time and intends to stay for a long period of time, and also maintains the home. In this scenario, the investor can expect to steadily collect several hundred dollars per month and have little work to do at turnover. That’s an attractive investment. Conversely, even if the investor is going to earn about $400 monthly, if the tenant is destroying the house and intends to leave within a year, all his or her proceeds will be dried up on turnover costs. In this example, the immediate future looks ok, but the big picture doesn’t. Investors likely won’t bite.
Is there more? Yes. Other things to consider – is your lease landlord friendly or tenant friendly? Are you in compliance with lead paint laws? Are you in compliance with rental licensing laws? These matter to intelligent investors. Unless the tenant agrees to sign a new lease with the investor (good luck with that), the investor is going to have to operate under the parameters of your lease. Is that good or bad for the investor? If your rental isn’t in compliance, that means more expenses for the new investor and weakens the appeal.
To successfully sell an occupied rental, you don’t have to check every one of the above boxes, but I’d suggest being pretty close. The fewer boxes you can check, the less interest you’ll get.
Generally, if the monthly net income isn’t close to the $400 mark and tenancy duration and upkeep are weak, get the property vacant before you sell. Note : you can only remove a tenant from a property by sending proper notice under Maryland and Baltimore City Law and the terms of the lease, or through legal eviction.
Once you get the house vacant, get it rent-ready – clean, tidy, and showable. Determine if there are homeowner sales happening in that area, and if so – go the extra mile and invest in some staging and curb appeal to draw in that audience as well.