Wealth. Legacy. Lifestyle.
Never try to teach a pig to sing; it wastes your time and it annoys the pig.– Paul Dickson
When you are thinking about selling an occupied rental property, you are not only selling the building but also the strength of your leases. Rental contract terms that maximize cash flow and retain high-quality tenants add value.
If you know that you plan to sell within the next 12 months, consider these four tips:
1) Use updated terms that comply with the latest federal, state and local ordinances. Many investors use leases shared from other investors. You can start there, but you need to make sure that your rental agreement complies with the latest landlord/tenant regulations in your area. A lease written even five years ago may not do so.
The best option is to use an agreement that has been recently reviewed by an attorney. You can either hire an attorney directly to review your custom lease or indirectly by working with a realtor who uses a lease approved by the legal gurus from the National Association of Realtors.
2) Include a clause that covers what should happen with a potential sale. You want to deal with this upfront before you get to the closing table. Your lease should spell out how to manage the transfer of all your rights as a landlord and any held deposits.
Even if you think that you will never sell, think about your heirs. By taking care of this in your leases now, you avoid any later headaches for them.
3) Consider not renewing residential leases that could potentially hurt your deal. If you have existing one-year agreements with a lot of time left, traditional home buyers will find your property less attractive. These buyers will likely not want to wait more than 90 days to take possession after closing.
Other investors, on the other hand, are okay with the existence of leases but are sizing up their quality. Leases with below market rents (or tenants with lousy payment histories) will highlight issues. Investors will ask for a discount to cover the pain of managing getting your problem tenants to vacate sooner rather than later.
If you plan to sell soon (and fast), opt not to renew bad leases (or bad tenants) and leave the residential units vacant. You will more than make up the short-term cash flow that you lose with a higher sales price.
4) Be careful of signing new leases with high-risk commercial tenants. If you have a commercial lease that is not on a multi-year contract, potential buyers will assume that the commercial tenant is a new business. A new business is a higher risk.
In addition to assuming more risk, you may also limit the financial returns for the new investor. The potential buyer may envision a different commercial use for the space (i.e. it’s now a hair salon but a coffee shop may be more profitable) or want a space for his own business.
If you can’t sign a stable business tenant, you will bring more risk to the sales transaction.
If you want advice on how to maximize the value from your rental properties, I would be happy to help. Feel free to contact me to set up a time to chat.
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