Learn how to cash out on your single-family rental investment portfolios by reading the article below. Keep an eye out for SFRhub!
When it comes to real estate, currently, it’s largely a seller’s market — which makes the idea of offloading properties tempting for many investors. By cashing out, you can use the capital gains to purchase more assets.
However, it’s important to ensure that you choose the best option when it comes to selling your portfolio. After all, your goal isn’t simply to offload your properties, but to get the best returns possible.
When it comes to buying and selling single-family rental (SFR) investment properties, it’s safe to say that we’re living in exciting times. Thanks to the prevalence of investor demand and the influx of online investor tools and marketplaces, it’s easier than ever to sell off properties as investments, giving investors an alternative to selling properties to owner-occupants. Additionally, for investors who prefer to make things even more efficient, there’s the option of selling off your entire portfolio intact.
It first helps to understand the SFR market, as well as options for selling your portfolio.
The Growth Of The SFR Marketplace
Today, the SFR market accounts for approximately 23 million rentals in the U.S. While SFR has long been a popular investment type, it’s largely been something that, until recent years, was bought and sold on a much smaller scale. Your average everyday investor may have owned a rental property or two, purchasing houses as a way to generate some extra income on the side while managing them themselves.
But in recent years, changes to the real estate market and how SFRs are bought, sold and managed have revolutionized how these investments are done — and the scale at which properties are being bought and sold. The current state of large-scale SFR investing has its roots in the post-recession years of 2008-2009. During these years, private equity firms spotted an opportunity with a large number of foreclosed houses on the market and began buying them up in bulk. Then in 2017, Blackstone completed its IPO of Invitation Homes, a 48,000-unit portfolio valued at more than $12 billion. Soon other institutions were following suit, and today approximately $33 billion of SFR assets are owned by institutions, something that’s helped to firmly cement SFR properties as a long-term asset class.
This growth in investor demand has also helped to fuel the development of online platforms for buying and selling properties, making it easier than ever for investors to connect and transact with each other. Today, instead of having to remove the tenants and sell the properties to owner-occupants, it often makes more sense to keep the units as income properties and sell them off to investors — or, in some cases, even keep the properties together and sell them as one individual transaction. The latter approach, as I’ve discovered through my hands-on work in this transaction space, can often be more profitable.
Selling Vacant Properties To Owner-Occupants
If you’re thinking of selling your properties to typical homebuyers — owner-occupants — here are a few things you’ll want to keep in mind.
Preparing a home for this kind of sale will require the home to be vacant at time of sale. This means you’ll need to remove the tenant and get the property owner ready if you’re hoping to sell it for its full market value. Often, this involves making repairs, painting and replacing flooring. You should also bear in mind the length of time that the house will sit vacant. The time from when it goes on the market to closing can be at least 90 days, which means three months of no cash flow. Meanwhile, you’ll still be responsible for all of the home’s expenses — taxes, insurance, mortgage costs, etc. These costs can add up quickly if you’re not careful. When I advise single-family rental portfolio owners on selling, I calculate a friction cost of 8-10% to sell the home vacant.
Some investors may attempt a 1031 exchange for each home, helping to keep capital gains tax and depreciation recapture low. While this makes financial sense for some, for investors with larger portfolios, it can be an impossible task.
Of course, a home can increase so much in value that it makes more sense to sell it to an owner-occupying buyer. Investors will buy based on cap rate, rather than the comparable sales value, so this should be a factor in your decision.
Selling Tenant-Occupied Properties To An Investor
If you want to sell your properties as investments, you’ll want to avoid the MLS — the channel that most real estate agents use to source and sell properties. The MLS doesn’t always gain much traction for investment properties, as it’s designed primarily for buyers who are looking to purchase homes within a local market.
There are a few platforms out there that make it easy to buy and sell SFR portfolios — or even SFR tenant-occupied rentals on an individual basis. My company is one of them, as are Roofstock, SFRhub Advisors and HomeUnion. Having an online platform is tremendously helpful, but is only part of the solution. Investors need to understand if the buyer has a local market presence, their fees and their experience. There is also a big difference between selling a single rental and selling a portfolio of hundreds of homes. What you can’t deny with the rise of these platforms is that now your rental can be exposed to a wider group of buyers nationally, rather than just locally, increasing your chances of selling to the right buyer.
As the real estate space is continually being disrupted, the ability to buy and sell investment properties from anywhere in the country is here. What this means is that what used to be a one-by-one local selling process is now sharing space with an avenue to sell your entire portfolio at once. For investors today, it’s easier than ever to transact, so find the strategy that will benefit you the most.