5 Selling Rental and Commercial Property
When selling rented single-family homes it is easier to sell a vacant home. It is also easier to get a higher price for a single-family home if vacant. This is because the home can be cleaned, painted, decorated and staged to show at its best. There will be few limitations on showings. There will be no tenant present to potentially make buyers feel uncomfortable. If a potential owner / occupy wishes to purchase the home they don’t need to deal with an existing tenant.
Legally all rental laws need to be followed. Morally if a tenant’s lease is not being renewed due to a sale you need to know that tenant’s life is being turned upside-down.
When selling multi-unit residential and commercial properties the higher the net income the more the property is worth. The value is closely tied to the CAP rate. The CAP rate is the net return as a percentage of the purchase price.
If the current rents are not all they could be then advertising a realistic potential rent is possible. This is called Pro-Forma rent. If this is done it is best to have 1 vacancy that is dressed to its best to show potential buyers how nice the units can be, therefore justifying the higher Pro-Forma rent.
The quality, condition and age of the property, the certainty of future income, the desirability of the neighborhood and current interest rates all determine the value less of course existing liabilities and deferred maintenance.
The most desirable properties in the most desirable areas will sell for as much as a CAP rate of 1% under current mortgage rates and the least desirable properties in the least desirable areas will sell for as little as a CAP rate 3% over current mortgage rates. Even these numbers will be pushed in extreme circumstances.
Example: Given 4.5% current mortgage rates, a property annually netting $100,000 can sell for as high as ($100,000 ÷ (4.5% – 1%))= $2,860,000 or as little as ($100,000 ÷ (4.5% + 3%))= $1,330,000 – $100,000 in deferred maintenance = $1,230,000. Again, even these values can be pushed in extremes.
When to sell: Neighborhoods being gentrified in a good way, population influx and declining interest rates all increase property values. The opposite decreases property values.
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