Many investors work for years to build their rental portfolio. They purchase, renovate, and manage. The income is great. But at some point, they may be looking to retire, or transition into more passive investments. How do they successfully exit?
It’s not easy to sell 5+ houses. Many of these rental properties are in area’s where retail buyers are unable to acquire financing. Some are not in “retail” condition. Selling to another investor is often the best option.
As an agent, I’ve had the good fortune to work on a handful of single family portfolio transactions in the last year. I’m seeing a tremendous amount of interest from both buyers and sellers. I’m also seeing a growing list of lenders able to provide financing for these transactions.
Here are my tips on how to successfully sell your portfolio.
How to make your portfolio attractive for sale
- Selling with tenants in place is better. Remember, you are selling the cash flow of your assets. The more cash flow the better. A property with a paying tenant is an asset. A vacant property is a liability. Vacancy may also effect the financing ability potential of the portfolio.
- Professionally managed properties are better. Property management companies keep good records. They’re a good source of 3rd party verification for potential buyers. Professional management also allows for the smooth transition from one owner to another, with minimal disturbance to tenants.
- Long term tenants are a plus. The longer tenants have been in place, the longer they’re likely to stay. It’s like the Lindy effect. Keeping tenants in place is the name of the game. A low turnover portfolio is always better.
- Section 8 is attractive. The stability of government backed income seems to be very appealing to most investors I speak to. I wrote about some potential benefits of section 8 rentals in Birmingham here.
- Having maintenance and capex records helps a lot. Potential buyers are going to ask about the age of certain systems. The roof, the HVAC, Water heaters, etc. If you’re considering selling, it would be a good idea to assemble a list of any improvements made in the last 10 years. You want to get credit for the work you’ve done!
- Pictures are still a big deal. Even if you only get pictures of the front of the house. Pictures give people a sense of the houses and the area. Investors are supposed to be rational, looking only at the numbers. In reality that is never the case. We all make decisions based on feelings. Pictures can heavily influence those feelings.
- Put together a pro-forma. A pro-forma shows how the portfolio is performing or likely to perform. It gives potential buyers an idea of the type of returns to expect from the portfolio.
What to expect from buyers
- Buyer’s will most likely have some real estate experience, significant net worth, and income. When I begin marketing a portfolio, I usually get a large amount of interest in it. I’ve noticed that having these qualities is likely to make the buyer more committed and legitimate. These are things that a commercial lender will be looking for as well. If you’re reading this as a buyer, my recommendation is to get pre-qualified with a commercial lender. Sending a pre-qualification letter to an agent or broker shows that you know what you’re doing.
- They may be from out-of-state or even out-of-country. There is tremendous interest in the Birmingham rental market. I speak to at least 2-3 new investors per week from other markets. They’re selling properties in more expensive locals, and looking to buy cash flowing homes here.
- Buyers will want to do home inspections. (even if it’s an ‘as is’ sale) Since many buyers are looking from out of state, they’ll need an objective and trained set of eyes on their potential purchase. It’s likely they will never see the inside of the houses themselves. These inspections obviously have to be coordinated with property managers and tenants.
- Buyers will likely use financing. It’s difficult to get financing on the purchase of a $40,000 house. It’s far less difficult for a qualified buyer to get financing on 10 $40,000 houses. This is one of the beauty’s of selling and buying as portfolio.
- They will ask about owner financing. Because financing isn’t as easy as it is for a single property, I get asked about owner financing on every new portfolio I market. I’ve found that most owners are open to it for shorter periods. However, it has to be the right buyer, with the right terms.
Contract to close
- I would estimate 3-6 months from listing to close. There is a smaller buyer pool, and significant due diligence involved in selling a rental portfolio. We’ve done it faster than 3 months, but I believe that is the shortest period you should expect.
- You may have to purchase termite bonds, if you don’t already have them. Some investors do not renew annual termite bonds on rental properties. Especially if they bought them for cash. If your buyer is using a mortgage, the bank may require it.
- If they’re using bank financing, the buyer will require appraisals. No question, selling to a financed buyer is the way to get top dollar for your portfolio. However, there will be a limit. If the appraisals don’t work for the bank, it could kill the deal.