Should I Sell My Rental Property Now or Wait for the Lease to Pass?

You have a property, and you want to sell it. But currently, a family is occupying the house. The tenants faithfully pay their rent and take good care of the property. You’d rather let them stay where they are.

Is it an economical decision to sell your property with tenants? Or is it better to wait out the lease term, empty the property, and then sell? Here’s what you should consider.

Selling Your Rental Property 

It might sound significantly more challenging to have people living in the house you’re trying to sell than to put a vacant property on the market. But that’s not necessarily true; with the right preparation, it can be a smooth, easy process. Plus, it can hold economic advantages.

Value from Rental Income

When income from rent is high, it can add to the value of the property because it brings an immediate return on investment. From the very first month, the buyer’s investment generates an income stream.

The value from rental income depends on what the market would pay had the property been vacant. If the rent is equal to or exceeds that amount, selling your tenant-occupied property is a good decision. The property price might be lower, but the rent the tenants pay can compensate for the difference. Over time, the rent added to the lower price can even exceed the vacant value.

Income from Section 8 Properties

Many potential buyers are particularly interested in properties under the Section 8 arrangement. These houses and apartments are intended for low-income citizens who must first apply for a voucher. If this voucher is granted, the residents will receive government support for up to 70% of the rent and utility costs.

This makes for a reliable source of income because the renters are less likely to move. There are long waiting lists for renting these properties. And because the demand for Section 8 properties is much higher than the supply, finding another Section 8 house or apartment isn’t easy. But if your tenants move, the waiting list will soon supply your buyer with a new occupant.

If your property falls under this arrangement, selling occupied property is an economically responsible choice. Since buyers often become aggressive in their purchase, you might end up with an excellent sale.

Comparing Relative Values

There are, however, also situations in which tenancy can lower the value of your property. Selling rented property is beneficial if the rent is high enough, but it may be a poor move if the property can’t bring in sufficient income. 

Analyzing Monthly Rent

To get a feel for what kind of lease buyers are willing to assume, you should do a competitive market analysis. You can compare the value of vacant and occupied houses of the same size in the same condition and neighborhood. Then, after finding out how much your vacant property would sell, investigate how that amount relates to the monthly rent.

If the property values are high but the rent you receive is low, few buyers would be willing to pay the full price. The return on investment would be too low to make it worthwhile. And as a result, you would have to lower your price to potentially unacceptable levels.

Comparing Prices

Suppose the market pays $250,000 for a vacant house similar to your rented house. If you get $1,800 per month in rent, it isn’t likely that a buyer will offer more than $200,000 for the property—$210,000 if you’re lucky.

If, however, similar houses are selling for $100,000 and your tenants pay you $1,400 in rent per month under Section 8, you might very well get $115,000 for the house.

The difference is that the rent is much higher relative to the value of the house.

In the first case, it might be better to postpone the sale until the lease agreement has ended. In the second case, selling with the tenants inhabiting your property is probably the best choice.

Making the Right Decision

There’s no cookie-cutter recommendation as to whether you should sell your property while tenants are still there—it’s all contingent on your buyers’ preferences, priorities, and availability, as well as what makes the most sense for you and your tenants. 

Selling to Investors Who Have Other Plans

Sometimes purchasing a property results in reduced cash flow on the purchase price. But instead of walking away, some buyers become more aggressive on the purchase, making faster and higher bids.

Their game plan may be to evict the tenant when the lease is over. They might do some rehab to increase the property value and then sell the property to a homeowner for a much higher price.

Waiting until after the Lease

The option, of course, remains open for you to wait out the lease term and renovate the house yourself. But this demands a lot of extra effort, and you might not have the time or resources for such an endeavor.

You’ll want to calculate the money it costs to renovate and the loss due to the turnover when the tenant leaves. You might say, “I want to take $150,000 now,” or “I’m going to wait seven months, put $15,000 into the property, and get $20,000–25,000 more for it.”

The second situation will require a significantly higher time and money investment than selling the property before the lease is up. Only you can decide whether that’s worth your while.

How to Decide Whether to Sell Your Occupied Property

Although many people don’t consider selling occupied rental property, it can be the right move for some. Your occupied property could be very attractive to potential buyers and land you a great sale. 

If you are selling in the Maryland, Washington, DC, Delaware, or Virginia regions and need help figuring out the best option for you, please don’t hesitate to contact us.