Residential Rental Property Sales Explained

Residential rental properties can be some of the most stable and time-tested types of investment properties. Buying and selling them has been greatly streamlined over the years, but the process still requires proper steps to be followed. Whether a property is a single family rental home or a 300 unit multifamily apartment building, performing proper due diligence, securing financing, and overseeing many of the other tasks involved in a property sale all come into play for both the buyer and seller to ensure a successful closing for both parties.

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How are Residential Sales Different from Commercial Sales?

Selling a residential rental property and selling a commercial property can be vastly different processes. Residential rental properties are typically designed for individuals or families to live in, while commercial properties are intended for business purposes. Commercial rental properties may include office buildings, retail spaces, or industrial warehouses, whereas residential rental properties are solely intended to be leased as dwellings to live in. While both types of properties focus on highlighting the property’s potential for generating income and attracting good tenants, much of the differences in the sale process come down to loan requirements. Sales of residential properties such as single family rental houses and multifamily apartment buildings, are usually substantially easier to complete thanks to standardized lending requirements by the federal government backed Fannie Mae and Freddie Mac. Commercial real estate loans on the other hand, are less standardized and ubiquitous which leads lenders to scrutinize property attributes such as tenant mix and income potential in order to secure a loan. Other factors such as obtaining environmental reports and negotiating complex modifications to existing lease agreements can be found in commercial sales and typically not residential.

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3 Important Factors to Consider When Buying or Selling Residential Rentals

When buying or selling a residential rental property, there are several key factors for consideration to ensure a successful transaction. These factors apply to both buyers and sellers, and each includes a “Pro Tip” based on real world experience.

1. Tenant Occupancy: If the property is occupied by tenants, sellers must determine whether to sell the property with or without tenants and give proper notice before showings. Buyers must assess current rents and determine if they are up to market or need to be adjusted. Pro Tip: Depending on the market, occupied units can be a positive or negative selling point.
2. Property Condition: Sellers should assess the property’s condition and address any necessary repairs or upgrades before listing to attract potential buyers. Buyers should also assess and determine a budget of planned repairs or upgrades beforehand to understand how much capital will be required. Pro Tip: Properties that are in good condition usually attract more buyers and generate higher offers.
3. Market Conditions: Sellers should evaluate the current market conditions in the area and determine the best time to sell to maximize profits. Buyers should also keep an eye on market conditions to understand the nuances between active and slower times of sale activity. Pro Tip: Start tracking nearby multifamily or single family homes that are for sale to get an idea what to expect when a property hits the market.

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How to Buy a Residential Rental Property? (15 Steps)

Buying a residential rental property to rent out is one of the best ways to start your journey as a successful rental real estate investor. Below are 15 steps to help potential buyers navigate the process of how to buy a residential rental property:

1. Determine Your Budget: Assess your finances and determine how much you can afford to spend on a rental property, taking into account the down payment, closing costs, and ongoing expenses.
2. Get Prequalified: Even if you have the knowledge and experience, you need to talk to a mortgage broker, direct lender, or bank to determine your eligibility for a loan. Thankfully residential rental property loans are fairly common with plentiful lenders and standardized borrower requirements.
3. (Optional/Recommended) Hire a Real Estate Agent: Most of the time, it is easier to hire a real estate agent to help guide you through the buying process, since they are usually paid for by the seller.
4. (Optional) Hire a Real Estate Attorney: Depending on your locality, state laws and the nature of the transaction, you may need to enlist the services of a real estate attorney. 
5. (Optional) Don’t Hire a Real Estate Agent: Alternatively, an advanced technique can be to try and  negotiate directly with a seller (assuming they don’t have a real estate agent either) to mutually save on commissions and in-turn pass those savings onto you. Be prepared to handle all aspects of the transaction if you decide to take this advanced approach.
6. Choose a Location: Choose a location with strong demand for residential units and potential for long-term growth to ensure consistent occupancy and profitability. Some densely populated areas are better for multifamily rentals, while suburban areas near strong job hubs are better for single family rental homes. 
7. Find a Property: Search online real estate listing websites, work with a real estate agent, and attend open houses in your desired area to find a property that meets your criteria.
8. Assess the Property’s Value: Look at similar properties that have sold, are currently for sale or consult your real estate agent to determine the target property’s value and identify any issues that may affect its rental potential.
9. Determine Rental Income Potential: Review existing tenant lease agreements and research comparable residential rental rates in the area to ensure the property will generate a profitable return on investment. This is also an important component in securing financing since the lender will base the loan on this factor.
10. Make an Offer: Submit an offer to purchase the property, negotiating terms and price with the seller until you reach an agreement.
11. Secure Financing: Following up on your pre-approval, let your lender know that you have an accepted offer and provide them all relevant details of the property to start the loan process. Note that this process takes some time to finalize.
12. Escrow, Contingencies, and Inspections: Once there is an agreed upon contract, both buyer and seller go into escrow which can usually be 30 days or longer. During this period, there can be contingencies that may need to be cleared for the purchase process to continue. Furthermore, the buyer usually orders an appraisal and performs physical inspections while working through a series of administrative requirements including satisfying loan approval conditions and completing a title search.
13. Evaluate the Property’s Condition: Hire professional inspectors and tradespeople to conduct thorough inspections of the property to assess its condition and identify any necessary repairs or upgrades. Most seller’s typically require an accepted offer before allowing inspections.
14. Close the Deal: Finalize the purchase by completing any necessary paperwork, transferring ownership, and securing the rental property with insurance.
15. Property Management: Determine whether to manage the property yourself or hire a property management company to oversee day-to-day operations and tenant relations. If you do decide to hire a third party manager, be sure they have experience in residential property management.

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How to Sell a Residential Rental Property? (14 Steps)

There can be many reasons to sell a residential rental property. Maybe you want to continue building your rental real estate empire with commercial properties, or simply need the money for other reasons. Below are 14 steps to help sellers navigate the process of how to sell a residential rental property:

1. Hire a Real Estate Agent: A good real estate agent associated with a reputable brokerage can net you far more than their commission when selling a property. Their market knowledge and negotiating skills to help overcome any inevitable challenges that arise in the selling process.
2. (Optional) Don’t Hire a Real Estate Agent: Alternatively, you can try to go the for sale by owner (FSBO) route by trying to sell yourself, or even try an iBuyer or instant cash offer service. These 3 alternative approaches all require additional effort on your part, or the acceptance of potentially selling the property at a discount in exchange for a faster and hassle-free experience.
3. Determine the Property’s Value: Determine a fair asking price based on the property’s value and comparable sales in the area. A real estate agent usually can help determine this through other comparable sales data, or you can hire an appraiser for an additional fee.
4. Consider Tax Implications: Consult with a tax professional to determine any tax liabilities associated with the sale of the rental property and to explore potential tax benefits.
5. Check Local Tenant Laws: New buyers may want the property vacant or a particular tenant out. Be sure to check local landlord-tenant laws to understand what is allowed, not allowed, and may be required to relocate tenants.
6. Decide on a Selling Strategy: Determine whether to sell the property as-is or make any necessary repairs or upgrades before listing.
7. Prepare the Property For Sale: Gather all lease agreements, make any necessary repairs and give the property some curb appeal to attract potential buyers.
8. List the Property: Your real estate agent should advertise the property through multiple channels, such as online real estate websites, social media, colleagues, and investor networks.
9. Show the Property: Your real estate agent will schedule showings and hold open houses (if applicable) to give potential buyers a chance to view the property. If it is a commercial property or not suitable for open houses, your agent will likely do private scheduled tours.
10. Receive and Review Offers: Review offers and negotiate terms with potential buyers until you reach a mutually agreeable price.
11. Enter Into a Contract: Once you have accepted an offer, enter into a legally binding contract with the buyer.
12. Escrow, Contingencies, and Inspections: Once there is an agreed upon contract, both buyer and seller go into escrow which can usually be 30 days or longer. During this period, there can be contingencies that may need to be cleared for the sales process to continue. Furthermore, the buyer usually orders an appraisal and performs physical inspections while working through a series of administrative requirements including satisfying loan approval conditions and completing a title search.
13. Close the Sale: Complete any final repairs or preparations, transfer ownership to the buyer, and receive payment for the property.
14. Use of Sale Proceeds: Selling a property can net you a large amount of capital if there is equity in the property. It is best to have a plan ahead of time of what you plan to do with the money, before  it hits your bank account. Maybe consider a 1031 exchange if you still plan to keep growing your rental property portfolio.

Selling a Residential Rental Property For Sale By Owner (FSBO)

Deciding whether or not to sell a residential rental property as For Sale by Owner (FSBO) is a personal decision that depends on several factors. While selling a property without an agent can save on commission fees, it also requires more time and effort on the part of the owner. Owners must be willing to handle the sales process themselves, including pricing the property, marketing it effectively, and negotiating with potential buyers. Additionally, owners must have a strong understanding of the local real estate market laws and be able to accurately assess the value of the property. For those with experience in marketing and real estate sales or who have successfully sold properties FSBO in the past, it may be a viable option. However, for those who are new to real estate sales or are unfamiliar with the process, working with a real estate agent is usually the safer and more effective choice.

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Residential Sales Companies

When buying or selling a residential rental property, the real estate agents that facilitate the process are usually associated with a particular larger company called a brokerage. Real estate brokerages hold individual real estate agent’s licenses and provide their agents with access to helpful resources through shared networks. Brokerages can range from local small multi-person companies, to multinational brands with thousands of agents. There are also specialized brokerages who focus on residential properties such as single family homes and apartments.  Much like choosing a brand of car or associating with a favorite sports team, real estate agents carefully select their brokerage to help maximize their growth and sales potential.

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Residential Sales Agents

Choosing a real estate agent to sell a rental property is an important decision that can impact the success of the sale. When selling an investment rental property such as an apartment building or single-family house, it’s important to find an agent with experience in residential investment property sales and a strong understanding of the local real estate market. A good agent should be able to provide guidance on pricing the property, marketing it effectively, and favorably negotiating the terms of the sale with potential buyers to your benefit. Additionally, they should be able to work with existing tenants and address any concerns they may have throughout the sales process. By choosing the right real estate agent, owners can maximize the value of their investment and ensure a successful sale.

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Where to Buy or Sell a Residential Rental Property?

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