At a Glance
- Darin Cunningham has personally underwritten more than 10,000 potential Greater Nashville rental properties and helped investors purchase more than 2,000.
- This is the third article in his rental-investing series, focused on disposition and exit strategy rather than acquisition or tax planning.
- A rental’s exit strategy, including selling to an owner occupant, another investor, or through an off market sale, should be considered before the property is purchased.
- Selling a rental with a tenant in place can be difficult on the open market, but can be an advantage when sold to another investor through Darin’s investor network.
- A properly structured Section 1031 exchange can allow an investor to defer capital gains by exchanging into other qualifying investment real estate, subject to IRS rules and timelines.
One of the questions I ask when evaluating a rental property is fairly simple:
Who is going to buy this property from us when we are ready to sell?
I think about the exit before I recommend the acquisition.
I have spent more than two decades selling homes throughout Greater Nashville, so I look at investment properties through two different lenses. I want to know whether the numbers work as a rental today, but I also want to understand how marketable that property will be five, ten, or even twenty years from now.
That is one reason I generally prefer rental properties with multiple potential exit strategies.
Ideally, a property could eventually be sold to an owner occupant or another investor. Having more than one potential buyer pool creates flexibility.
But there is another exit strategy that I believe can be particularly valuable for my investor clients.
Plan the Disposition Before You Buy
Selling a Rental Property With a Tenant in Place
Selling an occupied rental property on the traditional open market can be difficult.
An owner occupant may love the house but have no interest in inheriting a lease. Showings can become more complicated. The tenant’s schedule and cooperation matter. Presentation may not be what it would be with a vacant, professionally staged property.
The existing lease can also eliminate a significant portion of the traditional buyer pool.
For another investor, however, an existing tenant can potentially be an asset rather than an obstacle.
A qualified investor may appreciate purchasing a property with an established lease and immediate rental income, assuming the lease terms, tenant history, rent and property condition meet the buyer’s investment criteria.
That creates an entirely different disposition opportunity.
My Investor Network Can Become Part of the Exit Strategy
This is an area where my experience working with investors throughout Greater Nashville becomes particularly valuable.
I have helped investors purchase more than 2,000 rental properties and personally underwritten more than 10,000 potential rental acquisitions in this market.
Over time, that has also created a substantial network of investors who are continually looking for rental opportunities.
When one client eventually decides it is time to sell, there is a reasonable possibility that another investor I work with may be looking for exactly that type of property.
That can potentially create an off market transaction where one investor is ready to exit and another is ready to acquire.
I would not promise that an off market buyer will always exist. Market conditions, pricing, financing, lease terms and the individual property still matter.
But having an established pool of active rental investors creates another potential path that an individual landlord selling a property on their own may not have.
Why an Off Market Investor Sale Can Be a Win for Both Sides
Consider the transaction from each investor’s perspective.
The seller may be able to sell without first waiting for the tenant to vacate, preparing the property for traditional retail showings and exposing an occupied rental to the entire market.
The buyer may acquire a property with an existing tenant, documented rental history and income already being generated.
Neither side should assume that makes the transaction automatically attractive. The property still needs to be appropriately priced and independently evaluated by the buyer.
But when the numbers work for both parties, it can solve a problem on each side of the transaction.
One investor needs liquidity. Another needs inventory.
My role is to know both sides of that market.
The Exit May Also Be a 1031 Exchange
Selling does not necessarily mean leaving real estate.
An investor who has accumulated substantial equity may decide that capital would work harder in a different property or asset class.
A properly structured Section 1031 exchange can allow an investor to defer recognition of qualifying gain when exchanging investment real estate for other qualifying investment real estate. IRS rules and strict timelines apply.
That can create a natural progression:
Acquire, Operate, Build Equity, Sell, 1031 Exchange, Reinvest.
An investor might move from one single family rental into another property with better economics. Someone with several single family rentals might eventually consolidate equity into multifamily or another larger investment.
The important point is that we are planning for that possibility from the beginning.
Your CPA and qualified intermediary should structure the 1031 exchange. My role is on the real estate side: helping evaluate the property being sold, identifying potential buyers and helping source and analyze potential replacement properties.
From Acquisition Through Disposition
This is ultimately the value I want to provide an investor.
I am not simply trying to find you a house.
Before you buy, I can help underwrite the property using what I have learned from analyzing more than 10,000 potential rental acquisitions in Greater Nashville.
When you purchase, I can help connect you with the property managers, leasing resources, contractors and other vendors necessary to operate it.
While you own it, we can continue evaluating rent, property performance and market value.
And when the time eventually comes to sell, I understand that side of the business too.
I have been selling residential real estate in Middle Tennessee for more than two decades, and because I work with a large pool of active investors, we can evaluate whether the better disposition strategy is an off market investor sale, a traditional market sale, a 1031 exchange into another investment, or simply continuing to hold the property.
The exit strategy should not begin when you decide to sell. It should be part of the analysis when you decide to buy.
Final Thoughts
The more rental properties I have analyzed, sold and owned, the more I have come to believe that successful real estate investing is less about finding one great deal and more about building a repeatable system.
Underwrite correctly. Buy correctly. Operate efficiently. Use the tax benefits available to you. Maintain the property. Build equity. Then have a plan for what comes next.
That is the approach I take with my own investments, and it is how I approach properties for my investor clients.
I have personally underwritten more than 10,000 potential rental properties across Greater Nashville and helped investors purchase more than 2,000. I also own investment real estate myself.
That means I understand what it feels like to be on your side of the transaction.
My objective is not simply to help an investor buy another property. It is to help identify an investment that makes sense today, put the infrastructure around it to make ownership easier, and have a strategy for eventually extracting or redeploying the equity we worked to create.
Sometimes that means holding the property for another ten years.
Sometimes it means selling it to another investor with the tenant still in place.
Sometimes it means selling and completing a properly structured 1031 exchange into the next investment.
The right answer depends on the investor and the property.
But we should be thinking about that answer before we buy.
