Today’s question comes from a long time podcast listener, Ethan…
“I’m currently renting a house with my fiance in Denver. We love the house and have a great relationship with our landlord…
I’m eager to get into real estate and have been thinking about asking my landlord if he’d be willing to sell.
We intend to live in the house for at least 2 years to avoid capital gains tax, and rent it thereafter. I am pretty confident it would rent well. We are both on Money Gear #7 and are ready to take the next big step with our finances.
I’m thinking that buying from my landlord would be a great way to get a deal off the market and skip some realtor fees. Plus, we know the house well, because we’re living in it.
My main hesitation is due to the inflated Denver real estate market. You could find the same house in other cities for ¾ the price. Denver is attractive right now, which adds to my rentability confidence. But the high price might make it very difficult to cash flow. Our monthly payments will definitely be more than our monthly rent So, I’m curious what you guys think about the idea.
And if there is something else I should be considering first? I am also curious how we should bring this up to our landlord in a way that is both thoughtful and respectful. He only recently purchased the house for below market value, and he probably put about $50k into the house before renting it out.
I’m not sure if my landlord would even be willing to sell. But I want to go into this well-educated and any advice you could provide from a landlord’s point of view would be greatly appreciated.”
Matt & Joel’s response: I don’t see why you wouldn’t at least try to have the conversation!
You’re the perfect judge of whether or not it will rent well. You’re renting it and loving it enough to want to buy it! There’s certainly no harm in asking.
Here’s a few things to consider before approaching your landlord…
Cash flow vs. appreciation
Cash flow isn’t the only benefit of owning rental properties.
Yes, it’s important to have strong cash flow because it’s less of a monthly burden on you, the owner. But, appreciation (especially in bustling cities like Denver) might well make up for that lack of positive cash flow in the beginning years.
You have to be prepared for that and have the mental and financial fortitude to be willing to lose money consistently, knowing it will eventually pay off down the road. This is a long term approach, but one that can make sense for some folks!
Asking your landlord
The best way to broach the subject is to simply tell your landlord that you like the house so much that you like the idea of possibly owning it. Would he consider selling it to you?
Complimenting something he owns is a great start. It’s flattering to him. It sounds like y’all have a good relationship and that putting those cards on the table is a smart first move.
And it also puts the ball in his court. He can then think up a response and come back to you.
Your landlord probably receives about 10 letters, texts, emails and phone calls every day from no-name investors trying to buy his property at the lowest dollar possible. When you ask him, try to be personal, setting yourselves apart from the average “investor”.
I’d also make sure that you’ve got the liquidity to proceed if he does express interest. He should know that your offer isn’t fluff, it’s a real one and you are a serious buyer.
Negotiating a price
I’d also make sure that I knew what the market value of the home is currently on Zillow and by comparing recent comp sales.
For example, if it’s $800k, no matter what your landlord bought it for & what he sunk into it, that’s likely what he’ll want to sell it for now.
The landlord is likely using the same evaluation tools that you are. So don’t get too caught up in price negotiations. You both know how the market works and what the demand looks like.
As for how much he sunk into the place, I wouldn’t try to factor that in. He could have bought it for $5 from his great uncle. Or he could be into the place for $900k and looking at a major loss. You will never know!
The point is, don’t build up a big idea in your head about the landlord’s numbers or profitability. Just look at the black and white numbers you can control. Which is how much you truly think it’s worth, and whether that’s a great deal for you.
Saving on fees
If you’re gonna pay roughly market rate anyway, why this house!? Well, as you mentioned you might be able to avoid some fees involved in buying and selling. And you’re because of your familiarity with the house already.
A great negotiation tactic is telling your landlord that you’ll split the savings in agent costs with him. He makes a market rate sale AND saves an extra few percentage points.
You also save, at least in the $800k example, more than $20k, which is substantial!
That’s why it’s at least worth feeling this out, especially since you like the place and have long term goals for it.
Pain points & selling hassle
Also, try and figure out any pain points the landlord might have currently.
Even if he only bought a few years ago, he might not love being a landlord. And he might be willing to take the profit off the table and get rid of this property.
Basically, if selling is on his radar in any form or fashion, if it’s crossed his mind at all recently, he’ll appreciate you reaching out.
Selling to you means not having to get the place painted, landscaped, and picture ready (which costs him even more money). He’ll save on transaction costs and hassle. He’s also not having to accept a lowball offer in order to pull it off.
Sounds like a win/win in my book. Pitch that win/win scenario to them.
Don’t forget due diligence
I’d definitely still get an inspection. Yes, you live in the house. You’re familiar with the minor issues it has. But you might not know about something lurking beneath the surface.
It’s always worth the $500 or so to get that inspection because not having that info could cost you a lot more than that.
Inspections can also give you additional room to negotiate the price or repairs if the house has significant needs too.
The Bottom Line:
You said that you’re in Money Gear #7, which is a huge point in your favor. Trying to buy a rental property too early in your wealth building endeavors can take away from your ability to fund those all important tax-advantaged accounts.
But if you’ve been doing that & have jettisoned all of your troublesome debts, and you’re interested in real estate, it never hurts to explore this option.
It sounds like you’ve done the rental math, but run it again taking appreciation into account. As far as pricing goes, you might get a deal because you and your landlord can both save on fees as well as hassle. That’s a big advantage other buyers can’t really offer.
As for the conversation, it all starts with a bold question. But you’ll never know if you don’t ask.
Best of luck, Ethan!
For the full version of this discussion, check out Podcast Episode #850 (it’s the 3rd question in the episode)
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How do go about it with an older landlord, much older that has no family, kids, or husband and has home in a trust, owns where we rent, and lives in the same community, along with another single family home in another city? Could this benefit us more than what you have explained? We are scared to ask, but know she likes us.