Real estate investing has its fair share of tried-and-true strategies. Because of that, many investors overlook great opportunities in niche corners of the market. Residential leasebacks are a great way to not only get a discounted price on a unit but also a reliable tenant in that unit.
A leaseback consists of two basic components:
- Buy a property from a homeowner
- Become the landlord and rent the property to the former homeowner
It’s worth being on the lookout for potential leasebacks, especially for long-term rental investors, because they offer several advantages over simply buying a property and then finding a tenant.
The Need for Leasebacks
Imagine you’re a homeowner struggling to keep up with mortgage payments. A residential leaseback could be your lifeline. Leasebacks enable you to sell your home and continue living there as a tenant. This way, you get the cash you need without the hassle of moving. In uncertain economic times, the ability to stay put is a huge relief.
Economic downturns, job losses, or personal issues like divorce can create a need for quick financial solutions. Residential leasebacks offer flexibility that suits both personal and financial needs. By turning home equity into cash without the stress of relocating, homeowners can gain time to rebuild their finances. You could even sell the house back to them at a later date if the situation were right.
Another common way to use leasebacks is when the homeowner isn’t able to move after selling. Maybe they need more time to find another house or plan on moving, but they don’t want to be held up by having to sell their house right before doing so.
How Can Leasebacks Benefit Investors?
Residential leasebacks offer many benefits. First, investors don’t have to worry about upfront leasing fees to a property manager since they don’t have to place a tenant. Plus, investors get immediate rental income since the former owner stays on as a tenant. Keeping them in the property eliminates vacancy periods as well, saving turnover costs.
Tenants who were once owners usually have a strong emotional connection to the property. This means they take better care of it, reducing maintenance surprises and preserving the property’s value. Their previous pride of ownership often translates into being an ideal renter. Investors save money on repairs and save time on house visits to deal with issues.
The option to stay in their existing home offers many homeowners a sense of relief. They are much more likely to accept an offer under the market value if it saves them that stress and disruption. And investors gain some additional equity.
Portfolio Diversification and Tax Benefits
Leasebacks are not just about immediate equity gains, however. Having long-term tenants who care about the property balances out riskier investments investors may hold. Investors get tenants they can depend on whereas that may not be the case with other rentals.
If investors have a rental property that brings in some cash flow without too many headaches, there’s no rush to offload it. Investors can strategically time the sale to coincide with favorable market conditions, potentially increasing the sale price and maximizing profits. By delaying the sale, investors may be able to qualify for long-term capital gains tax rates, which are generally lower than short-term rates. This can result in substantial tax savings.
The Bottom Line
Residential leasebacks can be a win-win for both tenants and investors. They offer a way to snap up properties with ready-made tenants while throwing a lifeline to homeowners who’ve hit a rough patch. When considering a leaseback, look for properties in good condition and with owners motivated to sell. Investors will need to lean on their off-market resources like wholesalers or contact homeowners themselves. That extra legwork is where investors can find better returns.
For those looking to finance their next purchase or refinance existing properties, Dominion Financial’s Long-Term DSCR Rental Loans offer competitive rates and terms designed to help you stay adaptable in a changing market. Embrace the opportunities that residential leasebacks present, and position yourself for success in any economic climate with Dominion Financial’s price-beat guarantee.
This blog is based on Episode 52 of Real Investor Radio with special guest Daniel Kattan. Kattan is the founder of Sell2Rent, a platform designed to assist homeowners through the sale-leaseback process. To learn more about Daniel Kattan and Sell2Rent, click here.
