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That’s right, folks – after owning rental properties since 2003, I’m now completely out of the game!
In 2018, I sold the house I had bought as an investment property in 2003. And just a couple of weeks ago, we closed on selling the duplex we had purchased in 2015.
Here’s the weird part – if you’ve been following my blog over the years, you know that I’m a strong advocate of owning real estate rentals.
Each property can provide a solid asset, another income stream, and a hedge against the stock market. This can be truly invaluable for anyone on the road to building wealth.
So why in the world would anyone who values the benefits of real estate so much want to get out of owning rental properties?
Why I went down the path of owning rental properties to being with…
When I was in my early twenties, I found Robert Kiyosaki. I wasn’t exactly looking to start owning rental properties – essentially, I was just trying to figure out how to get out of the rat race.
Although most people cite Rich Dad Poor Dad as the first Kiyosaki book they read, I actually started with a lesser-known one called Rich Dad’s Prophecy. That pulled me in enough to read some of his other books, including Rich Dad Poor Dad and CASHFLOW Quadrant.
Love him or hate him, these books were a real eye-opener for me. I didn’t think of them as a step-by-step directive, but rather more of an understanding that there are other options in life. Although working for someone else is fine for many, building wealth is more difficult to come by that way.
Real estate intrigued me so I did some more reading on the subject. Then I bought my first rental property in 2003.
I was young and motivated, but still stupid when it came to the subject of real estate. I didn’t understand the game or the numbers well enough when I jumped into it. Looking back, I made three big mistakes:
- I bought the house in a rough area (there was even a shooting right in front of it while I was renting it out).
- I had simply done some math to figure that if the rent covered the mortgage payment (with taxes and insurance) I should be good.
- The house was old – almost 100 years old. That made repairs and improvements difficult, especially considering I was never good at that kind of stuff.
Nonetheless, I got extremely lucky. Lisa and I lived there for several years while we worked on fixing it up. Eventually, we moved out and got renters in the place in 2009… and somehow they stuck around until 2018. Our cash flow wasn’t huge but we brought in a little more than what we owed on the mortgage each month.
Once they moved out, however, we decided to sell the place. It was destroyed and learning from my mistakes knew it wasn’t worth it to give it a round two. We ended up selling the place at a loss but it was good to be done with it.
Take 2… the duplex
In 2015, I got the itch to buy another rental property. This time around though, I had experience under my belt and had read a lot more books on the subject to broaden my knowledge. I also was fortunate to have my financial mentor in my corner assisting me along the way.
Long story short, I was able to buy a 1967 duplex in a good neighborhood where all the numbers worked very well. Notice that all of those factors are the opposite of what messed me up on the first rental property. Not only that, but it was rent-ready with only a couple of minor tweaks that I could knock out myself.
The cost was $98,000 and I obtained a 30-year fixed mortgage for $73,500 at 4.75%. That made my total monthly payment $673.09. Expected rents were $750-800 per side (with one side currently filled).
If you’ve heard of the 1% rule of thumb when determining if the property is worth looking at, it essentially states this…
The one percent rule is a guideline frequently referenced by real estate investors when evaluating potential property purchases. This rule of thumb states that the monthly rent should be equal to or greater than one percent of the total purchase price of an investment property.–Roofstock – How Ironclad is the One Percent Rule in Real Estate Investing?
This property was giving us a little more than 1.5% based on that rule, which I was more than happy with. As a bonus, because this is a duplex, that meant that even one side could cover the payment when I’d have a vacancy.
So I rented the duplex out from 2015 onward. It cash-flowed very nicely over the past 5+ years I owned it. Not only that that, but as I mentioned earlier, it’s nice to have a hedge against the volatility of the stock market. Sure, I had some repairs and a few goofy tenant issues, but it went fairly smoothly and my property management company handled a lot of that.
If owning rental properties is so good, why sell?
That’s the million-dollar question, right? Owning rental properties can be a great asset to have in your portfolio so why the heck would I get rid of it?
Well, the answer to that culminated from a few different factors. Let’s start with the minor ones…
Big expenses around the corner
One of the less joyful facets of owning rental properties is that you have to account for and keep up with capital expenditures. In the case of our duplex, a big expense that’s going to need to be addressed very soon is a new roof. It’s not leaking, but it’s probably about 20-25 years old now.
I never got as far as getting any estimates, but checking with a knowledgeable friend, it would likely run in the neighborhood of $6,500 to replace the existing roof! It comes with the territory, but that’s still a huge chunk of change I wasn’t looking forward to letting go of out of my pocketbook. And in all reality, I don’t even know what a pocketbook is!
Some repairs and renovation items were also in need. The windows probably needed to be replaced (single pane) and there were a bunch of other punch list items out there. I’m sure it goes without saying that as you spend money, your profit goes down. It’s got to be done but it still stings.
Owning rental properties can be a headache
I’m not going to pull any punches – although owning rental properties has some big advantages, it also brings some headaches along for the ride. I’ve always used a property management company, which helps alleviate some of those headaches but it doesn’t remove them completely.
I’ve never heard of a great property management company. And if you don’t spend time managing your property manager, things will slide… and not in your favor. That can be time-consuming and makes you wonder if a PM is even worth it.
I had tenants on one half of the duplex who didn’t pay rent for almost the entire 2020 year. Why? Because they could get away with it due to the moratorium on evictions during the COVID-19 pandemic. That was their sole reason for not paying.
They took advantage of the system and it almost cost me almost a full year of missed rent. My property management company finally brought them to court and we were granted an eviction. But the attorney they used was horrible and it still didn’t end up happening.
In the end, it took putting the property up for sale and getting my agent involved to figure out what was going on. It turns out their lease ended last spring so they could have been thrown out immediately. What a mess.
In the end, I was able to recoup most of the back rent owed through the county as part of the CARES Act. I was also able to cleanly get the tenant out and negotiate a deal with them which let me keep their security deposit and get a cashier’s check for some of the money they still owed. I still lost about $2,400 (not counting late fees) because of it, but it could have been much worse.
Who needs this kind of headache? I’m getting a little older and don’t want to deal with stupid stuff like this anymore.
These factors in and of themselves weren’t likely to make me sell though. The income and tax advantages we got from owning the duplex were worth those few annoyances. But there was one thing that really tipped the scale…
Crazy, unexpected appreciation
Sure the real estate market’s been hot – I think we all know that. But my duplex is an area where there are a lot of multi-family homes like this… a real lot. And areas with a lot of duplexes have a tendency not to appreciate as fast as areas with single-family homes.
A lot of this is because generally, your only prospects for buyers are going to be other investors. People don’t usually buy a duplex for themselves and other family/friends. That limits your pool of buyers quite a bit. So the market tends to appreciate a lot slower than other neighborhoods.
I knew that going in and was ok with that. I planned to hold onto the property for the long haul and you should never buy a rental property simply in hopes of appreciation. Property values going up are just icing on the cake. The important thing is that the numbers work for renting it out, which of course this one did.
But something strange happened. The stars seemed to align and interest rates have dropped to next-to-nothing during a seller’s market. That’s made for an interesting scenario for investors because even with inflated prices, they’re able to obtain such low mortgage payments which can still make the numbers work.
In my case, I ended up selling the duplex I bought only five years ago at $98,000 for $158,000. That’s incredible for a property here to appreciate so much, especially in so little time. That’s over a 61% increase in value in just 5 years!
This is one of those opportunities that may never happen again in my lifetime. And I’ve learned over the years to keep an eye out for these golden unicorns and jump on them when I see them.
So I did. We closed on selling the property just a couple of weeks ago.
So now what?
In the 5 years that we owned the property, I always paid a little more on each mortgage payment. I like to squeeze in what amounts to a little more than one extra payment per year since it reduces the loan by such a tremendous amount over time. That helped bring what I owed to the bank down to $63,017.10 when we sold.
Overall, we ended up pocketing $78,828.43 when all was said and done. That meant that we more than tripled our $24,500 down payment in just over 5 years. That doesn’t even count the profit we made from rental income or the benefit we had to our taxes (depreciation helped us show a loss most years).
Even though I consider that to be “good debt” since it was easily being paid off by our tenants, it feels weird (in a good way) to have next to nothing on the liabilities column right now. Most of you know that I use Empower (formerly Personal Capital) to aggregate my accounts and it’s weird seeing nothing but assets listed…
As for the short-term, I’m hoping to minimize capital gains on this win over the year. I’m not a tax expert but my accountant is so I’ll be relying on him for help. A quick look at a capital gains calculator said that I can ballpark about $6,500 in tax assuming we do a full Roth conversion this year and we bring in just a little bit of income…
But, that’s if we do a Roth conversion. We started moving our money from our traditional IRA accounts to our Roth IRA accounts utilizing a Roth IRA conversion ladder. By doing small chunks of money each year, we can minimize our tax burden. And then we’re able to freely pull that money from our Roth IRAs without penalty after 5 years.
We’re in a position though that we can skip this year’s conversion or only convert a smaller amount. That can help take the capital gains tax down to next-to-nothing. There’s also the possibility of doing tax-loss harvesting with an aim to offset the gains of the sale of the house. I haven’t done this before, but it might be worth digging into if needed.
Then there’s the decision on what to do with the money. $78,828.43 is a pretty nice chunk of change. I could possibly double that up with some well-spent time in Vegas! Or not.
I’m thinking it makes sense to keep the money in real estate. For now, though, I’m considering putting the money into REITs. Although I lose some of the advantages physical real estate has to offer (like the tax advantages), there are a lot of pluses as well (more liquid, more diverse, low to no headaches, etc.).
Down the line, maybe I’ll buy another property, but that’ll depend on how the market’s doing, interest rates, and if I really want to go down that road again.
I don’t regret getting into real estate. I’ve learned a lot over the years and owning rental properties can be a very good way to build wealth. It’s also nice to have investments not directly tied to the stock market.
However, I’m ready to take a break and with the possible once-in-a-lifetime jump in appreciation on the property, this seemed like a no-brainer.
What do you think? Was this a good or bad decision to sell my last rental property?
Plan well, take action, and live your best life!
Thanks for reading!!