Owning Rental Properties Is Smart, but I’m Out, Jack!

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Owning Rental Properties Is Smart, but I’m Out, Jack!

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:

  1. I bought the house in a rough area (there was even a shooting right in front of it while I was renting it out).
  2. I had simply done some math to figure that if the rent covered the mortgage payment (with taxes and insurance) I should be good.
  3. 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…

Owning Rental Properties Is Smart, but I’m Out, Jack! - Empower (formerly Personal Capital) Net Worth - Assets and Liabilities
The only liabilities are now the credit card balances (which we pay in full each month).

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…

Owning Rental Properties Is Smart, but I’m Out, Jack! - Capital Gains

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!!

— Jim

You know you wanna share this!!

38 thoughts on “Owning Rental Properties Is Smart, but I’m Out, Jack!”

  1. We sold our oceanfront beach rental condo this year. After 15 years I was tired of the hassle of repairs, worrying about hurricanes, and dealing with crooked property managers. Great feeling with no more worry! Now I rent at the beach! 😉

  2. My husband and I are listing our duplex for sale at the end of February. We are done being landlords. My husband purchased it in 2005 for $335k and by 2008, we saw it drop in value to $175k. The value is finally creeping back up to $320k, so it is time for us to let go and cut our losses. Thankfully we had purchased another home in the beginning of 2016 and love where we live. We only have these 2 mortgages on our personal income statement. It will be nice to have the largest one off of there. For us, selling it means that we are gaining freedom.

    I love your blog and look forward to the emails I receive. Safe travels back to the US!

    1. Sorry to hear about the property drop, Jenny, but glad to hear it’s slowly found its way back up in value. The good news is that you’ll likely be able to show some kind of a loss on your taxes for the year! I’m always aiming to see the glass as half-full! ?

  3. In just one week, I will close on the sale of my property management company and couldn’t be more relieved. I think we ran an honest business and that’s probably why I wanted out. Profit in this business comes at the expense of over billing owners and that’s not how I run a business. We built a PM firm that managed over 500 houses at current numbers. It’s a LOT of headaches. I never owned a rental myself and likely won’t after seeing the true effects. Tenant entitlement, expensive repairs, market flux. Most of my investors made great money since the recovery. Many millions likely.
    But the flip side are the big loses along the way too. Lately are COVID squatters making good income but don’t want to pay rent. Long story, looong. Hasn’t paid in a year now.
    Would I own a rental now? Only if I can self manage it, buy during a recession and sell in a hot market, then it’s worth it. Frankly, that’s part of my plan. Waiting for the next recession. They’re guaranteed.
    Lanlording is not for the faint of heart. I’m very jaded at this point, but plan to go into the vacation rental space. High expenses here, but managed by yourself becomes very profitable.
    So if I don’t own rentals, what have I been doing? Notes. It’s interesting space and no “Toilets, Tenants or Trash”.
    Another is REITs mentioned by Jim and syndications can be great opinions to consider as well.
    Jim. It was a good time to sell. All the best on your journey. Joining the expat life this year ourselves!

    1. Thanks for sharing the other side of what it’s like from owning a property management company, William. I’ve heard that it’s a tough business with not a ton of money in it, so it’s good to hear that you ran a good, honest business.

      Haha, you might be onto something with no “Toilets, Tenants or Trash” mantra – I’ve never heard that before. I don’t know much about syndication but maybe I’ll dig into that a little more as well.

      Congrats on the plans to become an expat – where are you headed?

      1. William K Robison

        Tried to put Boquete on the very short list, but the wife wont go that far from USA. I’ve got Costa Rica a bit on the map, but she is leaning towards Puerto Vallarta currently.
        There are some good syndication companies out there and several poor ones. Reach out to me directly and I can share a bit about what I know. Syndications and Notes are nice alternatives in an expected fluctuating market.
        Great to see also that you guys aren’t leaving the expat life. All the best to the family. Overall, I think the culture benefits outweigh the downside, but that’s just me. I took my kids on many adventures. I only wish I discovered this lifestyle when they were young. Now theyre all in the “real world”. Now if I could just get them to pay attention to F.I.R.E.

        1. I hope you enjoy your time in Costa Rica or Puerto Vallarta – that should be an awesome new adventure! I also wish you all the best with getting your kids to appreciate the value of financial independence – such an eye-opening realization. They might not want to quit their jobs if they’re enjoying them, but at least they’ll have the option if something changes down the line.


  4. Everyone I know who’s tried being a landlord bails out after a few years, mostly because of the renter-induced headaches. Although stocks have volatility, they always recover and often fly even higher if you’re patient. I’m stunned to see any 5 figure piece of real estate, even if it was a few years ago – that’s a unicorn in the eastern US (I thought it was a unicorn on both US coasts). Literally, pocketbook = purse = handbag; figuratively they’re synonymous with wallet.

    1. Haha, thanks for the pocketbook explanation, Mary – I forgot I put that in the post! ?

      I’m with you on the stocks for the long-term, but it’s always been comforting for me to have something outside of the market as well. At least if I go the REITs route, I’ll kind of get the best of both worlds. 🙂

  5. We sold a duplex last fall that we had owned for 15+ years and done well with. Prices for duplex’s in the area had increased rapidly, so we sold. The taxes from the sale are depressing, particularly the depreciation recapture. I have another duplex that I would like to sell, and then we would be out of real estate, but the tax hit would be huge from the depreciation recapture, and capital gains. We could do a 1031 exchange, but then we would still be landlords, and it only defers the taxes. I haven’t found an exit strategy I like.

    1. Ouch, that’s a tough position to be in, Andrew. I’m not a tax advisor by any means so don’t take this as advice, but one of my financial mentors actually sold one of his properties at a tremendous loss to his existing tenants solely for tax purposes. Everyone walked away a winner in that transaction. I wonder if talking to an accountant might yield a similar strategy or some other way to help you avoid getting crushed on things. Good luck for sure!

  6. Nice win, Jim. I’ve never had the appetite to deal with long term rentals, though our short term vacation rental on our retirement cabin worked great for us. We haven’t started renting our Alabama property yet, heading down this week to spend a week with our daughter, looking to finish furnishing it while we’re there. Safe travels back to Ohio!

    1. Nice – maybe we’ll be your first renters, Fritz! Just know that we like to make our mark and destroy a rented place when we leave it. 😉 Ok, probably not true… one way for you to find out though!

      Have fun spending time with your daughter!

  7. Great story! Amazing to have tenants for that long for the first home. Though yes, there are always maintenance issues and capital improvements to deal with for any real estate investment which can be costly.

    Congrats on getting out! I have a love/hate relationship with real estate myself. It can be pretty stressful at times. Glad things worked out and you’re satisfied with the results!

    1. We were extremely lucky to have tenants for as long as we did on our first rental, Rachel – that’s for sure! 🙂 As you well-know, there are ups and downs to rental property. It’s great for some people and I’m glad I learned so much from it over the years, but I’m not sure if I’ll be jumping back into it anytime soon! ?

  8. Great article and certainly a more balanced story on owning rental properties then one generally sees. I think I’m grateful that I realized early on that I just don’t have the constitution to let others live in one of my assets. I knew that I’d always have to deal with horrific people issues and constantly worry about the place getting trashed, so I just never did that. I did invest in real estate for myself including houses and raw land and did well that way. Glad to know that some of my suspicions of running rentals weren’t baseless. Glad you did well overall though!

    1. Hopefully I didn’t make it sound too bad – there are really a lot of great benefits to owning physical rental properties. And a lot of folks really love it. I didn’t mind it for a lot of years, but I think I’m just getting to the point of where I want to simplify… and this was just a great opportunity to jump out. 🙂

  9. interesting – do you think it would’ve been easier if you were in close proximity to the rental and could go see what was going on? I always wondered how tricky it would be managing a property without being in the same market.

    I’ve been considering getting back into a rental property but the management hassle is always a mission. I guess like any business really. I’ve been avoiding property though in my own market since a lot of laws passed in the last few years in our country are incredibly bad for landlords and great for non-paying renters. I guess that’s why our properties have reduced in value in USD terms over the last 10 years.

    I’ve got quite a lot of REITs, sadly they all cut dividends massively or stopped paying, but I think their prices now probably reflect a lot of the Covid pain, so if you can find ones that aren’t financially bankrupt REITs are probably a decent alternative to acquiring a new physical property – and more diverse – but will lack that leverage on your equity that you enjoyed with this current property.

    1. Personally, I don’t think being closer to the property would have made too much of a difference in my case. That said, if I was a lot more involved in the property, then yes, I probably would have known what was going on sooner. But if that was the case, there really wouldn’t have been a need for the property management company. I purposely hired the PM though, even when we did live nearby because I wanted to be as hands-off as I could. The problem is that PMs don’t generally have the same concern for your rental that you do so things like this can fall through the cracks if you don’t stay 100% on top of them like it did for me.

      You nailed it on the leverage, too, Charlie. That’s a huge part of the value of owning physical property and something you don’t get with REITs. I’m willing to forego that (at least for now) but it’s an aspect of real estate I’ll miss in the meantime! 🙂

  10. Ah, bummer on non rental payment. Due they have to pay eventually?

    I’m going the opposite way and trying to buy as much rental property as possible. The cash flow value has gone way up b/c interest rates have come way down. It takes a lot more capital to generate the same amount of risk-adjusted income.

    But for that rental property value compared to your net worth, it doesn’t seem worth it.


    1. I was able to recoup most of the money owed – some through the CARES Act and some through a negation with the tenant. It wasn’t great, but at least I was able to get the majority back.

      The ability to use leverage with your money to get a better return is certainly an advantage. That makes sense that you’re buying up more property right now. I’m not sure if we’ll go that route again or not – I guess time will tell!

      Good luck on your property purchases, Sam!

  11. We are getting ready to sell our prior home which we turned into a rental for the last 2 years. The main reason is appreciation. I bought in 2011 at the low point. The housing prices in the Seattle metro area has exploded. If we sell now, we still fall in to the capital gain exclusion of up to 500k for couples. We will be close to that on the gain so we are getting out now. We were super fortunate on timing and this will move us far ahead on FIRE.

  12. Congrats on getting out on top!

    Real estate has been a big part of building my net worth, but some days I just want to sell it all and be done with the headaches.

    Fortunately we’ve had a lot of appreciation over the last 5 years or so in our market, and we’ve taken the opportunity to sell about half our rentals.

    Like you said, I love the hedge against inflation and the stock market, but at some point I hope to be where you are sharing that we sold the last property!

    1. Thanks, Andrew, but I think it’s too early to say if I got out on top or not – you never know, the housing market could continue to grow. 🙂 Either way, I’m happy with where I bailed.

      Looks like you’re really the one crushing it though in the real estate game! Nice job dumping off some properties recently – hopefully, you kept all your favorites. It’s great to be able to take advantage of the appreciation in today’s market.

  13. Congrats on the sale Jim (and a very nicely written post too!)

    2020 was certainly a perfect storm for landlords. The headaches must have been intense! Sorry to hear you had to go through all that!

    Personally I’ve always thought that the landlord game only works on the ‘small scale’ if you’re willing to put in the sweat equity and do A LOT of stuff by yourself. It certainly worked-out that way for my parents.

    As an adult, I remembered all the work they put into their properties to make them successful when I was a kid. I decided that REITs were the way to go for me. And that path has worked out rather well for me too. One of the REITs I own is up almost 1000%!

    The name of the game is the same though — Your profit is earned when you buy, not when you sell.

    Admittedly the tax advantages are smaller (and better hidden) when it comes to REITs, but you can still do very well owning real estate through that kind of vehicle.

    Good luck in whatever you decide!

    1. So true – it can be a lot of work, especially if you don’t understand all the ins and outs. One of my financial mentors owns 7 rental houses and another owned well over 100(!) so it was always good to be able to lean on them for feedback. It’s also nice to personally know people who’ve been able to successfully make it work and enjoy it.

      I’ll follow your lead though for now and get a little more vested in REITs. I do own a small sliver right now but I’ll be padding that up here soon. 🙂

  14. Congrats on the sale Jim and the increase in net worth! The US real estate in general is so much cheaper than ones in Canada. I saw recently a to-be-torn-down detached house in Vancouver was sold for over $2M! Trying to get into the multi-family apartment rental business certainly will need a lot of money here in Vancouver.

    1. Thanks, Bob! Funny enough, it actually knocked our net worth down a little. We’ve always counted the equity in our net worth so removing the debt the property value kept our net worth the same, but the closing costs knocked it down a little. Somehow though, we already recovered that with the current stock market continuing to rise.

      That’s incredible on that house in Vancouver! I had no idea that Canadian real estate was that much pricier than that in the U.S.! Maybe you’ll have to move to the U.S. to become a booming real estate tycoon! 😉

  15. Ha! This article was spot on! Have you thought about short-term rentals? We were “you”, now we are short-term rental owners. We recently sold a 4 unit in Pittsburgh and made a nice penny (too far away, too old, too cold) that we managed ourselves and another single house we sold a few years back. Now, we just have 2 short term rentals (and one all to ourselves right across the street from a beautiful beach in Barbados). We are looking for another multi-unit. Although a little-bit more work, worth it financially and since we are “jobless” and have plenty of time to be beach bums (hehehe).

    1. That’s really cool, DTD! My brother and sister-in-law just bought an investment property specifically for short-term rentals. I want to keep an eye on how this flows for them, but I have heard about how that can be very good for the wallet! 🙂

      More importantly, if we make out way to Barbados, I’ll be looking you up to find out more about your property to rent!

  16. Congrats on the sale Jim and great job increasing your net worth! I was looking to buy a multi-family rental property and I learned a lot from your experience. Thank you!

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