From homeowner to landlord (Part 2 of 2)

If you’ve not read Part 1 yet, click here.

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We’d been brewing on a decision to sell for a few months but after our midyear review in 2019, we decided to sell both of our rentals. The first one we bought in 2014, we ended up selling in late 2019. We could’ve sold our second [debt free] rental sooner while it had a tenant in it but it would’ve involved a bunch of headaches we didn’t have the energy to deal with. So instead, we chose to let the lease expire and give the tenant ample notice so they had time to find another home. For us, this also meant we collected a little more rental income before offloading the home.

So why did we decide to sell? Why wouldn’t we just continue to collect rent checks to supplement our income into the foreseeable future. Well here are a few reasons.

1. Because we can

You know what’s interesting? If we said we were selling some of our index fund portfolio or an individual stock nobody would bat an eye. They’d say, “ok good for you…it’s not like you’re cashing out your entire nest egg“. But when we say we’re selling our rental property, we’ve received a lot of questions about it as if we’ve broken a sacred unspoken rule of wealth building.

As an asset that we own, selling is and has always been on the table. Whether or not it’s a debt free rental or one that has a mortgage on it, as owners, we’ve always had the option to sell. That is one of the perks of ownership! Not to mention, in order for someone to buy, someone has to sell.

Ideally, when you do sell, you do it at a point that is favorable for you, typically when the market is high. For me, I bought the property in 2006 for $102K, we listed it at $153K in February 2020 and sold it for $161K in March 2020.

Could the property value climb higher before the end of the year? Possibly. Would that imply that we’ve missed out on potential gains? Sure. Is that a decision we’re comfortable making at this point in our lives? Absolutely.

2. There are “easier” ways to build wealth

In the late 2000s, when I was gorging myself on wealth-building and personal finance content, you could not have convinced me that investing in real estate wasn’t a necessary pillar to building wealth. Even if it took me years to build a sizable portfolio, I was convinced I needed to have multiple properties to supplement my income and to build generational wealth. But I was an outsider looking in and admittedly caught up in the allure of being a real estate investor.

Having been there, done that and now exposed to other ways to make money I won’t go so far to say I regret becoming a real estate investor but…I know better now. For me, real estate was a gateway drug to the FIRE movement and now, FIRE has become a pathway to digital entrepreneurship. So when people ask me why I would sell a debt free rental, one of my other answers is because there are easier ways to build wealth.

Today, we’ve earned income through creating and selling products, brand partnerships, public speaking, affiliate marketing and now writing a book. Soon, we’ll expand that to include several other income streams we can’t quite share yet. But when we analyze the effort, risk and capital required to make similar strides with our rental properties, our real estate portfolio looks like a dud. The fact of the matter is, the internet is a viable, dynamic and rapidly growing space that has given us the potential to earn income and build wealth far faster and easier than our real estate portfolio ever did.

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In Part 1 of this series, we described the fourteen year process from homeowner to landlord. Knowing we could sell at any point, we held on as long as we could because we wanted to sell at what we believed to be the peak of an economic cycle. While we have no idea whether or not we’ve hit that peak, we do believe that now is a good time to call it quits. After all, this is undeniably a sellers market and we experienced it in spectacular fashion.

Our real estate agent did such a good job with selling our first rental, we opted to work with him again to see if he could replicate his magic. In our early conversations, he recommended we re-take some photos because he thought we could use better shots to help market the property better. Initially, I thought this was overkill because the pictures we had were fine but looking back, he was absolutely right.

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We were attending and speaking at an Auburn University conference when the pictures went live at about 9:15 AM. By 10 AM, our agent reached out to say we had an offer, site unseen for the asking price. Apparently, the buyer had missed out on a few homes in that neighborhood and was already familiar with the layouts so they were comfortable submitting an offer. A few minutes later another offer came in at the asking price.

By midday, our agent texted us that his phone was blowing up with inquiries and by the end of the day, we had 4 offers on the table to include a cash offer from an investor and two well above the asking price. We were completely blown away and in that moment, we felt validated for having made smart renovation decisions a few years earlier.

But the madness didn’t stop there. While we were making some final updates to the property to prepare us for closing, a fellow investor literally walked up to me and offered to purchase the property. He owned the unit right next door and snuck a few glimpses of ours while we had the door open. Over the next week, I’d routinely receive random texts and calls from prospective buyers and agents with the same request. It was nuts.

But this frenzy wasn’t just because the property looks good and the pics were phenomenal. We believe it’s also a reflection of rapidly rising rent in urban areas. Having been landlords who benefited from rising rents over the last five years, we knew there would be plenty of people looking to purchase our home. With really low mortgage rates, we knew they would see buying it as a great way to save money, even if they purchased it above the list price because their mortgage payment would still be lower than their current rent. But even with all this, there were still other forces playing a key role in our decision to sell.

3. Real estate is highly influenced by forces beyond our control

Like many other major cities, we’ve seen Atlanta re-develop over the years and unfortunately many of the homes and condos being built are geared at high earners. This is unfortunate and speaks to the depth of inequality we’re experiencing in the US today. According to a January article by the Atlanta Journal Constitution, “the greatest scarcity of listings continues to be homes at the lower end of the price range” and “the imbalance will likely worsen, because low interest rates will keep drawing would-be buyers into the market“.

In short, if you’re looking to buy an affordable home that doesn’t require a lot of work and is convenient to the city-center, there aren’t many options available to you. We saw this coming years ago and knew that our home wasn’t just a place to live or a nice rental property. It was a lifestyle solution for many up and coming professionals who couldn’t afford to live anywhere else. While stocks are also highly influenced by powers outside our control, they are more liquid than real estate which gives us a degree of flexibility we need more today than we did in prior years.

When it was all said and done, by 6 PM the day after listing it, we’d accepted an offer for $161K. A few weeks later, just before things got really dicey with the coronavirus pandemic we closed and were officially former real estate investors. With Kiersten quitting her corporate job, we were now both full-time entrepreneurs, with a healthy cash runway and tons of momentum in our business.

So what will we do with the proceeds? Here’s a rough breakdown.

1. Hold cash reserves (est $60K): We think of this as our bills runway. It gives us creative freedom to manage our business more intentionally and without concern of any impact to our livelihood. We’ll also set aside some funds for vacations though given the state of travel, we may not be able to go anywhere anytime soon.
2. Taxes (est $10K): We will likely owe and there are capital gains to pay for selling our rental last year.
3. Beef up our emergency fund (est $20K): In addition to the cash noted above, we want to hold significantly more cash on hand now that we are both entrepreneurs. This will be added to our existing emergency fund to account for health issues and any other potential hiccups that may occur along the way.
4. Personal (est $15K): Now that we’re both working from home, we’ll need to ensure we’re both comfortable and able to be productive here. We need to furnish a few more rooms, build storage shelving in our garage, buy new clothes and a few other things to keep us motivated through the book writing journey.
5. Invest in our business (est $XX): In addition to writing the book, we have some really exciting projects coming down the pipeline that require funding and equipment.
6. Invest in the market: (est $XX) After the bills are paid and our business is funded, all other proceeds will go into the market. This includes our son’s 529 account, our brokerage account and a custodial IRA we’ll be setting up for our son soon. All of it will be invested in index funds with likely a 10% bond cushion. We’re not big on timing the market but we will be monitoring quarterly earnings and the recent jobs report to inform when we pull the trigger.

This also implies that practically all profit earned from our business could be invested into the market for the foreseeable future. That prospect alone is perhaps what we are most excited about. Given the recent dips in the stock market, we are well positioned to capitalize on the opportunity and have every intention to do so. But we also know there will be people in our lives that need help and if we’ll deal with those situations as they arise.

Key Takeaways:

1. These are unprecedented times with a growing pandemic and a long overdue looming recession. We anticipated the downturn and are therefore hunkering down with significantly more cash than we would have otherwise.
2. We’ve moved a significant amount of our wealth out of real estate investments in the last year because we believe it could grow faster if invested in our business. This doesn’t mean we’ll never invest in real estate again.
3. For those who have the means, investing today and holding for the long term could be one of the best financial decisions you ever make. We believe the fundamentals of investing still hold true and with that in mind, from a purely financial perspective, this downturn is a gift to investors. What you do with it, is up to you.