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One of the most well known and universally accepted idioms around the world is “all good things must come to an end”. The phrase is usually reserved to comfort those experiencing a loss of something meaningful. In this case, we’ve been saying it to ourselves repeatedly for months because we are in the process of selling one of our rental properties.
When we first bought this unit in February 2014 for $62K, one of the key things we kept in mind was to not make the purchase an emotional decision. After all,we wouldn’t be living there. It was our first investment property so rather than thinking about what we liked about the place, we focused on what a prospective tenant would like and need to be comfortable there. But as much as we tried to not make it personal, over time we become a bit attached.
Think about it.
It was the first big entrepreneurial decision we’d ever made and the property was a backup plan for Mr. r&R’s Mom who we knew was economically fragile and might one day need somewhere nearby to live. In our minds, we believed the property would always “be in the family” as a part of our broader asset portfolio and that we would reflect on it years from now as the neighborhood was redefined. So in that sense, it was hella personal. But it just goes to show…things change.
In our case, it’s not that we aren’t thinking long-term anymore or that we’re not concerned with Mr. r&R’s Mom. Nothing could be farther from the truth. Rather, we’re in the process of molding the life we want for ourselves and while doing that we had to ask ourselves some tough questions.
Do we still want to be real estate investors? Is owning a rental property the best way to provide support to an aging parent? Given the direction our life is going, what percentage of our wealth do we want to have in real estate?
Perhaps the biggest question we had to ask ourselves was…If we had an extra hour of time devoted to making more money, how would we spend it? Click To Tweet
For the past five years, the unit produced steady passive income, tax perks and a healthy dose of intellectual stimulation whenever we needed it. But despite the benefits, when it required our attention, it was incredibly inconvenient. Even if it was just a matter of getting on the phone with the bank, management company representative or HOA, it had the tendency to always be at the wrong time. Today, our time is more valuable than it was in 2014, which forced us to re-evaluate the role this property served in our lives.
In addition to being inconvenient, it was slowly becoming less interesting to us. We’re not suggesting that we have nothing left to learn but whenever we found ourselves with a few extra hours to devote to financial or entrepreneurial education, real estate didn’t quite get us excited anymore. We’d much rather devote time to learning new skills [digital marketing, coding, options-trading] or exploring emerging industries [tech and cannabis] over learning about probate and real estate mumbo jumbo. Our time has been so stretched lately, we couldn’t even keep a commitment to celebrate our rental property income though the date was on the calendar months in advance.
So after reviewing our mid-year plan and preparing for 2020, we came to the slow decision of selling. But there was obviously more to consider and work to be done to make it happen. Here’s how it all went down.
Our first thought was “sweet…we can sell it on roofstock” and this would be great content we could share on the blog. We’re fans of their platform and have heard nothing but good things about the user experience. But unfortunately, our property [a condo] didn’t meet their criteria.
Plan B was to work with some of these new hotshot tech disrupter companies like Opendoor, Knock and Zillow Instant Offers. Considering Mr. r&R’s Mom had such a great experience selling her home with Opendoor, we figured we might get a sweet cash offer too. But the universe had something else in store.
Both Opendoor and Knock were only interested in single family rentals in the Atlanta market and since our unit was a condo, it wasn’t eligible for a cash offer. Knock, as a part of their service, offered to help connect us to a real estate agent but we passed on their offer. By far, the worst experience we had was with Zillow.
They didn’t know their right hand from their left. We received emails saying our property wasn’t eligible, followed by another email from someone stating they wanted to schedule a call to discuss more. Even after a few rounds of this via email and them confirming the property was in fact not eligible, we still received a phone call from them wanting to learn more about the unit. Our advice for anyone considering any of these services is to stay far away from Zillow Instant Offers until they figure out the kinks.
So after a few weeks of this we had a few more options– sell it ourselves, get a real estate agent to sell it or work with the management company to find a prospective buyer.
We loved the latter option because the management company we work with already knows the property since they’ve been managing it for the past 5 years. We thought they might have a list of prospective buyers much like they’ve had a list of tenants over the years. Unfortunately, it didn’t work out because our unit didn’t meet their investors criteria.
We thought all of five minutes about selling it on our own since that would put us in the position to save a few thousand dollars. But given one of our primary reasons for selling was our limited time, it made little sense to sign up for selling it on our own. The mere thought of taking multiple trips to the unit over the following months, hosting open houses, conducting viewings, marketing and having our phone and email blowing up sounded like a nightmare. So we opted to keep it simple and work with a real estate agent. He was the guy that represented us when we bought our primary residence and we liked him so we figured we’d work with him again. In our case, it was a smart move.
In 9 days, we received and accepted an offer from a real estate investor for $140K! We were so excited, could smell the money coming in and time freeing up on our calendars. But then they got spooked. We went back and forth a few times hoping to make a deal work out but ultimately, it fell through. The one positive was that they backed away after a key deadline and had to fork over a cool $1K in earnest money.
So we put the property back on the market. Within two weeks and lowering the price a smidgen, we accepted another offer of $137,900. We agreed to pay the buyer fees and contribute $1K. This deal came down to the wire because the buyer was pushing to get us to contribute significantly more than the $1K we agreed to hours before their due diligence period ended.
From our perspective, while we were certainly able to do it, we knew we didn’t have to. Also, knowing they were likely first-time buyers we knew we had leverage. They were likely renting and heading into the holiday season, the last thing a renter wants is to cut another rent check. We didn’t know for sure, but we held firm on our offer and ultimately, it worked.
Of course, understanding the math behind this deal was a critical part of the process as well. Today, we collect about $600 [it varies] a month from this unit and had capital reserves sitting in cash for future improvements. We could continue to collect that money for the foreseeable future and likely continue to increase rent as the neighborhood and surrounding area is improving. Or we could cash out the equity, bank the capital improvements and free up our time. For us, this was a no-brainer.
Assuming we opted to keep the property and collect rent, we could expect about $6,300 net on an annual basis. Or we could cash out the approximately $76K sitting in equity. In choosing the latter option, we’d have to pay capital gains tax, pay off the mortgage and account for seller fees (assuming 6% of purchase price) but even still, it’s a really nice return that we believed we could put to better use today.
Basically, it boiled down to a choice between receiving a consistent payment every month well into the foreseeable future or a lump sum today amounting to several years of that payment. But there were other factors at play here.
A recession is coming
We’re not even gonna lie to ya’ll, the looming concerns of a recession spooked us a bit. This property’s market value is more than twice what we paid for it in 2014 and we didn’t see it increasing much higher in the short run. Furthermore, condominiums typically get hit harder than single family homes in a downturn and we’d hate to see all that equity evaporate into thin air.
Also, assuming we did head into a downturn and held onto it as a rental, we’d likely have to renovate it while evaluating whether or not we should lower the rent to maintain occupancy. The combination of spending money on an asset so that it could deliver less cash flow wasn’t something that appealed to us, though in some scenarios, it makes sense.
Now you may be thinking, wouldn’t our stock portfolio also be impacted by a downturn? The short answer is yes, but we have much greater confidence in our portfolio rebounding [with no effort] than we do in that particular property. Not to mention, we don’t need to have cash set aside, insurance, LLCs and a third-party management company to manage our stock portfolio. It’s just simpler.
So that’s it…the end of an era. We have one more property that we’ll look to sell as soon as the lease is up in a few months and with that, we’ll officially be former real estate investors.Looking back, purchasing this rental was one of the best investment decisions we'd ever made. Click To Tweet
It was cash flow positive for 3 of the last 5 years, a tax shelter and it gave us comfort in knowing that if anything happened with a parent or loved one that we’d have a place to put them. From our perspective, the success of this investment was not due to our intense analysis of the marketplace, savvy number crunching or learning anyone’s cheat code.This was calculated courage. We used our credit to get favorable terms on the mortgage, invested close to home and were determined to figure things out along the way. Click To Tweet
Financially, it gave us a cash-producing asset that appreciated significantly in value over a five year period with very little effort compared to our other income sources.Having this in our back pocket, in addition to being debt free is one of the reasons we could make such bold decisions with our lives. Click To Tweet
Now, as we look to hold more cash and pad our brokerage accounts without the worry and complication of being property owners, this move gives us comfort and flexibility as we look ahead to the future. Are we completely out of the real estate game forever ever? Probably not. We can envision a world where we are owners of property again but we’d be much more interested in commercial than residential. Until then, we have our eyes set on a few other ventures and padding our bridge fund to get us closer to hitting our FI number.
Got questions? Drop ’em below and we’ll answer as many as we can.