{"id":172368,"date":"2024-05-24T10:05:49","date_gmt":"2024-05-24T16:05:49","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=172368"},"modified":"2024-05-24T10:21:04","modified_gmt":"2024-05-24T16:21:04","slug":"brian-took-the-easy-way-out-why-im-never-selling-my-properties","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/brian-took-the-easy-way-out-why-im-never-selling-my-properties","title":{"rendered":"Brian Took the Easy Way Out\u2014Here’s Why He Made a Big Mistake and Why I\u2019m Never Selling My Properties"},"content":{"rendered":"\n

A very \u201cgood\u201d problem many investors have is whether they should sell or rent their primary residence when it comes time to move out. <\/span>I have been blessed with this problem over the last two months, and jumped back and forth <\/span>as to what I think the best option is<\/span> and ultimately decided to rent my primary residence.<\/span><\/p>\n\n\n\n

Let me briefly set the scene here. Brian Carberry, editorial director at BiggerPockets, and I were in\u00a0extremely\u00a0similar circumstances over the last two months: making a tough decision about whether to sell or rent our primary residences after moving out. <\/span>Brian decided to sell his property<\/span><\/a>, and I decided to turn my home into a traditional long-term rental property.<\/span><\/p>\n\n\n\n

Every investor is unique in the way that they invest in real estate. They have <\/span>unique<\/span> goals, unique variables in their local markets, unique personal financial circumstances, and so much more that ultimately factor into <\/span>the decisions we make<\/span>. Brian is not an idiot, though it may seem like he is for selling his primary residence, which could have <\/span>been very easily converted<\/span> into a cash-flowing long-term rental property. I would never try to make anyone feel bad about their decision, but I know Brian has very thick skin after years and years of supporting Philadelphia sports teams. <\/span><\/p>\n\n\n\n

The Holes in Brian\u2019s Logic<\/span><\/h2>\n\n\n\n

Brian is one of the smartest individuals I have <\/span>come across<\/span> in my professional career, but <\/span>on this one<\/span>, he took the easy way out instead of trying to maximize the opportunity that presented itself.<\/span> <\/span><\/p>\n\n\n\n

The equity position and <\/span>cash flow<\/span><\/a> present too much opportunity to sell. <\/span>I have a 3% loan on my first investment <\/span>property,<\/span> and trust me<\/span>, it<\/span> is almost impossible to think of refinancing or selling at a rate well below the <\/span>historic<\/span> average for 30-year mortgages.<\/span> A common phrase I live by is \u201cyou make your money when you buy.\u201d Brian hit an absolute home run out of the park when buying his home in 2020 but only decided to take a ground-rule double at the selling table. <\/span><\/p>\n\n\n\n

I completely understand the logic behind his analysis. He can immediately have $55,000 in net profit by selling or take eight years to see the money through his monthly cash flow. <\/span>This is very linear, and <\/span>a lot of<\/span> different wealth-building opportunities included in owning rental properties <\/span>were ignored in this analysis<\/span>.<\/span><\/p>\n\n\n\n

Let\u2019s start with <\/span>appreciation<\/span><\/a> since I have a pretty good understanding of the growth Brian has earned over the last three years. Buying the property at $225,000 with a valuation of $300,000 means this property appreciated at an 11% rate year over year in the three years of ownership. <\/span>This<\/span> equates to $25,000 annually of unrecognized appreciation being unaccounted for. <\/span><\/p>\n\n\n\n

From a return on investment  (<\/span>ROI<\/span><\/a>) perspective, with the cash flow, Brian <\/span>will be able to<\/span> collect $1,950 a month. Putting 3.5% down on a $225,000 property comes out to $7,875 down to purchase the property, and $1,950 a month will produce $23,400 in annual cash flow. <\/span>This<\/span> is a 197.14% ROI.<\/span><\/p>\n\n\n\n

I<\/span> won\u2019t even go into the numbers behind the <\/span>tax benefits<\/span><\/a> that are not accounted for a<\/span>s well. Having the <\/span>ability to offset gains w<\/span>hen it comes to <\/span>tax season through mortgage interest, depreciation, and management\/maintenance fee deductions will be extremely impactful over the duration of keeping the property.<\/span><\/p>\n\n\n\n

Though <\/span>the benefits of tax deductions were overlooked<\/span> in the analysis, I will credit Brian\u2019s knowledge of the tax code to <\/span>offset the capital gains<\/span><\/a> on the sale utilizing the Section 121 exclusion to be exempt from up to $250,000 in capital gains from the sale of his home. Not having any prior experience as a landlord when it comes to tax season certainly does not help either, as I have seen these benefits on my last two years of tax returns <\/span>being<\/span> a landlord. <\/span><\/p>\n\n\n\n

As I mentioned, Brian and I had a similar experience, but made different decisions. <\/span>Here\u2019s why<\/span> I chose to rent for long-term growth rather than sell like Brian did.<\/span><\/p>\n\n\n\n

Purchasing My Second House Hack<\/span><\/h2>\n\n\n\n

I bought my property in June 2022 as a primary residence in a very nice neighborhood located in Northwest Colorado Springs, Colorado. I was moving out of a primary residence on the other side of the city that I had purchased in May 2021; I <\/span>house hacked<\/span><\/a>, moved out, and converted it into a traditional long-term rental property. <\/span><\/p>\n\n\n\n

I was cash flowing while living in my first house hack, cash flowed even more when I moved out, and I kept my <\/span>personal<\/span> monthly expenses as low as a 24-year-old possibly could save up a <\/span>down payment<\/span><\/a> for my second house hack. <\/span><\/p>\n\n\n\n

Purchasing this property came with <\/span>a lot of<\/span> challenges leading up to my closing date in June 2022. <\/span>I was under contract for two other properties <\/span>that<\/span> I had paid nonrefundable inspections and appraisals <\/span>on<\/span>, and rates were rising faster than anyone could\u2019ve <\/span>possibly<\/span> anticipated.<\/span> I <\/span>was feeling<\/span> defeated and ultimately at a complete loss after purchasing my first property overpriced at a 3% rate the year before. <\/span><\/p>\n\n\n\n

But I had finally put pen to paper and sold my soul into another 30-year mortgage\u2014more than doubling the <\/span>existing<\/span> debt I already had in conventional loans. <\/span><\/p>\n\n\n\n

This home is a three-bed, 3.5-bath, 1,600-square-foot <\/span>townhome<\/span><\/a> that had the <\/span>exact<\/span> same layout as the property I was moving out of. <\/span>With rates and values increasing, I knew I would not have cash flow while I lived in the property while I house hacked, but <\/span>that did not stop me from taking<\/span> my next swing.<\/span> <\/span><\/p>\n\n\n\n

This home came with a $2,500 seller concession to replace the carpet that was likely original <\/span>to<\/span> when <\/span>the home was built<\/span> in 1993. <\/span>It required a little <\/span>bit of<\/span> work, but I had such a great relationship with one of my tenants at my first house hack that I <\/span>actually<\/span> had zero days of vacancy during my move and rented out my two extra bedrooms from day one.<\/span><\/p>\n\n\n\n

I was able to do all the work around the house while my tenants lived in the property, replacing the entire main floor with brand-new luxury vinyl plank flooring and installing a door to the basement (where I was living) to make the home a true three-bedroom home. <\/span><\/p>\n\n\n\n

I only put 5% down on the property ($17,500) and had budgeted roughly $6,000 worth of repairs when under contract. As I mentioned, the year before, I was locked in for a 30-year rate of 3% on my first home, but this time around, I was at 5.5%. <\/span><\/p>\n\n\n\n

From a Traditional House Hack to Family and Friends<\/span><\/h2>\n\n\n\n

My intention was<\/span> to move out of this home in three to five years after I had purchased it, but my clock had sped up faster than anticipated. I had a relatively traditional house hack for the first year, bringing a tenant from my first house hack and finding a second roommate to offset my living expenses. <\/span><\/p>\n\n\n\n

Being single and 24 had <\/span>its<\/span> pros and cons, and my pros were <\/span>certainly<\/span> my reason to scale my portfolio without the burden or impact affecting anyone but me. <\/span><\/p>\n\n\n\n

Things settled down. I met the love of my life and moved in with my girlfriend, Erin. If you did not meet Erin at BPCON last year, I will almost certainly guarantee you will meet her this year, as she is the most outgoing and generous individual I have <\/span>been blessed<\/span> to have in my life. <\/span><\/p>\n\n\n\n

My traditional house hack tenants both gave me notice to move out, and it was just Erin and me taking on my mortgage for two months. One of my closest friends took a gap year, and I <\/span>decided to rent<\/span> out one of my vacant rooms, creating what I like to call a \u201cluxury house hack.\u201d <\/span><\/p>\n\n\n\n

Did this create the same cash flow I was receiving before? <\/span>Absolutely<\/span> not. B<\/span>ut after two years of living in my basement, I wanted to enjoy being in my own home while still taking advantage of the benefits of house hacking,<\/span> with <\/span>Erin and my best friend from home p<\/span>aying <\/span>their share of rent to s<\/span>till <\/span>offset my living expenses. <\/span><\/p>\n\n\n\n

Erin was offered her dream job back in my home state of Pennsylvania, and we started to pack our bags and talk about the future of the home we were moving out of in Colorado. Since I have only owned and lived in the <\/span>home<\/span> for two years, the decision came down to selling the property or renting as a traditional long-term rental property. <\/span><\/p>\n\n\n\n

Why I Made the Decision to Rent the Property<\/span><\/h2>\n\n\n\n

M<\/span>y goals around real estate are to create long-term wealth growth while n<\/span>ot overleveraging <\/span>and keeping as much ownership as possible in my portfolio. <\/span> <\/span><\/p>\n\n\n\n

I decided to keep my property as a rental for several reasons.<\/span><\/p>\n\n\n\n

1. I am in this for the long <\/span>haul<\/span><\/h3>\n\n\n\n

My plan was never to sell, and I still hold true to that feeling now that I am creeping up on my two-year anniversary of owning this property. I am not investing in real estate to replace my W-2 income, build <\/span>a ridiculously large<\/span> empire, or take on any unnecessary risk to potentially increase my return. <\/span><\/p>\n\n\n\n

I am extremely patient and in no immediate rush to see the benefits of the portfolio I have started. I am investing in real estate to supplement my retirement income <\/span>and will<\/span> do whatever I can to teach the generations after me how to operate a rental portfolio and provide what I believe to be the opportunity of a lifetime. <\/span><\/p>\n\n\n\n

Call me crazy, but this property is <\/span>actually<\/span> cash flow negative, costing me roughly $300 a month to keep factoring in all the expenses, including property management fees. Before you think I am a complete idiot for <\/span>keeping<\/span> a property that produces negative ROI, I have seen rapid appreciation increases in my less than two years of owning this property, creeping just under 9% in total growth. <\/span><\/p>\n\n\n\n

I recognize <\/span>there are<\/span> numerous factors in that number, but let\u2019s <\/span>just<\/span> say the property continues to appreciate at a rate of 4.5% annually.<\/span> At this rate, the value of this property will be worth just under $1.3 million when my mortgage <\/span>is paid off<\/span>. I will <\/span>certainly<\/span> pay $3,600 annually to earn a 4.5% appreciation rate on a property starting at the purchase price of $345,000. <\/span><\/p>\n\n\n\n

My outlook is over a 30-year horizon on both of my properties. It is too foggy to try and give hypothetical scenarios on doing a <\/span>HELOC<\/span><\/a> or refinance in the future, so I like to look at the next 30 years assuming I do nothing to the debt on the properties. <\/span>I know if<\/span> I do not touch these properties (sell or refinance), I will have them both paid off when I am 52 and 53 years old, respectively.<\/span><\/p>\n\n\n\n

I<\/span> also know that median rent increases in the 21st century have averaged at an annual rate of 3.15%,<\/span> a<\/span>nd am a firm believer i<\/span>n this number continuing <\/span>to stay stable and rise over a very extended period.<\/span><\/p>\n\n\n\n

If the rate of 3.15% holds <\/span>true<\/span>, and my starting rental rate is $2,000, my paid-off <\/span>townhome<\/span> valued at $1.3 <\/span>million<\/span> will bring in a net monthly income of $5,071.16.<\/span> That is over $60,000 a year alone on just one townhome I decided to keep and not try to leverage the equity any further. <\/span><\/p>\n\n\n\n

To bring this full circle as best as I can, my initial $17,500 investment will generate a 247.74% return once the loan is paid off, only considering monthly cash flow with a rental rate increase of 3.15% year over year. <\/span>The appreciation and tax liability reduction <\/span>I will <\/span>just<\/span> <\/span>consider<\/span> as the icing and cherry on top at this point.<\/span> If you\u2019re still calling me crazy, you may be <\/span>right<\/span>, but I think it is <\/span>certainly<\/span> more crazy to sell! <\/span><\/p>\n\n\n\n

2. My monthly expenses are <\/span>extremely <\/span>low<\/span><\/h3>\n\n\n\n

It would <\/span>not be fair<\/span> to explain why I am keeping a property at a negative net income, talking about how my monthly expenses are low, and not explaining <\/span>why <\/span><\/em>my <\/span>expenses<\/span> are low. <\/span><\/p>\n\n\n\n

F<\/span>irst o<\/span>ff,<\/span> the net gain from my first house hack is almost equivalent to the net loss I am taking monthly from my second house hack. I essentially view my small rental portfolio as breakeven monthly w<\/span>hen it comes to looking at cash flow, and <\/span>will certainly be negative at the end of the year when factoring in maintenance expenses and vacancy rates.<\/span><\/p>\n\n\n\n

I can stomach a loss on this for a few different reasons that I know are not available to every individual, but I challenge you to think about what truthfully is a want and what is a need. <\/span><\/p>\n\n\n\n

A<\/span>t the time of writing this article, I h<\/span>ave <\/span>done a few things r<\/span>ecently <\/span>to dramatically decrease my monthly expenses.<\/span><\/p>\n\n\n\n

3. For the next few months, we are living at my parents\u2019 <\/span>house<\/span> <\/span><\/h3>\n\n\n\n

I am <\/span>absolutely<\/span> filled with pride knowing that I own two homes in Colorado but temporarily <\/span>using<\/span> my childhood bedroom as an office.<\/span> I\u2019m sure you can feel my sarcasm through the screen. <\/span><\/p>\n\n\n\n

In all seriousness, knowing we are here for a few months to add to our savings for a down payment, we are gladly swallowing our pride, knowing that we are creating options in the future to expand what will become our rental portfolio moving forward. <\/span>This<\/span> is a sacrifice I am sure not many families are willing to make, but I will gladly share in a few months what the sacrifice led to. <\/span><\/p>\n\n\n\n

4. We became a one-car <\/span>family<\/span> <\/span><\/h3>\n\n\n\n

I <\/span>made the <\/span>bonehead<\/span> decision<\/span> to buy a new car off the lot after I totaled my car in Colorado right after closing on my first house hack, thinking my finances had skyrocketed and it was time to enjoy the high life. <\/span>My job is remote, and I <\/span>simply<\/span> do not need a vehicle during <\/span>normal<\/span> business hours unless there is a one-off appointment or scheduling conflict.<\/span> <\/span><\/p>\n\n\n\n

G<\/span>etting rid of a<\/span> car payment, insurance payment, gas payments, <\/span>and reducing our maintenance liability concerns,<\/span> it was <\/span>an absolute no-brainer to only h<\/span>ave the need for <\/span>one car moving forward. <\/span>When <\/span>the decision was made<\/span> to keep the rental property at a loss, we asked ourselves: Should we keep the car or keep the home? <\/span><\/p>\n\n\n\n

We knew they would create an almost identical expense for us monthly. <\/span>Needless to say,<\/span> we did not think about this decision too hard, had a quick laugh about depreciating assets versus appreciating assets, and came to the conclusion that we would be more than happy to keep our home instead of our silly car. <\/span><\/p>\n\n\n\n

5. The rinse-and-repeat effect<\/span><\/h3>\n\n\n\n

I am <\/span>by<\/span> no <\/span>means<\/span> claiming to be an expert on leveraging debt and reducing your housing expenses through real estate, but I <\/span>can confidently say that I<\/span> have done just that with my two rental properties in the last three years.<\/span> <\/span>I know <\/span>that we can <\/span>absolutely<\/span> do it, and the last three years <\/span>gives<\/span> me the confidence to do it again.<\/span> <\/span><\/p>\n\n\n\n

We will be on the hunt for the next house hack, and with both of us living this investment strategy for the last two years, I know <\/span>that we can do it and<\/span> do it even <\/span>bigger<\/span>.<\/span> The market we are in will allow us to look for a smaller <\/span>multifamily<\/span><\/a> property to house hack this time around, and though the door count gets <\/span>larger<\/span>, we are ready to try to flex our muscles onto something a bit larger. <\/span><\/p>\n\n\n\n

We are now in a position where we have almost entirely wiped out our monthly expenses, increased our financial positions through our professional careers, and consistently added to a savings account for our next primary residence. <\/span>This<\/span> is not the quickest way to scale and <\/span>definitely<\/span> not the sexiest way to improve your financial position<\/span>, but it<\/span> is a way for us to keep 100% ownership in our portfolio, continue to learn valuable lessons on what we are capable of doing as DIY landlords, and keep us relatively insulated from numerous factors that we <\/span>simply<\/span> <\/span>just<\/span> don\u2019t know at the stages we\u2019re at in our investment journey.<\/span> <\/span><\/p>\n\n\n\n

Who Is Right: Brian or Me?<\/span><\/h2>\n\n\n\n

Trick question. I think Brian is 100% right in his reasoning to sell his property, collect the proceeds to impact his life immediately, and, I\u2019m sure, invest a large chunk into the future for his wife and kids. I also think I am 100% right in my decision to sit on the equity and fully anticipate not putting a dollar into my personal life for the foreseeable future. <\/span><\/p>\n\n\n\n

That said, I would love for you to poke holes into my theory because<\/span>, again,<\/span> I <\/span>think <\/span><\/em>I am right.<\/span> <\/span>I fully recognize that at 25 years old, I have an abundance of learning experiences that will certainly come my way for better and for worse as time goes on, but soaking up a variety of different angles will only positively impact my decisions <\/span>for the better<\/span>.<\/span>  <\/span><\/p>\n\n\n\n

What it boils down to is<\/span> that I do not need immediate access to capital, and I have created a very small system that works for us.<\/span> It is repeatable, comfortable, and <\/span>gives us the ability<\/span> to scale at our own pace while only very subtly impacting our personal lives. I<\/span> have had a mountain to climb to get to where I am today, and see no reason to try and shake things up as things currently stand in my investments,<\/span> a<\/span>nd much more importantly, in my personal life. <\/span><\/p>\n\n\n\n

Final Thoughts<\/span><\/h2>\n\n\n\n

When I invest, the numbers always need to make sense on paper, and I will never consider a property without doing my analysis. As I’ve grown a bit older, I’ve come to realize the importance of impacting lives beyond my own. This added layer of responsibility requires much more careful planning, for which I am deeply grateful as I shape my decisions moving forward. <\/span><\/p>\n\n\n\n

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\n \"find\n <\/div>\n <\/div>\n<\/div>","protected":false},"excerpt":{"rendered":"

A very \u201cgood\u201d problem many investors have is whether they should sell or rent their primary residence when it comes time to move out. I have been blessed with this problem […]<\/p>\n","protected":false},"author":613743,"featured_media":172377,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[4433],"tags":[],"class_list":["post-172368","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-opinion"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/172368","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/613743"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=172368"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/172368\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/172377"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=172368"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=172368"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=172368"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}