Selling my very first rental property today - here's why...

25 Replies

This afternoon, I'll be heading to a closing on the sale of the first rental property I bought almost 5 years ago, in November 2014.

Here is a post where I was trying to figure out whether or not to buy the property, when I was brand spankin' new to real estate:
https://www.biggerpockets.com/forums/88/topics/154881-should-i-hold-firm-or-negotiate-this-deal

I chuckle a little at myself when I re-read that post.  It's also interesting to read the various opinions of other BP'ers on whether or not it was a good deal.  @Todd Whiddon - you're a rockstar.  I love going back and reading your comments (TIP: put more weight on advice you get from people who are in your market than advice you get from those who aren't) 

The plan when my husband and I purchased was to hold with cash, but we got over that pretty quickly :)  We were all in on this property for around $104K, with purchase and rehab, initially rented it for $1150/mo, and refi'd out within a year, pulling out around $97K (it appraised for $132K back then).  

After initially leasing it up, we literally had no vacancies - 2 different tenants total over almost 5 years, one moved in the the day the others moved out.  The rent today, the day we are closing on the sale, is $1300, and honestly could/should have been higher based on where the rental market is in Cobb County GA/Kennesaw.  Without going back and digging in to the numbers in detail, it's safe to say net cash flow was $250/mo, so over 56 months, that's $14K in net rental income after all expenses and debt service. 

Fast forward to today - we're selling the property to our tenants for $184,900.  After closing costs and fees, we'll net around $179K on the sale.  After paying off the mortgage, we'll keep about $92K in our pockets.  Not too shabby! :)

Now, for the cool part (no, that wasn't the cool part)... the reason we are selling is:

(a) we wanted to capture the equity in the property at a time when it *appears* we've reached the top of the cycle (I don't have a crystal ball, I could be wrong, but things have gotten pretty crazy in our market) 

AND 

(b) we are closing on a 24-unit apartment complex in September and want to use that equity towards the down payment on the apartment. See this post for more on that process.  The down payment is $180K, so we'll cover a little over half of that from the proceeds of this sale.

But what about taxes, you ask?

So here is THE coolest part... I was planning to do a 1031 exchange, but, of course, there's some risk with that because if the purchase of the apartment hadn't gone through, we would end up giving a big chunk of our profit to Uncle Sam, or have to purchase another property, which would not be easy consider the time frames of a 1031, putting us at risk of purchasing a mediocre deal.  Turns out, that wasn't necessary.  

Back in October 2007, we had what I like to call our "false start" in real estate.  We bought 2 non-adjacent lots in a mountain community in North GA, one to build on, and one as an "investment" [chuckle, snort, guffaw].  At that time, we wouldn't have known what a real estate investment looked like if it slapped us in the face. Needless to say, that was a disaster.  We were heading straight for the crash and when it came, many lots in the community that the developer still owned were foreclosed on by the bank.  A number of them are still bank-owned today.

Fast forward to early 2019, and we finally sold those 2 properties by owner-financing them.  We took a huge loss.  But, every cloud has a silver lining, and guess what?  We were able to use that loss to offset the gains on the rental property we're selling, so it wasn't necessary to use a 1031, thereby allowing us to sell the property and avoid taxes even if the purchase of the apartment fell through.

If all goes as expected on the apartment, we'll be trading $250/mo in net cash flow for something closer to $2k/mo in net cash flow (potentially more if it's a home run).  

It's a little sad to say goodbye to our first rental property, but what that property did for us, with only $7K into it after BRRR'ing it, just speaks to how incredibly powerful real estate can be!!



Well played. I am going back to read your other two posts. I am trying to convince myself that we can go multifamily with a 1031 exchange but after 12 years of landlording 3 units I feel like I don't know if we have the stomach for it. I am sort of at my landlording threshold. Are you using an on site property manager for your new acquisition? I would love to hear more details on the management part. Thanks for your inspiring post. 

You mentioned that you wanted to get your equity out as it appears you are at the top of the market.  I'd like to suggest a different way of thinking about this.

Most folks know how to calculate cash-on-cash ROI. How much are you in for divided by how much you make each year. But a better metric is equity ROI: equity divided by how much you make each year. Typically equity ROI declines year over year, mainly due to equity increasing faster than cash flow. There will come a point where your equity ROI is lower than what you could make if invested that equity elsewhere. At that point it's time to get that equity out and reinvest it. Make sense?

Secondly, no one can time the real-estate market perfectly.  (Or the stock market either.)  A lesson I learned a long time ago in stocks is that if someone buys my stock and makes a bunch of profit off of it because I sold too early, well that's OK, as long as I got my profit when I sold.  In other words don't worry about timing the market, no one can anyway.  Instead rely on equity ROI to let you know when to sell/refinance.  

Oh, and great deal, I'm jealous!  ;)

@Julie Kern ,

    Awesome story. Amateur investor here but sounds like you've thought it through and are making a great decision - you're ready to move on to a larger sets of units to meet your 50-unit goal. Analyzing the numbers is important but it sounds like you have good vibes and intuition about your decision, as well. Go for it! Great job!

Julie I have to say the story has inspired me even more. Especially when I went an read the original post and the replies. I am so new to this, my fear is of jumping in is real, However, this has been a big help. Thank you.

Originally posted by @George Pauley :

You mentioned that you wanted to get your equity out as it appears you are at the top of the market.  I'd like to suggest a different way of thinking about this.

Most folks know how to calculate cash-on-cash ROI. How much are you in for divided by how much you make each year. But a better metric is equity ROI: equity divided by how much you make each year. Typically equity ROI declines year over year, mainly due to equity increasing faster than cash flow. There will come a point where your equity ROI is lower than what you could make if invested that equity elsewhere. At that point it's time to get that equity out and reinvest it. Make sense?

Secondly, no one can time the real-estate market perfectly.  (Or the stock market either.)  A lesson I learned a long time ago in stocks is that if someone buys my stock and makes a bunch of profit off of it because I sold too early, well that's OK, as long as I got my profit when I sold.  In other words don't worry about timing the market, no one can anyway.  Instead rely on equity ROI to let you know when to sell/refinance.  

Oh, and great deal, I'm jealous!  ;)

exactly! return on equity is an important metric too

Thomas S. was a huge promoter of this. I miss his posts...

 

@Jon Arsenault Thank you! And yes, we’ll have an on-site manager. Originally we were going to use a property management company but there are some nuances and complexities in the early stages with these apartments so we’re going to be a bit more hands on and utilize the onsite manager (25 hrs/wk) for day to day operations. Then we’ll reevaluate after a year or so. 

I also hit my landlording threshold on SFRs. For the most part they run pretty smoothly on autopilot but the time spent on turns and releasing has begun to feel like it isn’t worth it. I could have used a property manager on those properties but lease up fees of one months rent are painful when rents are in the $1300-1500 range. 😬

My goal is to eventually leverage all of our SFR equity into multi-family properties, and manage the managers of those properties, not the asset/tenants themselves. Although on this particular property it will take some time to develop systems and processes to get there.


@George Pauley Great points! That’s exactly the point where we are now with our rental properties. If we have vacancies this year, I’ll be taking a hard look at holding vs selling with the appreciation we’ve experienced in our market. 

What was the downside of trying for the 1031 exchange but having the carry-over loses as a back-up plan? My thought is that the loses could be used later when you are selling (this?) property to go to a less-expensive one. 

@Terry N. One thing I can tell you, when I bought that first property in late 2014, I never imagined it turning out as well as it did, or eventually using it to move in to multi family investing. I just knew the area well and based on my knowledge at that time (all of which came from BP forums and podcasts), I was *pretty sure* it was a solid deal. But I was an amateur too - that first purchase was scary!! Taking that first step was absolutely key in what ended up being a full time REI career for me.

@Steven Tittle   Thank you for the kind words, and I'm glad you found some inspiration in this and the previous posts.  I included the link from that early post to demonstrate what a difference 5 years can make if you just keep moving forward and taking the next step!

@Eric Mayer Thanks so much! And I certainly will be shooting for higher cash flow... the goal is to refi after 2 years and get all of the capital invested back.  If I can do that and cash flow $2K/mo, I'll be a happy gal.  But there is definitely a possibility it could be more per month; I just like to use conservative #'s :)

@Tina Pauley Thank you! That's awesome, sounds like you guys are doing great!

@Deanna Opgenort Good question! And I could have gone that route.  Honestly, the use of the loss vs. a 1031 made things simpler (at least in my mind), as the purchase of the apartments has been a roller coaster ride with a ton of moving parts (I'll be posting more about that in another post). It just eliminated one more thing to coordinate and worry about.  But that's a very good point.

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