I am selling my properties. Am i crazy?

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I am selling my properties. Am i crazy?

Alexandre Marques dos Santos
Rental Property Investor · Member since 2020 · 215 posts · 137 votes

I have a total of 8 SFH fully paid that were the source of my retirement.

Every year i had to fill a dispute to tax appraisal as they always put the price of my property very high, in order to collect more taxes.

That started to bother me as my expense becomes higher than usual. Instead of paying a % of the right value of the property in taxes, i usually paid more. That is because i had to pay the attorney fees.

I also noticed the rental price dropped as massive inventory was added to to the city i have my properties. When i strt buying those, i was having around 5-5,25% return. Since then rental prices dropped 5-10%.

All together, plus the fact i started to foresee an increase in capex ( properties are now 7 years old), dropped drastically my expected COC return.

So i was hoping i for an opportunity to change the allocation on some of my investments.

With this market, i saw prices increasing by as much as 10%. Rentals are flat. So i decided to sell some of my properties. I already sold 3 and i am negotiating the 4 th one. I expect market to cool down a bit, and a possible increase in foreclosures. If that happens, i will be in a great position to acquire distressed properties. Am i crazy?

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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
5y

First, you shouldn't be using percentages to compare anything in REI...especially to the stock market. They are in no way similar investments. When you do, you lose out big time in your REI. You are seeing an example of it right now...and probably don't realize it...yet.

You said you have all your properties paid off (I'm in pain right now). That means you are losing money every day on your REI. Equity is cash that is "dead". It has little or no "real" value in dormant state of equity. It has a "face" value that is equal to the property value though...which means your "real" value is running at about 20% of what it should be.

If you sold all of your properties, and used that cash as DP's on replacement (and added)  properties, your equity wouldn't change...it would just be spread over 5 times as many properties as you have now.  The CF would go down for each property (at worst 50%), but if you had 5 times as many properties your total CF should actually increase to 2.5 times what you have now.  Not only that, but your total property values would increase 5 times...which means your appreciation also increases 5 times.  Keep in mind that increase in property value is also an increase in your equity (thank you economy and your tenants))...for free.   So when you retire, that equity you wanted to retire off of, also increases.  

All of this happens when you simply transfer the "cash" in your equity from a "dead" state to a "living" state.

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  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    5y

    First, you shouldn't be using percentages to compare anything in REI...especially to the stock market. They are in no way similar investments. When you do, you lose out big time in your REI. You are seeing an example of it right now...and probably don't realize it...yet.

    You said you have all your properties paid off (I'm in pain right now). That means you are losing money every day on your REI. Equity is cash that is "dead". It has little or no "real" value in dormant state of equity. It has a "face" value that is equal to the property value though...which means your "real" value is running at about 20% of what it should be.

    If you sold all of your properties, and used that cash as DP's on replacement (and added)  properties, your equity wouldn't change...it would just be spread over 5 times as many properties as you have now.  The CF would go down for each property (at worst 50%), but if you had 5 times as many properties your total CF should actually increase to 2.5 times what you have now.  Not only that, but your total property values would increase 5 times...which means your appreciation also increases 5 times.  Keep in mind that increase in property value is also an increase in your equity (thank you economy and your tenants))...for free.   So when you retire, that equity you wanted to retire off of, also increases.  

    All of this happens when you simply transfer the "cash" in your equity from a "dead" state to a "living" state.

    9Reply
  • Alexandre Marques dos Santos
    OP
    Rental Property Investor · Member since 2020 · 215 posts · 137 votes
    5y

    @Joe Villeneuve

    Joe, not sure when i compare RE with Stock market... where did i gave this impression?

    0Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    5y
    Originally posted by @Alexandre Marques dos Santos:

    @Joe Villeneuve

    Joe, not sure when i compare RE with Stock market... where did i gave this impression?

     You're right.  I went back and reread what I wrote and realized it came out wrong...just because of one word substitution.  Just change the word "to" to read "like".

    It should have read, "...especially 'like' the stock market"

    0Reply
  • Alexandre Marques dos Santos
    OP
    Rental Property Investor · Member since 2020 · 215 posts · 137 votes
    5y

    @Joe Villeneuve

    I understand the concept of leveraging. Having more than 25 years of financial markets in my curriculum, its easy to understand.

    But there are different investors profiles. I respect your view. Leveraging is a part of the game for some players.

    But to me RE is a diversification. I have cash invested in many different assets, some “safe” some risky. The RE was an allocation of the “safe” piece of my portfolio. Instead of making a “ killing” in the bank, ( 2% p y at the time), i put i RE to make more. Considering depreciation, the net value was considerable higher.

    I still have a fairly good amount of cash sitting in the bank. I dont see value in paying 4.5% for a loan, with 5k in closing costs, while my money is making 2-3%.

    When i allocate this piece, i will start leveraging

    To my defense, i got a loan and bought some units while cash flow paid quickly the loan. It was a short term line of credit linked to my investments. What was a big surprise to me was to see many banks turning me down or presenting very high rates for mortgages, even having a 800+ credit score. They did not like the fact i did not have a w 2 stable income, but only rental/ investment income...

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  • Alexandre Marques dos Santos
    OP
    Rental Property Investor · Member since 2020 · 215 posts · 137 votes
    5y

    @Joe Villeneuve

    Got it...

    0Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    5y

    The only cost to the REI is what comes out of their pocket, as long as they have positive cash flow. The use of percentages when dealing with REI is very misleading. For instance, a 5% annual gain + CF (reinvested) in REI is exponentially greater than a 15% gain in the Stock Market (or anywhere else).

    0Reply
  • Bill B.
    Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
    5y

    You didn’t list a city so only things I can add is..

    You say you’re selling because rents are dropping in your city. Buy properties in the 90% of markets where rents are up.

    You say 7 year old properties are about to have big increases In Capex? Buy better built houses. My average home was 4 years old when I started and now they're about 24 years old. There has been almost zero increase in capex. With 15 properties between 15 and 25 years old, I bought 1 ac unit ($2500) 1 water heater ($800), and a refrigerator ($1100) this year. You're talking $4500 on $250,000 in rent, well under 2%. Except for the ac repair it was about average.

    If you want to sell, that’s one thing. If you want to buy in a different market, that’s another. But paying 10% selling costs, then 15% capital gains and 25% recapture taxes is going to leave you in a horrible position to buy back in to the same market. I guess if you were predicting a 20% crash you could buy back in about even? (I don’t know if there are 5 cities in all of the US where that could even be a 5% chance.)

    But...if there’s not a a crash, and a big one, you’re done with real estate. You’ll be so far behind where doing nothing woulda put you that you’ll never jump back in.

    Let’s say you sell a $300k property and net $270k, then pay taxes and end up with $240k. What price would you buy back in at? (Don’t forget the lost rental income while out of the game.)

    Again, if you want to get out of real estate or change locations, fine. But that should be the goal of selling.

    2Reply
  • Todd Rasmussen
    Rental Property Investor · Clarksville, TN · Member since 2016 · 1k+ posts · 1k+ votes
    5y

    @Alexandre Marques dos Santos

    What's the % appreciation you've realized on the sales? Hoping your low cash on cash is baiting us into the gotcha of a giant appreciation number. If not, I think you'd be better off changing markets or changing your investing strategy. Even with high expenses and assuming owned outright, most that will chime in here probably can't imagine returns as low as 2-3%.

    I get selling losers out of your portfolio, and if you only have a couple % return, a couple building systems could be a big deal, so it might be good timing for you to exit these.

    0Reply
  • Alexander Szikla
    Real Estate Agent · New York City · Member since 2020 · 819 posts · 641 votes
    5y

    @Alexandre Marques dos Santos okay, so after you sell. You are going to have cash. Then what?

    The question isn't whether or not to sell. Rather how to redeploy. That is the tough part!

    2Reply
  • Alexandre Marques dos Santos
    OP
    Rental Property Investor · Member since 2020 · 215 posts · 137 votes
    5y

    @Bill Brandt

    You got very good points.

    1). Quality: i had A/c problems popping. 2 units had to change pieces. I had refrigerator problem, i had faucets, garage problems (3 units so far) and even dish washer replaced! I argue i live in an old property for 13 years, and never had such problems that most of my new units had ( now 5-7 years).

    2) relocation: i am taking opportunity to sell at sellers price. Not frequently you can achieve that. I am studying new locations to invest. When i started to invest, i had rentals for 3100/3150 in some units. Same units are 2900 now.

    3) taxes: over the 7 years, capital gain was scarce. Almost none. When there was, it covered broker. Not sure what you added as tax. If you could explain, appreciate

    4) talking on broker fee: i have been working with a broker with much lower brokerage, than usual. Not sure if in future i will be able to do this.

    5) replacement: here is where it really lies my bet. If my scenario is right, i will turn to a foreclosure market, where i will be able to buy some properties at discount.

    0Reply
  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    5y
    Originally posted by @Alexandre Marques dos Santos:

    I have a total of 8 SFH fully paid that were the source of my retirement.

    Every year i had to fill a dispute to tax appraisal as they always put the price of my property very high, in order to collect more taxes.

    That started to bother me as my expense becomes higher than usual. Instead of paying a % of the right value of the property in taxes, i usually paid more. That is because i had to pay the attorney fees.

    I also noticed the rental price dropped as massive inventory was added to to the city i have my properties. When i strt buying those, i was having around 5-5,25% return. Since then rental prices dropped 5-10%.

    All together, plus the fact i started to foresee an increase in capex ( properties are now 7 years old), dropped drastically my expected COC return.

    So i was hoping i for an opportunity to change the allocation on some of my investments.

    With this market, i saw prices increasing by as much as 10%. Rentals are flat. So i decided to sell some of my properties. I already sold 3 and i am negotiating the 4 th one. I expect market to cool down a bit, and a possible increase in foreclosures. If that happens, i will be in a great position to acquire distressed properties. Am i crazy?

    I'm with you selling headaches facing cap ex (a roof or tired hvac) as they became vacant.  I have been selling 1-2 per year since 2017. Some had debt, some didn't. 

    I sold for specific reasons, strategically, with tax consequences in mind.  If I sell 2 in a year, it's because one of them dealt me less of a tax blow.  One fatty I bought 17 years ago I exchanged.  So keep tax bite in mind.

    You might be crazy selling many properties close together if it's because of blind fear 'the market' is tanking or you give no thought to taxes.  Knowing you, Alexandre, I doubt that's the case. 

    Please speak to how you are dealing with taxes selling multiple properties in the same calendar year. Thank you👍

    0Reply
  • Alexandre Marques dos Santos
    OP
    Rental Property Investor · Member since 2020 · 215 posts · 137 votes
    5y

    @Todd Rasmussen

    Thats the point. In the course of 6-7 years i had almost none capital appreciation. Very shy indeed.

    It pays broker fee and nothing much else. Total was 5-10% appreciation in each. I was making 5.5% and now dropped to 4.5%. Dont think its worthy to keep. Have other properties paying 5.5%-6%. Was better than bank, but time to rethink about this.

    Now i am joining a development that gives a much better prospect.

    0Reply
  • Bill B.
    Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
    5y

    There you go. it’s a market problem. You have a 15% rent decrease ($3100 to $2900) and only a 5-10% appreciation in 7 years? Many/most markets are getting that every year. Vegas might be an unfair comparison but prices have increased at least 10% every year for more than 7 years. Rents have increased 5-10% per year. That’s pretty much a doubling. 

    Why would you want to get back in to a market like that? I truly don’t know where I would invest outside of my local area, local knowledge is priceless. Maybe you could do an exchange in to a syndication or a dst? (Probably not worth if it these are cheaper properties where the depreciation recapture won’t be very much. In which case just sell outright.)

    0Reply
  • Alexandre Marques dos Santos
    OP
    Rental Property Investor · Member since 2020 · 215 posts · 137 votes
    5y

    @Steve Vaughan.

    As i mentioned i have other investments as well.

    So at this point, i am making a full relocation. Some investments were down, so i took opportunity that they improved recently and took the loss. This loss will offset the capital gain ( only due depreciation) in the properties.

    That will clear tax burden.

    On another note, i am focusing on a development that looks to be an excellent opportunity.

    2Reply
  • Alexandre Marques dos Santos
    OP
    Rental Property Investor · Member since 2020 · 215 posts · 137 votes
    5y

    @Bill Brandt

    I wish i had such appreciation. But as the economy improved in my area, builders put a massive inventory, holding prices tight.

    This is one of the reasons i decided to move out. Focus on other opportunities... maybe foreclosure properties, a development, maybe even become a lender...

    1Reply
  • Bill B.
    Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
    5y

    Sounds like a plan. Must be a relatively expensive market. Our advantage was builder’s cost to build is/was above our average market price. They couldn’t keep prices low with new builds. 

    0Reply
  • Travis C.
    Investor · San Antonio, TX · Member since 2016 · 145 posts · 61 votes
    5y

    @Alexandre Marques dos Santos why not do a 1031 exchange to at least remove the tax liability for now?

    0Reply
  • Chris Mills
    Investor · Northern VA · Member since 2020 · 124 posts · 87 votes
    5y

    @Alexandre Marques dos Santos Sounds like a prime opportunity to 1031 into a better market with better appreciation and rent/cost ratios. Maybe even better landlord/tenant laws. Your market doesn't sound like a good one, at all. You have a lot of other options.

    1Reply
  • Alexandre Marques dos Santos
    OP
    Rental Property Investor · Member since 2020 · 215 posts · 137 votes
    5y

    @Chris Mills

    Laws are favorable. What bother me is the yearly game to get some money from investors. Its not an expense you thought of. Adds almost like another insurance ( 400-600/ year/ house).

    Leverage would get me nowhere. Return is similar to loan rate. Leverage would give me more risk just to run for appreciation, in a market that got me almost no appreciation in the last 7 years ( about 10%). Capex tends to grow from now on. It could drag even more my return.

    0Reply
  • Devin Cahill
    Wholesaler · West Palm Beach, FL · Member since 2020 · 16 posts · 2 votes
    5y

    @Alexandre Marques dos Santos

    If you are serious about lending let’s talk more

    0Reply
  • Brent Crosby
    Rental Property Investor · Farmington, UT · Member since 2018 · 171 posts · 148 votes
    5y

    @Alexandre Marques dos Santos not crazy, so much of what is going on right now doesn’t seem sustainable long term. Nothing wrong with repositioning.

    2Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    5y
    Originally posted by @Bill B.:

    There you go. it’s a market problem. You have a 15% rent decrease ($3100 to $2900) and only a 5-10% appreciation in 7 years? Many/most markets are getting that every year. Vegas might be an unfair comparison but prices have increased at least 10% every year for more than 7 years. Rents have increased 5-10% per year. That’s pretty much a doubling. 

    Why would you want to get back in to a market like that? I truly don’t know where I would invest outside of my local area, local knowledge is priceless. Maybe you could do an exchange in to a syndication or a dst? (Probably not worth if it these are cheaper properties where the depreciation recapture won’t be very much. In which case just sell outright.)

    there you go the perfect argument ...  IE   I only buy cash flow and dont care about appreciation..  not sure who beat that into investors heads but its sure prevalent on this site.. IE  appreciation is gambling..  However this post is the poster child.  basically anytime you buy in a market that appreciates very little and U choose to exit in 5 to 10 years your not going to be happy.   my thought process is cash flow is just a place setter so you can enjoy appreciation .. so even brake even or a little negative is fine in markets that move up more than a few % a year

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  • Jaquetta T Ragland
    Real Estate Agent · Winston Salem, NC · Member since 2014 · 486 posts · 303 votes
    5y

    @Alexandre Marques dos Santos crazy 🤷🏽‍♀️ lol but my question is what’s the plan with the profits? To reinvest to better? Then it might be a wonderful idea

    0Reply
  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    5y

    It is normal to second guess yourself.  From the sounds of it, you aren't happy with how things are going and want to buy in another area.  Nothing wrong with that.  No one knows what the market will do, but if once you factor in all of the costs associated with selling, your money will go further in another place...all the power to you.  I have places in an area where prices sky rocketed. Don't know if it will last, but I was just happy my property taxes remained about the same as before.

    0Reply
  • Alexandre Marques dos Santos
    OP
    Rental Property Investor · Member since 2020 · 215 posts · 137 votes
    5y

    @Jay Hinrichs

    You are right, many guys in BP play a “gambling” game of appreciation.

    This is the biggest argument of the “pro leverage at the sky” guys. In some discussions they come with 1 property x 10 properties, and put 5% appreciation per year like this is sooooo normal to have.

    I am not discussing if thats possible. You will see some markets. But there are markets you will see it opposite. Economics usually dictates.

    To me, appreciation is a cherry in the cake. If cash flow justifies, the appreciation will give the jackpot.

    In my case, return ex ante of 4.5% does not justify the risk, plus inventory was under the water for some time... and the constant fight against costs, insurance, tax, plus the scenario of increase capex ( that potentially would depreciate even more the return) made me take a decision.

    I am focusing on a development in Florida, and started to study new cities.

    I open a small business in Brazil, focused on foreclosures. I will do the same in US.

    If i can have a team in place, i am thinking if i should try a shot in being a lender.

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