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Selling rental units
Old 10-05-2022, 02:44 AM   #1
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Selling rental units

Wow...housing market is hot here (midwest).

We had 5 rental units for the past 13 years...I managed them. Cash flow was excellent, with the typical occasional tenant issues. But due to a variety of factors...

1) I'm getting old and don't want to work on them anymore...I did most of the labor (I have been a handyman for the past 4 years...so it makes sense)

2) Wife is concerned that if I passed away young (no, I'm not terminally ill lol) that she'd have to deal with all the complexities of liquidating the business

3) RE values are way up here

4) Tenants moving out en masse

we decided to slowly unwind the business. We sold one unit in late 2021, 2 units so far this year, one more pending and should close within a month, and then we plan to sell the last unit in early 2023.

Take a look at these results:

Unit 1 - Bought for $54k, sold for $122k "as is"...cash offer, no inspections, no repairs required. The tenant had damaged some things, but the buyer took responsibility for all repairs. Collected $5.1k in damages from tenant through court-ordered judgment...paid bi-weekly via garnishment...all has been collected now. Also kept their SD of $1,000. If you add this to the sale price, we can say we essentially sold it for $128,100.

Unit 2 - Bought for $72k, sold for $166k...inspection found no repairs needed...I had spent about 6 weeks (about 15 hours/week) fixing this one up significantly...fresh paint throughout, painted cabinets, much more...but mostly labor...only $1,500 in materials.

Unit 3 - Bought for $76k, sold for $135k "as is"...cash offer, no inspections, no repairs required. Tenants left this one a mess, but the buyer took responsibility for all repairs. Collected $5.5k in damages from tenant through court-ordered judgment...paid it all in one check. Also kept their SD of $1,200. If you add this to the sale price, we can say we essentially sold it for $141,700.

Unit 4 - Bought for $91k (this one was "move in ready", so paid a premium), pending sale for $167,500. Tenant left it mostly clean, so only kept $200 of their deposit. Inspections/appraisal/financing all passed and are in order, no repairs needed, closing set for 10/18/22.

Unit 5 - Bought for $29k (this one was a total mess when purchased, had to put about $35k in it before renting), will be sold 2023. Estimated sale price of $155k. Probably will need some repairs...let's estimate $5k...we will keep the SD of $1.1k, but unsure whether we can collect any more...we shall see. If we deduct off the large spend upon purchase and add the SD, let's say we end up netting $87k.

Negotiated with our realtor that the first house we'd pay the "usual" 6% realtor fee, but the rest would be at 5%, or if we were able to sell to an investor before listing in MLS, she'd do 4.5%. We sold two via an investor before listing in MLS, so saved additional .5% there.

I won't go to the trouble of adding up all the numbers exactly, but here are the takeaways:

1) We had excellent cash flow for 13 years (all were bought with cash, no mortgages), about 68% of the rental income was profit.

2) I was a licensed home inspector for 7 years prior to being a handyman, so I focused on maintenance...and therefore very few service calls...we averaged only 1.2 unscheduled repair calls a year for the last 11 years (the first two years were rough...had to get all the properties up to good repair).

3) Still haven't seen the tax bill for most of these...so we shall see how this affect us...but we spread the sales out over 3 years to minimize...and did not take any withdrawals from retirement accounts this year since we sold 3 and don't want to move up in tax bracket.

4) My original reason for getting into rentals was to diversify out of equities...so we bought 5 because that gave me the % in real estate that I wanted...then we stopped buying.

5) With the proceeds from the sales, we are using some to live off, and the rest is going into our FIDO investment account (non-retirement)...where we mostly have it in short term CDs and munis.

6) Yes we paid agent commissions on the sales...you can do the math but to keep it simple let's say 5% on $750k...or $38k

Very rough numbers here, but on a $357k initial investment, we "built" a $722k asset (about $750k less $38k in realtor commissions) over 13 years. This may not sound like a great return, but remember we had excellent profits and cash flow the entire 13 years (well, not so much the first 1.5 years lol...lots of start-up costs/issues).

I guess I could spend a few hours and do an overall analysis with the annual cash flows included, but I'm too lazy lol. Let's simplify and say our average rent was $900/mo, and 2/3 was profit...so $600/mo x 5 properties x 12 months, or $36k/year.

Overall I'm very happy with how this has worked out, DW is happy that we're "simplifying" our lives, and by about March of next year we should be completely clear of the business.
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Old 10-05-2022, 04:36 AM   #2
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Old 10-05-2022, 05:00 AM   #3
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Congrats! Don't forget Depreciation Recapture impact on the taxes/net profits.

I'm seriously thinking of the same, but currently still w@rking so impact on taxes, etc. is very high. I want to simplify for the "what-if" situation but might wait a few years when I RE and seller finance the sale to spread taxes.
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Old 10-05-2022, 06:32 AM   #4
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Well done Dave. Liquidating in this market and not having to deal with all the issues anymore sounds like a prudent thing to do.
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Old 10-05-2022, 08:01 AM   #5
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Wow, congratulations! Must feel really good to wind that down.
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Old 10-05-2022, 08:55 AM   #6
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I'd look into 1031ing into DSTs and avoid the tax.
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Old 10-05-2022, 09:35 AM   #7
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Quote:
Originally Posted by Finance Dave View Post
Very rough numbers here, but on a $357k initial investment, we "built" a $722k asset (about $750k less $38k in realtor commissions) over 13 years. This may not sound like a great return, but remember we had excellent profits and cash flow the entire 13 years (well, not so much the first 1.5 years lol...lots of start-up costs/issues).
That is pretty good, congrats! I would make note that if you had invested $357,000 in VTSAX 13 years ago and sold TODAY, you would have grossed $1.85MM and had you sold 12/2021, that would have been nearly $2.5MM.

I am not trying to stomp on the accomplishment, just thought it was interesting how passive investing might compare to R/E investing.
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Old 10-05-2022, 09:41 AM   #8
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Congrats! I know that your wife has to be feeling good about it.
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Old 10-05-2022, 10:52 AM   #9
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Quote:
Originally Posted by Finance Dave View Post
Negotiated with our realtor that the first house we'd pay the "usual" 6% realtor fee, but the rest would be at 5%, or if we were able to sell to an investor before listing in MLS, she'd do 4.5%. We sold two via an investor before listing in MLS, so saved additional .5% there.
Thank you for sharing your experience with all this.

Regarding the quoted passage, isn't it conventional wisdom that you could get more if you sell to a retail buyer than an investor? Maybe I don't understand this fully, but this part caught my eye.

-gauss
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Old 10-05-2022, 12:27 PM   #10
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Quote:
Originally Posted by ExFlyBoy5 View Post
That is pretty good, congrats! I would make note that if you had invested $357,000 in VTSAX 13 years ago and sold TODAY, you would have grossed $1.85MM and had you sold 12/2021, that would have been nearly $2.5MM.

I am not trying to stomp on the accomplishment, just thought it was interesting how passive investing might compare to R/E investing.
Yes, and although I don't have that particular fund, I do have large chunks in equities. Remember in my original post, my goal with the rentals was to diversify AWAY from the stock market. Since the market tanked in March of this year, the rentals have gone UP in value...so the strategy has worked.

I did make a lot in RSP, IVV, SPDW, SPYV, VEU, FHLC, and others in that part of our portfolio!

And, don't forget the NPV of $36k/year of profits for 13 years!
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Old 10-05-2022, 12:39 PM   #11
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Originally Posted by gauss View Post
Thank you for sharing your experience with all this.

Regarding the quoted passage, isn't it conventional wisdom that you could get more if you sell to a retail buyer than an investor? Maybe I don't understand this fully, but this part caught my eye.

-gauss
Ok, I'll provide a little more info here...have to get into the weeds a bit.

The two we sold to an investor were left in poor shape by the tenants. These would have been hard to sell to a retail buyer due to the condition. Most of it was appearance items...things like:

1) dogs scratching a 4' diameter hole completely through the vinyl sheet flooring so the subfloor was visible

2) 84 drywall damaged areas (I put post-it notes on all damaged areas, take photos of each wall with the post it notes there for court hearings...things like fist holes from fights, candle wax dripped on the walls, and places where they hung items with those "removable" hangers but they don't read the directions on how to safely remove them so they tear the paint off the wall)

3) Paint damage such that walls/rooms needed completely repainted, grease stains on kitchen ceilings, etc.

4) 9 electrical boxes (old work) pulled out of the walls, must have been done on purpose

5) Acoustical foam attached to walls with two-sided tape as the guy used one bedroom as his "music studio" since he plays guitar in a band...didn't remove the foam when he left

6) Nearly every mini blind in the house was damaged beyond repair

and so on.

Ok...so that was the starting point when they moved out. Remember that I'm a handyman, so I would be doing most of the repairs/paint myself. That's fine, I don't mind doing it...but I injured my knee and was on crutches. Having knee surgery soon...so I can't do the work for awhile...would have to hire contractors or leave the house sit and pay utilities, property taxes, etc. Called a few paint contractors, they are either backed up for months or want $3,000 to paint the house...no way.

My realtor knew a guy who is buying rental houses. He has a dedicated crew that does all that type of work. He will buy "as is", cash (no chance for financing to fall through), no inspections, and we closed in 6 days on one house and 9 days on the other. Money is in the bank earning interest and all the issues are GONE!

So yes, I could have got more had I fixed them up...which is what happened on the one house we sold for $166k...it was beautiful when I finished it...I'll post a few photos of it....but that was before I injured my knee.

I'm hoping my upcoming knee surgery heals by about early December, then we can give a non-renew notice on our last rental and I can start working on that house myself in about Jan/Feb timeframe, and get it sold by April or so...I've been in the house so I know it will need a fair amount of work...tenants have been in there 6 years.

Hope that helps explain...there is always more to the story!
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Old 10-05-2022, 12:43 PM   #12
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^ Thank you for the explanation. It makes total sense.

Good luck with that knee surgery.

-gauss
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Old 10-05-2022, 12:44 PM   #13
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This is the house that sold for $166k

IMG_0476.jpg

IMG_0478.jpg

IMG_0486.jpg

IMG_0489.jpg

IMG_0493.jpg

IMG_0501.jpg

IMG_0505.jpg

IMG_0520.jpg
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Old 10-05-2022, 12:45 PM   #14
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Quote:
Originally Posted by Finance Dave View Post
... We had 5 rental units for the past 13 years...I managed them. Cash flow was excellent, with the typical occasional tenant issues. But due to a variety of factors...

1) I'm getting old and don't want to work on them anymore...I did most of the labor (I have been a handyman for the past 4 years...so it makes sense)

2) Wife is concerned that if I passed away young (no, I'm not terminally ill lol) that she'd have to deal with all the complexities of liquidating the business

3) RE values are way up here

4) Tenants moving out en masse

we decided to slowly unwind the business. We sold one unit in late 2021, 2 units so far this year, one more pending and should close within a month, and then we plan to sell the last unit in early 2023.
...
Overall I'm very happy with how this has worked out, DW is happy that we're "simplifying" our lives, and by about March of next year we should be completely clear of the business.
Next summer I hope to begin working with family members to begin shutting down the family biz, a process that will play out over many years. Some of them aren't going to be pleased because they receive nice income while not doing any work. I'm saving your post to show them at the proper time. Every little bit of persuasion helps!
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Old 10-05-2022, 12:48 PM   #15
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More pics of the same house

IMG_0549.jpg

IMG_0523.jpg

IMG_0568.jpg

IMG_0548.jpg

IMG_0525.jpg

IMG_0551.jpg

IMG_0593.jpg

IMG_0571.jpg

IMG_0498.jpg
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Old 10-05-2022, 12:48 PM   #16
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Next summer I hope to begin working with family members to begin shutting down the family biz, a process that will play out over many years. Some of them aren't going to be pleased because they receive nice income while not doing any work. I'm saving your post to show them at the proper time. Every little bit of persuasion helps!
Hope it goes well! Keep us posted.
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Old 10-05-2022, 12:52 PM   #17
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Thank you for sharing the photos of a "nice house".

After having inherited several residential properties, having photos of a modern/nice place helps me to see where improvements can be made on my properties.

-gauss
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Old 10-05-2022, 12:56 PM   #18
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Anybody got a link to a simple method to calculate the tax bill for selling a rental? (depreciation recapture, capital gains, etc.)
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Old 10-05-2022, 12:59 PM   #19
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Originally Posted by ExFlyBoy5 View Post
That is pretty good, congrats! I would make note that if you had invested $357,000 in VTSAX 13 years ago and sold TODAY, you would have grossed $1.85MM and had you sold 12/2021, that would have been nearly $2.5MM.

I am not trying to stomp on the accomplishment, just thought it was interesting how passive investing might compare to R/E investing.
But did he pay cash for the full price of each place he bought? If he did, your comparison is correct. If he put down a small down payment on each, the comparison changes.

For example, I bought one place in '96 for 193K. But I only put down about $6200. The place is worth 1.2M to 1.4M now.

Comparing 193K vs being in the market, will result in a far different outcome than comparing 6,200.
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Old 10-05-2022, 12:59 PM   #20
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Thank you for sharing the photos of a "nice house".

After having inherited several residential properties, having photos of a modern/nice place helps me to see where improvements can be made on my properties.

-gauss
I would never rent one looking like this...tenants will just tear it up...but when ready to sell, you can really improve the price by doing these things. I only spent about $1,000 in materials...mostly it was paint, new cabinet hardware, door knobs, door hinges, a couple light fixtures and bath mirrors, and then a lot of consumables like paint/primers, paint brushes and rollers, paper towels, caulk, etc. Mostly it was time removing all the junk/trash, sweeping, mopping, cleaning, and then doing all the work of painting...I used a sprayer in this house which I rarely do.

Spraying is a wild experience if you're new at it like I was. I spent 3 x 6 hour days prepping (masking off, washing walls with TSP, drywall repairs, etc.)...then about 1.5 hours setting up the paint equipment (straining paint, adjusting pressure/air, extension cords, pouring, etc), and then I painted the entire ceiling of that 1,070 square foot house in about an hour! I then had to change the masking to protect the ceilings (which took another 6 hours), then I was able to paint the entire house walls in 2 hours! It's all in the prep work!

I painted the kitchen cabinets in about 20 minutes times 2 coats...but again there was a lot of prep work.
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