Why I Decided to Sell Three Investment Properties.
Why I Decided to Sell Three Investment Properties.
Although I’m just a small-time real estate investor, I have learned some valuable lessons over the past few years in purchasing residential and commercial real estate.
My goal of sharing this content is that you’ll gain some insights into my perspective around why I decided to sell some of my investment properties against the heeded advice of naysayers who say “buy real estate and wait” – which, frankly, to me, is somewhat of a cop out.
Asset Bubbles
If you don’t live under a rock, you know by now that the Federal Reserve is now on a war path to pop the three asset bubbles we are currently experiencing: bonds, stocks, and real estate.
The ultimate triple threat. If you haven’t already, buckle up!
Investment Review
One day back in December 2021, one of my business advisors called me and said I should start following the Federal Reserve more closely and look at my stock portfolio (thank you Paul!). This tipped me off to investigate deeper and I found my advisor was right, the P/E ratios were incredibly high and with the Federal Reserve changing its tune, I decided to liquidate my stock portfolio.
I immediately shared this information with my brokerage and business partners, so they could become aware and make decisions for themselves. I then moved the cash into 12–14-month timeframe deep value-add commercial real estate investments that I thought would generate better returns in a changing and rising interest rate market.
This more recent investment review also caused me to evaluate my real estate portfolio, of which I effectively own 44 commercial and residential doors through multiple syndications and through properties I purchased locally since 2015 through 2020.
My evaluation found that there were residential rental properties I no longer wanted to own, especially not for the next 10 years. So I began a plan to start pruning my portfolio.
Specifically, I identified three properties that I did not want to hold (certainly not for the next ten years), for these reasons:
Non-Conforming: Does not have 3-4 bedrooms or at least 2 bathrooms, or odd square footage, funky layouts.
Location: Further outside the city or in a sub market.
Age: 20+ years old property.
Rentability: Areas that are tougher to rent even in a good market.
Secondly, I reviewed the current cash flow vs return on equity, and the expected repairs based on the ages of current main components of the property, here’s what I found and what happened:
Belle Rive Condo Flip
Description: 2 bed / 2 bath 950 sq ft condo purchased for $71,996.60 at foreclosure auction in December 2019.
Story: Renovated the property and since our ownership we invested $17,285 in the property over the life of ownership and immediately rented the property for $1,075, with rent increasing to $1,415 and then $1,450 upon the lease renewals. This put the property well within the 1% rule for investment.
Issues: Soon we found out our purchase from the auction was a second mortgage, but thanks to us buying an owner’s policy, the insurance company ended up paying for the title search mistake. It wiped out a $100,000+ first mortgage. This is why you buy title insurance. Due to the first mortgage lien, we were forced to own the property cash for the term of the purchase, so we didn’t lock in low rates, and just held the condo in cash.
Asset Price Increase & ROE: Over time the value of the property popped up to $190,000, and our return on equity slipped to 7.6%, as we have a $241 association fee per month and a $1,450 rent. The return on equity is lower (below 5%) when we estimated future repairs that need to be done, and of course, we have to spend a little time managing it.
Decision & Result: Thus, with low returns and high equity build, my wife and I decided to sell, and when we did, net all selling fees, our rehab, and our purchase price, we ended up netting $121,010.
Here are the details below during the life of ownership:
o Purchase: $71,996 in December 2019
o Rehab + Capex + Association Fees: $17,285
o Rent: $30,347
o Selling Price: $190,000 in October 2022
o Selling Concessions + Title & Brokerage Fees: $10,056
o Total Investment Cost: $99,337
o Sale Price + Rent: $220,347
o Net Profit: $121,010
o Return on Investment: 121.81% in 32 months
Astral BRRRR
Description: 3 bedroom / 1.5 bath in Riverside purchased for $121,000 from a wholesaler in January 2020.
Story: Renovated the property and since our ownership we invested $23,015 in the property over the life of ownership, and paid $25,732 in mortgage payments (we did a cash-out refinance at 4.75%) and immediately rented the property for $1,350, with rent increasing to $1,750 upon the lease renewals. This put the property well within the 1% rule for investment.
Issues: I made the mistake of half renovating the property at the beginning when we purchased it, and then again renovating it when we went to sell. I should have spent the money to fully remodel the property when I originally purchased it, including relocating the refrigerator and remodeling the kitchen and baths.
Asset Price Increase & ROE: Over time the value of the property popped up to $310,000 in price, and our return on equity built slipped to below 5% due to the age of the property (it was 1950s).
Decision & Result: Thus, with low returns and high equity build, my wife and I decided to sell, and when we did, net all selling fees, our rehab, and our purchase price, we ended up netting $163,257.
Here are the details below during the life of ownership:
o Purchase: $121,000 in January 2020
o Rehab + Capex + Mortgage: $49,528
o Rent: $37,712
o Selling Price: $310,000 in October 2022
o Selling Concessions + Title & Brokerage Fees: $13,927
o Total Investment Cost: $184,455
o Sale Price + Rent: $347,712
o Net Profit: $163,257
Return on Investment: INFINITE because I did a BRRRR and got my money back within three months of purchase.
Keystone Heights Flip
Description: 3 bedroom / 1.5 bath in Keystone Heights purchased for $150,766 from a wholesale in March 2022.
Story: Renovated the property which was WAY over budget. I initially budgeted $37,500 but it came in at $64,091. The problem was that this property was an hour outside of Jacksonville, and our contractors didn’t want to go that far. The property was also in much worse shape that we anticipated, and as investors, we want to fix every problem we find, so we keep a good reputation, so we did. We also did a short lease-back to the tenants living in the property for three weeks, which was a bit risky, but they ended up moving out on time.
Issues: The cost of basic work has drastically increased over the last two years. In the past, it was super easy to get the project done, sometimes even under budget, but today with the supply chain issues and labor shortages, you pay an arm and a leg to get simple things done.
Asset Price Increase & ROE: I estimated that the property would sell for $250,000 but we listed it for $300,000. When we got a $280,000 offer, we jumped on it and cashed out. The increase in the estimated purchase price offset the additional construction costs.
Decision & Result: I personally wouldn’t want to hold a property this far away from us and in a submarket that doesn’t have a lot of rentals or rental demand. The property is also more than 70 years old so we don’t want to have to keep maintaining it. Ultimately, the flip netted us $53,589 within three months of purchase, a nice 24.9% return in 5 months.
Here are the details below during the life of ownership:
o Purchase: $150,776 in March 2022
o Rehab + Capex: $64,091
o Rent: $0
o Selling Price: $280,000 in May 2022
o Selling Concessions + Title & Brokerage Fees: $11,554
o Total Investment Cost: $214,867
o Sale Price: $280,000
o Net Profit: $53,589
Return on Investment: 24.9% in five months.
Not Buying the “Buy Real Estate and Wait”
Now, I understand the “buy real estate and wait” mentality and slogan we see all over social media. If you hold an asset for 30 years and you have a 30-year mortgage, you will own it outright by the end of that term. You just need the tenant to pay the bills + cap ex for you. Yet I view investments a little differently. I’m more interested in risk and reward. Right now it occurs to me that the risk is high and reward is low for rental properties. The question: would I buy these properties again at their current price? If the answer is no, then I need to sell them. For all three of these properties, the answer was clearly, no, I would not buy them again at the current price.
Secondly, buying and holding has worked well over the last 30 years as rents have steadily increased along with interest rates coming down over that period. I no longer see rents going up and interest rates going down being the base case. Perhaps rents stay steady, but with rates going higher, buying and waiting may not be a phenomenal investment thesis. If you have the equity built up, wouldn’t it just make sense to take that money and run?
Also, what I think a lot of investors miss is how much CapEx (repairs and maintenance) it requires to hold a property over 30 years - and the time it takes to manage it and/or the to manage the managers. That’s why I would only buy the investment if the returns justified the risk and effort.
These properties did make sense in the beginning when I purchased them, but once I realized I wouldn’t buy them again at today’s prices, they didn’t make sense to own anymore.
If you want to chat real estate - message me jon@movewithmomentum.com or leave a comment!