Real Estate Investing #20: A less irritable (numbers-based) assessment
February 24, 2020
If you’d like to join me in helping Lakota families and/or rural libraries this year, please read this post. Over 6 weeks in 2019, we raised $2669.94 for the Lakota families, touching 27 lives. What can we do in 2020?
Current total: Lakota, $521.62; Rural libraries, $321.62.
It’s time for a more pragmatic look into whether or not we should get out of the landlord business. I can’t just make a decision like that based on my irritation level and a vague recommendation from the PM who hasn’t given me enough data to go on. The thing is, they were originally pushing me to consider selling because of the money, now it’s because of “the neighborhood”. When a professional’s recommendations are vague and unsubstantiated, I have to do my own research.
I consulted with a friend who’s a veteran in the business and we did some searching. Initial research says: the neighborhood isn’t sketchy. Maybe the next one over is, and there’s overflow, but their gut feeling was to keep the property. The PM just sounds lukewarm about it, but as Veteran Friend advised, if it was an actual problem, they would say so outright and refuse to handle the property any longer. This bears observation but not a rush to sell.
So it was time to run the numbers. Getting into this rental cost about $34,000 out of pocket. After 6 years of rent, rent has paid down 10% of the mortgage, and the house has appreciated on paper by 66%. We have about $140,000 in equity if it sells for what the assessed value is now.
If we can assume best case scenario sale price and then want to see what happens after deducting our costs, we have to start with the 15% capital gains tax ($21,000) since we’ve never lived there, and I assume broker and miscellaneous fees related to selling would take another 10% off the top ($14,000), and then the initial investment of $34,000. That leaves $71,000. This isn’t exact. It ignores the profits each month and the repairs I’ve paid for, since those are paid for out of cash flow generated by the rent.
As rough numbers go, after costs, we would have made about double what we initially invested so I was wrong earlier when I thought we hadn’t made enough to beat the market index. My market investments have done well but at best over the past ten years, I made a 10.1% return. This part is somewhat speculative since the equity and appreciation are on paper and nothing’s gained until we sell. I think of this like I do stock options: it’s a great bonus but doesn’t matter until you commit to a sale.
So, looking at what I consider the real day to day of the money, in keeping the place: the rent. Our rent was 20% below market. We have a lot of room to bring that up to market rate and then keep it there in future years if the next tenant is great, or not if they aren’t great. It will still take at least 18-24 months to bank enough to make up the lost revenue and savings which were more than wiped out to pay for the repairs. That’s getting banked to pay for future repairs again, of course.
So the rental is neither a cash cow nor a money pit, it’s somewhere in between. It also gives us a worst case scenario option of a place to live if we really need a fall back at some point in the future.
Half my irritation came from actually dealing with tenant nonsense (the HOA violations, mostly, because that created disproportionate work). Half of it came from knowing that I was putting up with tenant nonsense for not much in return. If we can get in a decent tenant and they’re paying a decent rate of rent so the bills are more easily covered, I don’t mind sticking for a few more years. I always planned to keep the place for at least ten or fifteen years.
We had a lot of the same feelings when we were deciding to get rid of our two rentals. It’s not like we were losing money but we weren’t getting rich of these things either. When we factored in the time and stress (mostly the stress) we had to put in, in order to get a kind of meh return from the rent (but could get a pretty good return if we sold), we figured we’d alleviate the stress and take the profit in hand.
But of course there’s always going to be a part that wonders if we should have just held on. Maybe better tenants and rising rents would have, in time, made the decision clear but in the other direction.
Sorry that’s not at all helpful, but just wanted to say your post spoke to me. Best of luck with your decision, friend.
I appreciate the weigh in! It’s nice to know I’m not the only one in this boat. My friend is heavily invested and sticks with investing so I have that voice for perspective.
I empathize with so much of this. We had a bad tenant run and a bunch of repairs. The irritation was high, and our PM wasn’t a ton of help. The phrase “neither a cash cow or a money pit” is so perfect! We were renting our primary and not loving it, so that also weighed into our decision. We’re moving to the rental to make the repairs and capture the 2 years for tax purposes .- then we’ll run the numbers and decide if we sell or bail. As of this moment, I’d say we are done being landlords, but that might change after the irritation fades. I hope you find a decent tenant and it works out for you!
I’m sorry to hear that you had a similar experience. I have thought about doing the same thing at some point in the future – living in the rental for two years for tax purposes.
Good luck with your rental too!