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

[Julie Kern]

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!!

[Jon A.]

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.