SFR + ADU Rental turned Primary Residence - Sold for Profit

[Dorys Prentice]

Investment Info:

Single-family residence buy & hold investment.

Purchase price: $300,000
Sale price: $715,000

SFR 4bed/2 bath with add-on unit studio in back. Rental until 2016 when we converted it to our primary residence. Sold in 2018 and moved out of state.

What made you interested in investing in this type of deal?

This property fell into our laps as it was the next door neighbor's house.

How did you find this deal and how did you negotiate it?

My husband and family lived next door to this property for 60+ years. We knew the neighbor and had told him to let us know before he ever sold it. The house and property were much larger than our own, and we always hoped we would get the chance to purchase it and move into it. He succumbed to a short sale in 2009 and we had the opportunity to buy it.

How did you finance this deal?

Borrowed money from a parent.

How did you add value to the deal?

We didn't really do any due diligence as we were very naive at the time. Since we planned on living in the house at some point, and probably retiring in the same spot, we didn't buy it with the intention of selling any time soon. We knew the price they asked us to pay to get the bank to accept the short sale was worth it.

What was the outcome?

We ended up renting the main house to my husband's brothers and the studio to a friend of a friend. The plan was to eventually swap houses, for us to convert the rental into our primary residence and move the brothers into the smaller house. Due to the change in the area we lived, influx of drugs and homeless in the area, we decided to change our goals and sell the smaller house and take the cap gains exclusion, remodel the rental and move in, and then sell 2 yrs later.

Lessons learned? Challenges?

Biggest lesson learned was to not ever do any business with family! They paid way below market value on rent and when it was time to move, it tore the family apart. Long story...

Paid a ton in capital gains taxes on rental turned primary because we left before 2 yrs plus we had to pay depreciation recapture.

Did you work with any real estate professionals (agents, lenders, etc.) that you'd recommend to others?

Yes on the initial purchase. Owner's grand daughter was the agent. No when we sold. We found a neighbor that wanted the property so we made a deal on our own.