We don’t necessarily want to sell.
Some time ago we listed all or our rentals for sale. (http://thisgingerjustsnapped.weebly.com/blog/everything-is-for-sale)
We used a formula involving capitalization rates to set the prices. We listed each building based on its current income and expenses at a good rate of return for any investor who would buy it. We sold two double-block homes that way last summer, with mixed emotions. Steve said it felt like sawing off toes.
It might be time to sell if our business goals have changed
Yes, we bought those buildings with the intention of building up a huge rental empire. However, our business has gone through some changes in the last few years. Rentals are no longer our main focus. They are still part of the plan, but we’re focusing more on the immediate income of flipping single family homes for retail sale.
In 2013, when we were strictly rentals, we found ourselves in the “suck zone” – burdened with the full-time job of managing multiple properties that didn’t throw off enough income to justify the work. I had been laid off from my full-time job since 2012, and ended up taking a job I didn’t want in 2013 because our family needed the steady paycheck and health insurance – things the rentals alone could not provide. That’s when we discovered we needed a different plan for income if we wanted to be full-time real estate entrepreneurs.
So we got into flipping houses. Some were successful. Some were more flops than flips. We lost a lot of money on two houses in New Jersey we attempted to flip with some partners. The partnership went south, and we ended up stuck with quite a bit of debt when the houses sold at a loss. The only good news here is we get to take a Donald Trump-style tax write-off and carry over the loss for the next twenty years!
That, my friends, is the game of Real Estate. There have been moments when I thought I don’t want to do this anymore. It was in one of those moments that I asked Steve to list all the rentals for sale. I wasn’t giving up, not really. I was just curious to see if they would sell at a reasonable price that would also benefit us. Steve did the math and the numbers he came up with were very reasonable indeed, for both buyer and seller. He had just obtained his realtor’s license, and it made him look good to his broker to put all these listings up. So we did.
It might be time to sell if we need to rebalance our balance sheet
The sale of the two double-blocks allowed us to clean up some – not all – of the debt. It put us in a much better place financially. It lowered our rental income, but also our monthly expenses. It made our rental portfolio smaller and more manageable. I really haven't missed those four rents! After the sales, we moved forward, building up our wholesaling and house-flipping operations. With some of the financial pressure relieved, we poured some money and time into improving our remaining rentals. We needed to get some better quality tenants. It’s been a struggle, but slowly, unit by unit, we’re becoming full again. I have a vision of fixing and perfecting our rental system, and eventually using the income from the wholesaling and flipping to build our portfolio back up again. The properties remain listed for sale, but I hadn’t given much thought to actually selling them.
So the offers coming in on one of our big six-units took me by surprise. I’ve been thinking a great deal about this building lately, but not about selling it. We had some bad tenants living there. Two we were able to get rid of, the third is an eviction in progress. We have been upgrading the interiors of the empty units, getting ready to attract a better class of tenant. One has already been rented. We hired someone to clean the common areas regularly. I have big plans for the exterior, including professional landscaping. Steve did some calculations and the back apartment could fetch a much higher rent than we’d been getting with just a few improvements. Of all the rentals in our portfolio, why is this the one getting the offers? Why can’t it be one of the others I haven’t put so much visioning energy into?
The offers are not high. Actually, the best one is $60,000 less than our listing. It’s $30,000 more than we paid for the building in 2008. After the mortgage has been satisfied and closing costs paid, we’d pocket about $70,000. That would wipe out a good chunk – but still not all – of our NJ flop debt. The monthly expenses of that building are high, but so is the income. Those rents I would miss. We’re making the payments on the debt right now without a problem, so I don’t feel desperate enough to take this offer. It’s good to not be desperate. Even if it were a full-priced offer, I’d still have to think about if I really still wanted to sell this building.
I asked Steve if he wanted to accept this offer. No, he does not. That’s good. We’re on the same page.
We make our money – the income that pays our family expenses – from wholesale commissions and sale proceeds from houses we flip. The rentals pay their own expenses and add a small amount of passive income to our monthly totals. We had to sell off two of our rentals to rebalance our income and expenses. I don’t think we need to sell this one. I think we need to spend money on it and improve it, so that its cash flow will improve. I think we need to build a more efficient system for managing our handful of rentals. Right now we have just 24 units across 10 buildings. That’s a good number, and one I’d like to add to. I once had a dream of owning 400 rental units. That isn’t going to happen until we get a good working system in place!
If we’re not going to sell, we need to make the asset worth keeping!
It seems I have some work to do. I haven’t been fully involved in rental management for some time, as I have been dealing with financial matters and setting up business structure. My goal this month is to transition the rental management away from my husband, who has his hands full trying to manage the contractors working on our flips and rehabs (that’s a whole other blog post right there!) I have no choice but to approach this in a very systematic manner, because I have a limited amount of time I can spend on rental management if I want to accomplish all of the other goals I have for this business. I want to build a great rental management system for these 24 units. When it is running like a dream, I would like to add more units. And I would like to replace myself as property manager – not with an outside firm or contractor, like we tried before. That didn’t work for us. I want to hire an in-house employee to manage the rentals using the system that Steve and I design.
One of the reasons I write this blog every week is it forces me to focus on my goals and visions for the business. I hope, if you’re reading it, that it gets you thinking about yours, too. Why don’t you come to the next meeting of Investors Network NEPA and discuss them? It’s the second Wednesday of the month, 7pm at Perkins restaurant, Highway 315 in Pittston. The meeting is free, but we ask that you come hungry and order dinner or a snack. If our order totals at least $100, Perkins doesn’t charge us for the room we use. The next meeting is this Wednesday night, March 8th. Check us out on Facebook: https://www.facebook.com/investorsnetworknepa/