Have you ever questioned if owning a rental is the right move for you? If you own a rental already, you might be sick and tired of all the repairs and/or the resident not paying the rent. If you don’t have one, you might be worried that you might become that person. I’ve been managing rentals since 2008, and while I become good at managing rentals, I still run into issues, and I know it’ll never end. Since each case is different, I can’t say what’s the best choice for you. But I can say that you want to evaluate the value of your property correctly before you make the final decision. Instead of going through all the benefits of owning a rental, I want to give you a real-life example of how sometimes what seems like a loser can become a winner if you hold it long enough. When things get tough, I want you to remember that things can improve because of the many benefits rental properties bring you. Of course, this is just one example, so you want to evaluate your case to see if it makes sense.
In 2003, I bought my 1st duplex (just one side) to live for $150,000 by putting $8,437 down with all the fees. For the 1st few years, the duplex price kept going up. It was probably worth around $165,000 at one point. In 2008, I moved out and bought another house. I started renting out the duplex and became a landlord. The market crashed in 2008, and the price kept going down. At one point, the value was probably less than $90,000. I kept buying more houses instead of selling the duplex and cutting the loss. By the way, I can’t help but be fascinated with human psychology, as I remember looking at the house for $100,000 and thinking, “That’s too expensive.” That same house will cost at least $250k now.
So, what happened to the duplex? I kept it. I wasn’t about to sell it for a loss. Eventually, the market hit the bottom around 2013 and kept going up. In 2019, I decided to sell for $155,000. That’s right, the price went up just $5,000 in 16 years! It’s actually less than that when I include all the fees to sell. If you do the math, the appreciation rate was about 0.2% annually! So what’s so successful about it? Well, remember that I put less than $8,500 to buy it, so I made $5,000 by just putting less than $8,500, so the actual return was almost 3%. OK, you are still not impressed. Let’s include the mortgage paydown also. When I sold the unit, $32,207 rolled into my pocket after all the fees. If you do the math, that’s almost a 10% return on your money. Remember, I bought it just a few years before the market crash, and after keeping it for 16 years, it only appreciated by 3.3% in 16 YEARS, not PER YEAR but in TOTAL. This is the magic of owning a rental property, but it gets even better.
Instead of buying an expensive toy with that money, I did a 1031 exchange and bought another house. I did not have to pay any tax on the gain (yet) by doing a 1031 exchange. I put another $20,000 to buy a house. Once the unit stabilized, I did a cash-out refinancing and got $33,696 back. Since I only paid $8,500 to buy the original duplex and $20,000 for the exchanged house, my out-of-pocket money is only $28,500, but I got $33,696 back, so essentially, I received $5,196 and a rental house! The unit has a positive cash flow, so I am getting an infinite return on my money.
While I cannot say that the same thing will happen to you, and indeed, selling is the right thing to do in certain situations, one crucial thing to remember is that rental property can be a very forgiving investment if you hold it long enough.
For all the rentals I bought, I either still have them as rentals or sold them and exchanged them for other rentals. Since I hired a property manager to manage the units, I spend very little time every month managing them while the investment properties are working hard to make me money.
