I love our rental properties, but now I want to sell them. Why would I do that? To be precise, I love our passive income stream from the rentals. Being a hands-on landlord is not bad, but I wouldn’t say I love it. Luckily, we’ve had great tenants for years and it hasn’t been too stressful. So why should I sell? Well, life changes. Owning rental properties might make sense from the financial aspect, but it’s not the right fit for us anymore. Today, I want to share my thought process and get some feedback from the smartest readers on the planet. Read on to see why I want to sell our rentals. We’ll start with the background first, and then expand on the reasons why I want to sell.
Currently, we have 3 properties. One is our primary residence and two are rentals. I’ll quickly go through them one by one. The history is somewhat complicated at this point.
This rental is a single family home that was converted to a top/bottom duplex back in the 80’s. The upstairs is a nice one bedroom apartment with a lot of natural light. The downstairs is a spacious one bedroom unit with an office/den. The duplex is located in a great area that I always loved. I lived in this neighborhood in my 20s and had a great time there. There are many neat shops, restaurants, cafés, and grocery stores all within short walking distance. The Walk Score for this neighborhood is 97! The public transportation is great too with streetcar, light rail, and bus service nearby. It’s my favorite neighborhood in Portland.
The financial side of this duplex is very complicated. We purchased it in 2014 with a 1031 exchange to defer a big tax bill. Here is the timeline.
- Purchased our old home in 2000.
- Converted the old home to a rental in 2007.
- 1031 exchange to this duplex in 2014. (1031 exchange means selling one rental and buying another one.)
- We will convert the duplex into our primary residence at some point.
We’ll definitely need a good CPA to untangle this mess when we sell. The taxes will be pretty complicated. You can read more detail about our duplex in this post – Our Duplex Investment.
Our rental condo is much less complicated. We purchased it as a short sale in 2011. This condo is in the building next to where we currently live. Originally, we hoped my parents could live in this unit. However, it didn’t work out and we turned it into a rental. This condo is usually easy to rent out because it is in a convenient downtown location. The main problem is the yearly cost increase. The HOA and the property taxes increase every year with no signs of slowing down. This rental condo is not cash flowing for us. Currently, we spend about $50/month to rent it out. However, it has appreciated significantly. You can read more about our rental condo here – Our Rental Condo Investment.
Primary residence condo
We moved into our condo in 2007 when I didn’t want to live in the suburbs anymore. We rented out our 2,000 sq ft home and downsized to a 1,000 sq ft condo. The 2 beds/2 baths condo was perfect for us when we first moved in. There was plenty of space for a couple and 3 cats. We loved living here because the view is awesome and there are plenty of things to do in downtown Portland. However, the condo has shrunk as our family has grown. Now, our son is 7 years old, my mom lives with us full time, and we are down to one cat. A two bedroom condo is too small for a family this size. We’re making do for now, but everyone needs a little more personal space.
Investing in rental properties is a proven way to build wealth. However, my track record is somewhat checkered. Here is the cash flow spreadsheet for our rentals. The number here is just rental income minus expenses. For me, cash flow does not include depreciation, tax deduction, equity gain, or principal payment. We’ll start in 2014 to keep it simpler.
|2014||$818||Sold rental home and purchased duplex.|
|2015||-$5,408||New roof at the duplex.|
|2016||$1,974||Installed new hardwood flooring.|
|2018||$6,120 by the end of August||Good year so far.|
Here is a scorecard for the properties. (Low is bad, high is good)
The primary residence is the worse investment on this list. We purchased it near the height of the last real estate bubble and it hasn’t appreciated much since 2007.
The rental condo has appreciated about 90%. However, it is not cash flowing and I think the appreciation will slow way down in the next few years. The good thing is that I don’t have to spend much time on this condo. The only time I have to work on it is when there is a turnover. Usually, it’s easy to rent this condo out, but it was vacant for 4 months last time. The previous tenant left before Thanksgiving and nobody wanted to move in the winter.
The duplex has been our best investment so far. It generates a dependable passive income stream and it has appreciated about 40% since 2014. The only issue is that I spend quite a bit of time on this property. Last weekend, we went over to prepare the home for autumn. We cleaned out the gutters, trimmed the bushes, swept around the property, and threw out some trash. I guess I could hire a handyman to do all these things, but it’ll cut into the profit.
Why I want to sell
Whew, that went on a little long, but the history is complicated. My current plan is to sell our primary residence and rental condo, then move into the duplex. We’ll take over both units. Now let’s get to why I want to sell and consolidate.
We need more space
This is the number one reason why we want to move. Our 2 bed/2 bath condo is not big enough for 4 people. Currently, RB40Jr shares a bedroom with my mom. This room also doubles as my office. It worked okay previously, but life is changing. RB40Jr is getting bigger and he needs his own room. Also, my mom is dealing with dementia and she needs her own space. Last night, she was delirious so she kept getting up and waking us up. Everyone is exhausted today. Mrs. RB40 and Junior need their sleep.
Dementia is a big problem. People with this condition don’t deal well with changes. We need to move sooner rather than later. Moving will be more difficult as dementia worsens.
Mrs. RB40 and I need more space too. Our living room has been taken over by Legos, books, a rock collection, and various toys. Once Junior has his own room, he can move all that stuff in there. Lastly, we need a better work area. I want a space where I can work without disturbing the sleepers. Mrs. RB40 currently works at our small dining table. Once we move, we’ll get a big dining table so she doesn’t have to keep moving her laptop around. She can take over a section of the table and just leave her stuff there. The duplex is big enough for all that and more. Everyone will have plenty of space there.
Portland real estate market has peaked
It seems like the Portland real estate market has peaked. The rental condo has appreciated significantly and I don’t think the price will rise much more in the near future. Developers are building so many new condos. It really feels like 2007 with all the new buildings going up.
Real estate is illiquid and I don’t want to have our money stuck there if there is a real estate crash. Anyway, we might as well while the price is high, right?
Ugh, this is not a good sign. This home is just 2 blocks away from our duplex. Reducing the price by $200,000? That’s a huge discount. Is the real estate market turning already?
I’ve been pretty lucky with the tenants since 2014. Our tenants are great people. They pay rent on time and they rarely call me to fix problems. It’s been pretty passive, but I want our investment to be even more PASSIVE in the future. We want to travel more at some point and we can’t do that while being a hands-on landlord. I still like real estate, though. That’s why I’m investing more in real estate crowdfunding. It’s a lot more passive than owning rentals directly. The income is pretty good and investors get a cut of the appreciation when the project sells. Another thing I like about RE crowdfunding is the ability to spread risk geographically. So far, I’ve invested in Arizona, Texas, Florida, North Carolina, and Missouri. The west coast is getting too expensive for me so that’s why I’m looking in more affordable areas.
You can check out real estate crowdfunding by signing up with RealtyShares. Once you’ve signed up you can research previously funded project and browse new projects. Then you can decide if RE crowdfunding is the right investment for you?
Too many rules and regulations
Portland is becoming less and less affordable. Rent has increased tremendously over the last 10 years. The city council responded by making more rules to protect renters. Here are some of the changes we’ve seen.
- Notices of rent increases need to be sent out 90 days in advance.
- Landlords need to give 90 days notice for a no-cause eviction. We also have to pay a relocation fee to the tenant, $3,000 to $4,500. No-cause eviction includes not renewing the lease.
- If the landlord increases the rent by more than 10% and the tenant moves, the landlord will have to pay them the relocation fee.
- One of the city council members, also known as the tenant champion, is planning to propose a limit on security deposits and “wear and tear” cost.
Who knows what other rules the city council will come up with next? It’s getting more difficult to be a small time landlord in Portland.
HOA and property tax
This applies to the condos. The HOA fees and property taxes have increased significantly over the last 10 years. It’s pretty much impossible to cash flow these condos now. The only way to profit is through selling and taking advantage of the appreciation. The HOA also prohibits short-term rentals so the AirBnb option is out.
Once we move to the duplex, we wouldn’t have to pay the HOA fees anymore. Also, the property tax for the duplex isn’t that much more than our condo. We would double the space, but will only pay about 20% more in taxes. Overall, our housing cost will decrease a little bit. Of course, we’ll have more home repairs and yard expenses at the duplex. That’s one good thing about living in a condo. You don’t have to do much repair and maintenance.
We’ve had great tenants since 2014, but I’m afraid this luck isn’t going to hold. I try to be strict when I screen tenants, but you never know. The next tenant might be the proverbial tenant from hell. It’s a dice game and your number will come up sooner or later. At this point, I feel like I should get out while I’m ahead. I can’t deal with problematic tenants right now. We have our own problems as both sets of parents age.
Mrs. RB40 doesn’t want to be a landlord
This is another underlying problem. Mrs. RB40 doesn’t want to be a landlord. She doesn’t want to deal with tenants and she has heard plenty of nightmarish rental stories from her dad. If something happens to me, she’d have to take over and it’ll be difficult for her. I need to simplify our investment so she can handle it by herself.
Alternative to selling
Okay, those are the reasons why I want to sell the 2 condos and move into the duplex. That’s not our only choice, though. Let’s summarize the options here.
- Rental condo – We need to sell this one soon. The price isn’t appreciating much anymore and it is not cash flowing.
- Duplex – The income is good from the duplex. We can move into this duplex or keep it as a rental. If I can find a good property manager, it’ll become much more passive.
- Primary residence condo – We need to sell this one. The price isn’t appreciating and it won’t cash flow if we rent it out.
The only alternative I see is to sell the 2 condos and keep the duplex as a rental. Then we’ll need to find a new home. This might be a good option if Mrs. RB40 retires soon. We could turn the duplex over to a good property manager and move to a location with a lower cost of living. I’m hesitant to move, though. We like where we live and our schools are excellent. I’ll need to consult Mrs. RB40 about this. My wife still isn’t quite ready to retire yet. (ETA 2020.)
Also, we don’t know where we’d move to. Mrs. RB40 probably wants to move closer to her family in Southern California. Her parents live in an affordable area near Palm Springs. I did a quick research at BestPlaces.net, and found that the COL is estimated to be about 20% below Portland. I’m not sure how accurate this is. California has a lot of taxes. I’m pretty sure the schools aren’t that great either. This would be a good option after our son graduates from high school, but I don’t think it’s the right choice today.
What to do with the money?
Finally, I get to dream a little. We should net around $200,000 after we sell the 2 condos. I’ve never had that much cash before. What should I do with it?!
- Remodel the duplex. The duplex is in dire need of remodeling. There is a long list of projects that we want to do there. We want to refinish the basement, install a new deck, improve the entry stairway, remodel the kitchens, pour new concrete around the house to help waterproof the basement, and so much more. We could easily spend $200,000 if we do it all at once. However, I think we should tackle one project at a time. Refinishing the basement would increase the property tax so that one will have to wait a bit. Higher property tax is no joke. Our next door neighbor is paying more than twice in property taxes as we do, $15,500/year. Yowza!
- Invest. A better idea is to invest most of that income in real estate crowdfunding or REIT. Then, I can use the passive income to improve the duplex every year. I can call this the “home improvement fund.” We could do a lot with $20,000/year. I’m just estimating a 10% ROI. Also, I could DIY some of the improvements and save even more. It’s pretty tough to find a contractor in this overheated housing market.
What would you do?
My timeline for moving into the duplex is 1-2 years. I’ll raise the rent 9.9% in January and let the tenants know that I’m planning to move in. If they want to stay, they’ll just have to deal with a 9.9% annual rent increase. We’ll see how it goes.
Okay, what do you think? Would you sell if you were in my shoes? Or do you have a better idea? I tend to have tunnel vision when I have a plan.
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Passive income is the key to early retirement. This year, Joe is increasing his investment in real estate with CrowdStreet. He can invest in projects across the U.S. and diversify his real estate portfolio. There are many interesting projects available so sign up and check them out.
Joe also highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help DIY investors analyze their portfolio and plan for retirement.