Summary: This year we made a lot of big moves in our real estate portfolio. In this two-part post, I reflect on our real estate investments of 2019 and walk you through our decisions. In real estate, as in anything, there will be successes as well as challenges. Both are learning opportunities. That’s why we’ve chosen to share these stories at the end of this busy year. We want to give all of you an opportunity to learn from our experiences so that you can be better investors yourselves!
In 2019, we sold a total of 12 doors over five properties in two different states. We bought one single-family home on a large lot, which we are planning to subdivide and build on. We are also about to close on a 32 unit property.
So what does that have to do with you?
The point of this post is to give you an insiders’ view of our real estate portfolio, our decision-making process, and our wins and losses this year so you can learn from them. I hope that, no matter where you are in your investment journey, you are able to get investment pearls from each of the properties we moved this year.
First, for those of you who haven’t started investing yet, I think there’s value in seeing what we are doing. Some of you might imagine that the properties that we invest in are sexy A class properties in downtown areas. To some of you, investing may seem cost-prohibitive. If this is you, I know you’ll learn a lot from seeing actual examples of properties we have bought and sold this year.
For those of you who have some real estate investment experience under your belt, I’ll go into detail explaining the reasoning behind some of our choices, so you can decide if this type of decision-making is something you want to adopt and apply to your own portfolio. I also spend time explaining our growth strategy, which is based on the Fast FIRE system, so you can decide if it’s something you want to pursue in the future.
Finally, for those of you experienced investors, I hope you enjoy reading some of our war stories and can apply some of our insights to your portfolio, no matter the size.
When you invest in real estate, like anything else, you are constantly learning. And the fastest way to get better is to make mistakes yourself OR learn from others’ successes and mistakes. With that, I offer you our real estate investing year in review.
Duplex in Spokane, WA
Facts: Bought in March 2017 for $150,000 and sold in April 2019 for $195,000
This is the first property we sold this year. We bought this duplex back in 2017 as an off-market deal from one of our investor agents in Spokane.
So how did the property perform over the past two years? I think we would say that it performed “OK.”
Now, what do I mean when I say Broad Street was just “OK”?
It had decent cashflow since it was renting at $1,595 a month. We had increased rents by about $350 over the course of the two years, since it had been under-rented previously, and this was without us having to put in any money to fix it up. But there wasn’t any more hidden value we could see to tap beyond the under-market rents that we had already improved.
It was a decent “base hit” type property, but it was never going to be anything more.
Now, there’s nothing wrong with base-hits. We likely would have continued to hold onto this property for the long term if there wasn’t a second problem. We paid cash for this property, so we had $150,000 tied into it.
Why would we pay cash for this property?
This comes down to investing philosophy differences between me and Kenji. I tend to be on the aggressive side and want to be highly leveraged during the “growth phase” of our portfolio. Kenji, on the other hand, preferred to be less leveraged and have more equity in our properties.
We had gone back and forth about it a lot. But ultimately we had met in the middle, which was that we would pay off some of our properties (but not as many as Kenji wanted to).
So, in order to access the cash tied up in this property this year, we were either going to have to do a cash-out-refinance or sell the property to get the money out.
So why didn’t we just do a cash-out-refinance and move on?
Ultimately, we decided this was the year to turn over our small properties and go bigger in order to take advantage of the tax savings associated with 100% bonus depreciation. (It only applies to properties bought after September of 2017.) We also wanted to simplify things and get more of our lazy equity working for us. Kenji also had a change of heart about keeping so much equity in the properties and in large part due to the massive tax savings you can create with bonus depreciation. So we ultimately decided moving on from this property was the right way to go.
As I mentioned, our overall plan for this year was to go bigger. But with the proceeds from Broad, we decided to do something slightly different: we chose to 1031 exchange the property into a development project which happened to cross our desks. This is something we had not done before and is featured in more detail below.
In summary, this property served us well. It cashflowed a decent amount over the last two years. We didn’t have to put any money into improving it. The property appreciated fairly well in two years due to us increasing rents, and we could roll the proceeds over tax-free into a bigger deal with more potential.
Learning pearls: When you have lazy equity in a property, you can access it by doing a cash-out-refinance or selling. In the era of bonus depreciation, it often makes more sense to sell properties and use the proceeds to buy new ones (rather than cash-out-refinance) if you have Real Estate Professional Status.
Single Family Home with almost one acre of land in Sedro Woolley, WA
Facts: Purchased in April 2019 for $449,000. The goal is to build two duplexes in 2020, sell off one of the plots of land, and sell the single-family home. Then, cash-out-refinance on the duplexes and cashflow $36,000 a year with no money in the deal.
One of the decisions that Kenji and I made this year for our Semi-Retired blog readers is to go first and try new things. We know that if we take on the risk and build new skills, our readers can then gain from our experience and be better investors themselves.
We know it’s tough to try new things and push your boundaries, especially when you’re just starting out investing in real estate. That’s why as our portfolio has grown and we’ve gained more knowledge; we’re willing to assume more risk by tapping into new ways of investing in real estate.
As part of that, this year we decided to take on a development project. We’ve previously written about our property in Sedro Woolley in detail.
So now, for the update. What’s gotten done? Everything was finished including the duplex designs during the spring and summer. However, we’re still waiting on the short-plat approval from the city. We thought this would take four to six months. We’re now into month six. Until this gets done, we can’t start construction.
In the meantime, we’re basically breaking even on this property, not cashflowing but not really losing a lot either.
But there are a couple things we’ve learned along the way.
1. There will often be snags and challenges in deals
This is just part of investing in real estate (and in living life!). If you can roll with the challenges and figure out solutions, you’ll be much more successful (and happier) along the way. The short plat will get done when it gets done. We’ll certainly push to get it done as fast as possible, but we’re also not going to lose sleep over it.
2. Local banks and credit unions are often easier to deal with when trying to get good terms on construction loans
Fortunately, we developed a relationship with a local bank here in Washington about two years ago and they were able to help us out with the loan on the property as well as the construction loan. As we noted in our previous post about this property, our goal is actually to pull all of our cash out of this deal in a cash-out-refinance after construction is done and move it into another new property.
We have always advised our students in our introductory course, Zero to Freedom Through Cashflowing Rentals, to develop a relationship with a local bank as well as an investor lender. This was just another example of the value of having a solid relationship with your lender.
3. This deal allowed us to test out Hemlane’s software
Several of our friends have been raving about Hemlane for self-management for the last two years, but we hadn’t tried it ourselves prior to this. In this case, we decided to use Hemlane to self-manage the single-family home on this plot. We used it to create the lease and the lease checklist; our renter also pays us through Hemlane. Everything has worked out really well and our costs are extremely low.
Selling this property down the road is definitely going to be complicated. Because we 1031 exchanged from Broad street into this property and we plan on subdividing this property into four pieces and selling off two of the pieces separately, we’re not really sure how it’s going to work out from the tax perspective. The good news is, there’s more learning to come!
Learning pearls: It takes a while to subdivide land, but owning land that has a rentable property on it significantly lowers the risk. It can be better to work with local banks on construction loans. Hemlane works well for self-management and the cost is very low.
Single Family Home #1 in Spokane, WA
Facts: Purchased in November 2016 for $160,000 and sold April 2019 for $237,000
Kenji and I bought two single-family homes (the other one is described below) during our very first site visit to Spokane. On this trip we were actually looking for small multi-family properties. Unfortunately, we didn’t see any multi-family properties that were worth buying, so we ended up walking away with these two single-family homes. They worked out well for us in the end.
That’s the first learning point here. Sometimes you have to adjust what you’re looking for depending on what is available in the market at that time. This is not to say you abandon your cash-on-cash calculator and buy anything. As you’ll see, we cashflowed decently on these single-family home purchases. We just had to adjust what we were looking for during that scouting trip and buy single-family homes instead of multi-family because our agent just didn’t have any multi-family deals that met our criteria.
We sold these two properties this year as part of our simplification process (managing and overseeing 16 properties is a lot!). They had also appreciated so dramatically in the last two years, so they had significant lazy equity.
One of the questions we asked ourselves in deciding whether to sell these properties was, did we believe that these properties were going to appreciate another $80-100K over the next two years? Since the answer was no, it seemed worth getting our money out and having that money working harder for us in another property. Therefore, we used the proceeds from both of these properties for our 32 unit property we’ll discuss in Part 2)
One of the interesting learning points from this property specifically was that the house, which was renting for only $1,350 a month, actually sold for more than the other home that was renting for $1,495 and had a garage (see below). That just goes to reinforce how home buyers have a totally different way of valuing properties than investors.
Also, during the due diligence period for this property, we learned about how to replace a sewer line that had been damaged by root intrusion using a sewer burst. It’s pretty much the cardiac cath of plumbing. You can check out a video of how it works here if you’re interested. Doing this rather than digging up the sewer line saved us significant money at closing.
Learning pearls: Sometimes you have to adjust what you’re looking for based on what’s good and available in the market at that time. If you’re not sure if it’s a good idea to sell a property that has appreciated significantly, consider asking yourself, “Do I believe that this property is going to appreciate “x” amount in another “y” years?” Major plumbing issues caused by root intrusion can be fixed with a sewer burst.
Single Family Home #2 Spokane, WA
Facts: purchased in December 2016 for $155,000 and sold October 2019 for $230,000
Single-family home #2 was renting for $1,495 and had minimal expenses when we sold it. It was another decent rental, but it had appreciated so significantly, we thought it was worthwhile to sell.
Part of the reason this property appreciated is that we had added an “official” bedroom downstairs by adding a closet and digging out a window well (only $2,500 in Spokane). Of course, part of the sale price was also just pure market appreciation.
That’s one of the things that sets investing in single-family homes apart from multi-family. You have the opportunity to have massive market appreciation that has nothing to do with the rental income you’re collecting. In contrast, appreciation with multi-family properties tends to be mostly based on the net operating income of the property, so you can make repairs and improvements and force appreciation.
The downside, though, is that you’re taking higher risk with the single families because their value can likewise fall tremendously based on market conditions. Also, when there is a vacancy, you’re coming out of pocket every single month compared to a vacancy in a fourplex, where you’ll often still cashflow.
Learning pearls: Digging out a window well isn’t that expensive, and it can help you meet the egress requirements for a bedroom. Investing in single-family homes is riskier than investing in multi-family, but there is the potential upside of higher market appreciation.
And that’s only the first four property trades we made this year…
Okay, that wraps up a summary of our first four doors sold and one door bought for 2019. If you’re ready to dive into the other eight doors we’re selling as well as the details of the 32-unit we’re buying, head on over to part two!
Are you interested in learning how to invest in real estate with us? Then sign up for our introductory real estate investment course for physicians, Zero to Freedom Through Cashflowing Rentals!
