When I buy a property, I go into it planning on holding forever. But I recently decided it was time to sell off one of my properties after owning it for a little less than 2 years.
I wish I could say this was a profitable sale, but I decided to sell knowing I would be taking a loss.
Who the hell likes talking about their losses?
Not typically me, but a friend convinced me to write this. It’s fun to write about the wins, but sometimes it’s equally important to share the losses (and the lessons learned from them). So here it goes.
Some background on this property:
- Market: Memphis, TN
- Characteristics: 3 bed, 2 bath, 1,148 sq ft single-family home
- Purchased: Sept. 2018 for $63,500
- Sold: May 2020 for $64,000
- Total return (sales proceeds + cash flow during ownership – down payment to buy + closing costs to buy): -$1,260.81
So the big question here is why would I sell a cash flowing property (purchased for $63,500 and bringing $735/mo in rent) and be willing to take a loss on it? Here was my thought process:
1. With everything going on, we may see some deals in the next 6-18 months
We’re in a recession and an insane amount of people are unemployed. Things have felt ok for now because of all the stimulus that the Fed is pumping into the economy, but that stimulus won’t last forever.
Residential real estate may come out of this just fine or we may see some deals popping up from owners in distress. I just don’t want to be in a position where there are deals and I wish I had some extra cash on hand to make a move. So part of the reason I sold now was to build up as much cash as possible now in case opportunities start to pop up. This was the property I was most willing to part with to further build our cash pile.
Important note: the last time I tried to time the market, I sold all of my stocks in 2017 thinking the bull market was over (it wasn’t). Timing the market rarely works, so on to point #2…
2. My investing strategy has changed and I need more capital to make it work effectively
When I first started investing, I bought turnkey properties at close to market value. Turnkey properties have recently been rehabbed and have a tenant in place. This comes with a premium price tag to the investor buying the property.
It’s not a bad way to get started when you don’t have experience and don’t want to take on the repairs/rehab yourself. But strategies like the BRRRR method are much more appealing to me now that I do have experience and feel more comfortable taking on a project so I can keep recycling capital to grow the portfolio faster.
(If you’re curious to learn more about the BRRRR method, read this)
So to make this strategy work, it helps to have a lot of cash available (for both acquisition and rehab). My main options are:
- Keep saving $ from my full-time job and side gig
- Sell a property to recoup as much cash as possible (even if it’s at no gain or slight loss so that the money could be better used on a different investment)
- Raise money from friends and family
I decided to pursue all of these together.
3. I’m spread thin across too many markets
I owned property across 4 different markets before I sold this property. If I could rewind the clock, I wouldn’t have spread myself so thin across markets. You never get to take advantage of scale and you have to deal with multiple property managers.
What’s funny is that I’m actually going to be entering a new market soon, but it’s one that I plan on getting to know well and do many deals in. I’ll spill the beans on which market that is once we pickup a property there 🙂
4. Get a mortgage token back
You’re allowed to take out 10 conventional mortgages in your personal name. I call these mortgages “tokens” and I want to put each one to its best use.
You can get conventional mortgages on properties with up to 4 units. Once you go 5+ units, you need to get a commercial loan. Compared to commercial loans, conventional mortgages also have lower rates and are typically amortized over 30 years instead of 20 or 25. Commercial loans have plenty of benefits, but conventional loans are an amazing deal.
With a goal of maximizing cash flow to hit my target of $100k in cash flow per year, right now I see 4-plexes as the best use of my tokens to maximize cash flow.
5. This is a property I probably shouldn’t have bought in the first place
Cheap properties like this in smaller markets rarely gain much value over time. It’s 2020 and this property is only worth somewhere around $64k-$68k. Not exciting. Especially as a remote investor, I’m starting to think these types of properties aren’t worth it.