Getting out while the getting’s good

Today my realtor is sending me an offer on a home I have for sale in Winston-Salem, North Carolina.  This is a property that I bought subject to the existing financing and have owned for several years and run several tenants through.

It just came vacant in May, after a friendly eviction, and fortunately for me, the tenant left it in great shape.  However, the neighbors told us it seemed like the tenant was coming back to visit a few times (and removing some of the trees he had planted in the yard…?) so we decided it was important to change the locks right away. “Crazy tenant, tricks are for kids!”

I decided to sell this property rather than continuing to hold it for a number of reasons.

Why I’m Selling This Rental Property Now:

1. It’s hard to manage since I live far away and it doesn’t have a strong cash flow to pay for a manager… we could do it, but we’d probably have negative cash flow after factoring in the vacancy and repairs.
2. The home doesn’t have much equity and when I bought it Subject To the existing financing, I told the owners I’d try to have it paid off within 8 years’ time.   So, I’ll have to sell it at some point soon.
3. The property doesn’t have much appreciation potential.  What I realize now, which I didn’t at the time – being inexperienced when I bought the home, is that there isn’t a lot of demand for that type of property in that location.  It’s a double-wide mobile home on a permanent foundation on a nice acre of land, but double-wides, even attached to land, don’t have the same appreciation rates as other types of property, AND, Winston-Salem, NC has had a very FLAT housing market and it will probably remain flat for the foreseeable future.

So, I’m going to unload it and put my attention onto properties that are in stronger markets with better cash flow and equity positions.  I asked my realtor in Winston-Salem to stage the home, and after about 3 months of showing, it sounds like she has a buyer who can get financed and is eager to close.

It’s always exciting to see someone achieve the dream of home ownership for the first time, even if I’m helping it happen by not making much money on the sale.  I learned some great lessons as a landlord and I am now more particular about what houses I buy.

What I Learned From Owning This Rental Property:

1. Buy WITH Equity – ideally buy with 20-30% equity. I bought this house on great terms, Subject To owner financing, but it had no equity on Day 1, and due to low appreciation rates, still has no equity.
2. Have a management plan in place.  I was doing well managing this property until I left town to move to Seattle.  It can be expensive to manage your real estate, whether you pay someone else, or invest your time to do it yourself.  Make sure that you have a solid management plan in place, whether the property is local or not.
3. Don’t finance your tenants. I’ve had 3 tenants through this property in a short period of time.  Many of my tenants have to leave because they got in over their heads and/or had an interruption in their income.With 70% of American families living paycheck to paycheck, it can be hard for people to keep up on their bills when the proverbial rainy day comes and they have a glitch in their income or encounter extra expenses.

   I have found it’s NOT WORTH IT to let people get behind on the rent, they never catch up and are even less reliable about paying on time in the future.  NO PAY – NO STAY.  It’s a tough policy to stick to, but it’s part of being a landlord.

4. Know why you’re buying the property – show me the money!  In this case, I was “buying on the come” as my father would say – hoping that in the 8 years before I had to refinance the property, it would have gone up in value.  However, due to the property type and location, this was not the case.  The good news, from my perspective, is that it didn’t go DOWN in value either, as so many investment properties have across the country today.The important thing about these more “speculative” investments that don’t come with equity, is that you have to be able to afford to stick with the property (cash flow-wise) until you’re ready to sell.

   If the market has a downturn when you planned to sell it, you might find you need to hang on an extra 5-10 years in order to sell it at a profit.  The problem so many investors are having now is that they’ve bought homes with negative cash flow that now have negative equity as well.  That’s a tough combination to ride through the storm.

Real estate is still a great investment.  (I’ve also got a property with potentially a $50,000 profit going on the market this week, too.  I’ll tell you about that one soon.)  The key to making it work is taking the long view, not over-extending yourself and having a firm strategy in place.

Post your comments below and let me know how your properties are doing!

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