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To Sell A Rental House…

This post started as a question, but it’s now a done deal.  My first rental is sold!  Happened pretty quickly.  I thought about having some seller’s remorse, but nah, I’m happy with it gone.

Single family rentals are recommended on countless personal finance blogs.  And I agree – it’s a good way to start building net worth.  A pretty accessible side hustle…if you can scrape up the downpayment then you can do it.  You can convert extra time into real profit. And if you get at all lucky on timing the market, you can make off like a bandit.  I didn’t time the market particularly well (as you’ll see) but still made a handsome sale profit and good rental returns along the way.

Could I have matched this in the stock market?  No.  And I doubt I would have actually saved the same money.  But either way I would have learned less,  experienced less, and not been in the same decision-making role.  I also really like the cash flowing nature of actual real estate.  Once you stabilize your investment, the stream of checks is hard to beat.

So here’s my story:

My First Home

I bought the ranch house in 2005 for $210,000.  Just back in town from 2 post-college years in a big city, I grabbed the house because I didn’t want to live with mom/dad, pay rent to someone else, and liked the neighborhood.   I lived in it for 3 years.  Fixed up a few things, pulled up the carpet (hardwoods below), knocked out a wall, and painted.  Knocking out the wall was the most fun.  Painting was (always is) the worst.

I then rented it for 8 years.  For the most part an easy rental, with a handful of trying moments.

I only had 4 tenants, mostly good.  One was a pain – always paid, but paid late.  One was elderly and actually lived pretty hard in the house (with her dog and lack of cleanliness).  Maintenance was ok, except for one year when a hurricane brought a limb through the roof.  And the next day the sewer backed up into the finished basement.  Insurance claims for $15k total, and a ton of my time.  Other years were just a call or two for hvac, electrical, or plumbing fix-its.

Convincing myself into being a landlord

My for-sale underwriting when I moved out was that I could sell it for around $250,000.  Would probably have to fix up about $10,000 of things, and pay a realtor $8-12k (depending on how I listed it).  So $230,000, or net $20,000 profit.  Not terrible.  But the area still seemed undervalued with a   good trajectory.  And the softness in the market at the time made that $20,000 optimistic.

So I underwrote a longer hold.

The rental economics were shaky to start.  I paid about $1200 annually in interest, taxes, and insurance (Interest only loan).  Rental rates were mid $1400s.  But I wanted to move and it was no time to sell a house.  So I figured that I could find tenants and do repairs myself until rents went up or I could finagle something on the capital side.

I like leaving myself pressure & room to get creative.  By year 5 or so it should be cash flowing ok.  Then I’d be in the driver’s seat and could hold or sell opportunistically.  Even in a worst case, I didn’t see the local real estate market being down in 10 years.   In a best case, the real estate softness would be short lived, and I could flip out sooner at at stronger profit.

Rental Numbers

We hit pretty close to that worst case – as you know that time period ended up being dubbed the Great Recession.  And surprisingly I wasn’t far off in the underwriting.  It’s been 8 years since my “forecast” (read: guess).  The heavy real estate downside lasted only about 3-4 years locally.  Monetary policy was softened immensely to help borrowers (& asset prices).  And rents here only touched down for a year or so then have steadily trended upward.

Within 18 months of going rental, I refinanced and my interest rate went from 6% to 3.75%.   That cut about $350 from my monthly interest cost, and I added amortization of principal at $275.  I ended up cutting the rental rate by this $75 dollars at the lowest point of the market.

Over the next 5 years, the rental rate went up, while my interest rate went down again.  As the house got more financially stable, I outsourced the maintenance and even the tenant sourcing once or twice (when I was very busy).  Turnover costs were very high only once – as we did a complete repaint, re-flooring, exterior trim/clean, some plumbing, and minor fix-its.  For the last 3 years, I averaged $1650/month in income and just under $650 for interest, taxes, and insurance.  Principal was around $350.

Why Sell?

As I write this, I’m wondering if I sold the house because it was getting too easy?  Maybe.  But no, I don’t think so.  I had some other reasons.

For one, the roof and other systems were getting older.  Second, I have another rental house – so I won’t have to fully say goodbye to the cash flow (or the late night tenant calls during a storm)  And third and most importantly, I have become the owner of a bunch of commercial real estate through work over the past 5-6 years.  From a diversification standpoint, I don’t think I can possibly sell enough real estate.  It’s nice to dispose of one of the more active investments as our net worth grows.

How Did I Sell?

The sale process started when I toured a couple of friends through the house.  I didn’t really want to sell to friends, but they asked so I told them my number: $290,000.  A fair number – would’ve been a stretch a year or two ago but is a borderline deal today.  The sale was not to be…with them.  Could have gotten messy anyway – business with friends.

Then my tenants called a week later.  They’d been looking around town to purchase with no luck.  It’s becoming a seller’s market, as they’d seen.  And as renters they’ve liked the house, location, yard, etc. So…at what price was I looking to sell?  I maybe should’ve nudged up a bit, but I like these tenants a lot.  So I gave them the same friends/family number.

They thought about it for a couple of days, then we got a beer.  Over a beer, we settled the details and had a verbal agreement.  It was awesome. The way a house should be sold.  We wrote up a contract the next day, and closed 3 weeks later.  I got my number, sold it as-is, and got rent until the sale date.  They put down no diligence money and didn’t have to move.  We were both very happy.

If I’d put it on the market, I think I could’ve gotten $300,000 to $305,000.  But I would’ve had to do some cosmetic stuff.  I probably would’ve spent $5,000-10,000 between cost to get to market + repairs cost.  Then I would’ve had to pay a broker, at least for the buyer.  That would’ve taken about $8,000 out.  And my tenants would’ve likely moved out, so I might have lost a month or two of rent.  So I think I was ok on profit with minimal work.

Would I Do It Again?

…meaning buy & set up a rental house (8 yrs ago).  Hands down, no questions, absolutely YES.

  • I learned a ton about fixing things
  • I learned about contracts
  • I learned about tenants
  • I learned about subcontractors
  • I got to see markets change for better & worse, and see how it affected me personally with an investment
  • I hung in there, rather than walking away in 2008 with something between little & no profit
  • I made some money

And most importantly: I got to steer the ship of my own little business.  Living with the impact of your own business decisions is a cool and scary experience.  It’s eye-opening because you realize how often you don’t know how to deal with a given situation.  But when the buck stops (and starts) with you, you have find a way to get it done.