Being real estate investors requires work! In January of 2018, we listed our rental property near Nebraska furniture. We got that one the summer of 2014 for $143k. I personally sold it for $230k! Did I mention that I studied online for six months and got my real estate license in late 2016? When you see those numbers, you might think WOW! Here’s the deal, we purchased that house with full knowledge that major repairs would be needed. The inspection revealed the need for a new roof, fence and future foundation repairs. The awesomeness of a great location is, none of that prevented us from being able to rent it out. The house was rented for a full year before we replaced the fence. We waited two years before replacing the roof. After owning the property for 3 years, we had a tenant break his lease.
Grrrrrr…. this became our least favorite property! We repaired the foundation and made all the other repairs that came along with it. This includes but is not limited to, flooring, patching of walls and painting. We also chose to do a few additional things to make the house more appealing. The repairs were extensive. We did not take down a wall, upgrade the counter tops or put in a great back splash. We left that to the buyer. Had we not saved our bonuses and salary increases we might have been screwed! Sure, with market appreciation we probably could have sold it without repairs and broke even. The combination of the tenants aggressively paying down the 15 year mortgage and market appreciation allowed us to make a profit. We got into real estate to make money. So far…. so good! How do you know when to sell? That’s another post. 🙂
Anyway, back to the plan…
At this time, Mrs. Lee and I are binging on the Bigger Pockets podcast! My wife actually had a lender tell her, “Your mentor is doing a great job. You guys have an excellent strategy.” Through the Afford Anything and Bigger Pockets podcasts we are learning about small multi-family apartments (MFA). Small multi-families include 2, 3, 4 unit properties and so on. Anything 4 units or less can be financed with a residential loan for up to 30 years. Properties with 5 units or more are considered commercial. So, we recognize the need to own more “doors” but we do not enjoy the financing process. Unless you are buying all cash, there’s a loan for every SFH you purchase. There’s also a limit to the number of loans a couple can qualify for. Real estate prices have risen so much we cannot find an MFA in our preferred area that meets our criteria for cash flow.
In the meantime, we discover an IRS incentive for investors called the 1031 Exchange! The tax law requires that we take all profits from the sale of Sherman (that’s what we called her, sniff sniff. I miss you baby!) and roll it into a larger investment. Simple, right? Well, kinda. As the seller we were not allowed to touch the funds. We were required to pay a 1031 intermediary to take possession of the funds from the title company at closing. Before doing so we had to determine whether or not it was worth it to pay the fees. In this case, the cost of the 1031 Exchange firm was much less than paying the capital gains taxes. There are time limits on the identification and purchase of the property. The details are in the irs.gov link provided above.
We mentioned previously that our properties must cash flow enough to cover the expense of a property manager. Having property managers has been essential for us as we navigate real estate investing while working full time jobs. We learned enough from them to feel comfortable with the idea of investing out of state. Remember, we could not find a cash flowing MFA in our area. We made offers that didn’t even get responses. The market is that hot! We decided to look around online at places back home in Virginia. There were actually some pretty good deals! Yea, they needed a little work, but the numbers checked out! We closed on our first out of state investment using a 1031 Exchange in April of 2018! In a single purchase we went from a single family home to a 6 unit small MFA! We went from 4 rentals to 9, more than doubling our “doors”!
So there you have it! The new strategy is to move from single family homes purchased on a 15 year to small multi-family apartments purchased on longer terms to increase cash flow. Increasing cash flow will remain the strategy until we have enough doors to focus on pay down. We are so close we can taste it! Today, we believe it’s 15 but that could change.
Take Away – Remain open to learning something new. While having a direct connection with a mentor might be great, you can learn from the information shared via blogs, podcasts and audio books.
Ask yourself, what am I doing with the knowledge that I have gained? What’s holding me back?