Selling a Rental We've Never Seen

We're finally back from our trip to northern Europe: three and a half weeks of travel hacked goodness spent with our good friends from Phoenix. We'll have some posts and plenty of pictures to share from the trip in the coming weeks.

But we first wanted to tell you about the sale of one of our rentals, that we managed to accomplish mostly via email and digital signatures, from a smartphone.

Let's start at the beginning. How did we come to even own this house?

In the heady days of 2013, we had foolishly paid off the 15 year, 4.25% mortgage on our primary residence, a mere three years and change after buying it in 2010. This isn't as impressive as it might seem: we bought when the Phoenix metro area was in the toilet, and the initial mortgage was only $104,000 or so. 

Still, after the euphoria of being totally debt free wore off, we realized we had a lot more money coming in every month. We were maxing out our 401ks and IRAs at that point, and looking for another area to invest. Rental real estate sounded like a good option. What could go wrong?

Unfortunately, by 2014 our local market had recovered and the homes in decent areas weren't profitable investments. Forget about the 1% rule. Even when we factored in that we would not have to use a property manager, the houses wouldn't cashflow.

So we started looking into turnkey rentals: out of state opportunities where a company would buy a super cheap house that needed a ton of work, rehab it, sell it to us, and then even serve as the property manager afterwards. This last bit was important to us. We figured an ongoing relationship would make the company less likely to screw us over, especially since we were interested in buying several properties.

So after a series of phone calls, looking at potential properties online, negotiating purchase price and rehab options, we finally settled on a single family home: a really adorable brick ranch, with a detached two car garage, in what seemed like a pretty good part of town. We bought it for just over $90k and it was pulling in $1,125.00 a month in rent, just a couple weeks after we closed on the home. 

Everything was going so well in the first few months that we thought, hey, why not buy another? We had enough cash sitting around for another 20% down payment, as the houses were so cheap. So we did, again, sight unseen. This one rented for $1,000 a month, for a purchase price of $80k.

Anyone we bothered to share this news with thought we were crazy. How could we buy a house, shit, two houses we had never even seen? Weren't we worried?

Well, yeah. We had our share of worried nights. But we calmed ourselves by knowing that various inspectors, appraisers, title companies, and government agencies were there providing a certain level of governance. The properties existed, within the boundaries of property lines validated by local governments, were inspected, yada yada. We used sites like city-data to get an idea of the neighborhood's make up: how many renters and buyers, income, age distribution, education attainment, unemployment and crime rates, stuff like that.

We could have flown out a few times to see all this in person, but that also would wipe out a big chunk of the first year profits. And hey, we are doing this to make profit.

So we went forward. Before we knew it, we had two cute little brick ranch houses, covering the mortgages and property management costs, building up reserves for future repairs and vacancy, and throwing off a few hundred dollars in profit after all that.

Still, things were bound to change. The tenant on one of the houses got a job offer in Texas into the second year of her lease, in 2016. (And earning more in salary than her weird, blogger landlord, so good for her!) Luckily, she was happy to pay for the rent while the house was vacant and new tenants were found, so we only had to cover the utilities during the vacancy.

A new tenant applicant had a decent salary and passed all the checks from the property management company, so we went forward with a new lease. Everything was going fine until the rent suddenly stopped coming in. The tenant wasn't returning calls from the property manager, either. Eventually we found out that the tenant had been arrested.

I don't think it's prudent to go into the details of all that in this blog post. The tenants could be innocent, for all we know. Regardless, we needed the rent to be paid, and it wasn't. They weren't responding to calls or to letters left taped to the front door. The property manager would show up at random times, but no luck.

Eventually we went forward with the eviction process, which I learned can be a long, costly, pain-in-the-ass. The whole thing was delayed further by the holidays, but eventually we regained possession of the home. When we got inside, it was trashed. Garbage everywhere. Furniture and belongings left behind. Holes in the drywall, apropos of nothing. Who knows where the tenants went.

At this point, we had a decision. We'd been paying the mortgage and legal fees for months, just trying to get our house back. We could pay a few thousand in repairs to get it ready to rent again, or decide to cut bait, and sell. Given all the headaches with the property, we decided to sell.

Selling presented an additional choice. We could do a minimal repair to get it roughly back to the condition it was, try to sell for about what we sold it for (our agent estimated $75 to $80k), and thereby lock in a medium sized loss after realtor and transaction fees. Or, we could try to flip it: put roughly $20k into the house to redo the kitchen, floors, painting, etc. and aim for a $110k to $120k sale price, and make a small profit. Still, we could lose even more if our estimates were off.

We opted for the latter, despite the risk. Months of renovations later, we listed. A week before leaving for a three and a half week vacation to Europe that we'd planned for a year, we got an offer a thousand over our asking price.

Thanks to the wonders of modern telecom, we were able to handle everything from signing the purchase agreement to handling inspection items via digital signatures on a mobile phone. As an aside, I can't say enough about Google Voice and Google Hangouts. For $10 a month through Airvoice, I can call and text all I want, even abroad, through VOIP technology and wifi, and can use the less awesome mobile network when I need to.

The day after we got back from Glasgow and a seven hour layover spent in the Newark United Lounge, we signed the final papers with a mobile notary on our dining room table, and had our funds wired the next day.

For you fellow number nerds, here's a short summary of our end to end ownership of the house. The purchase and sales prices have been rounded/changed slightly to keep a bit of anonymity for ourselves and the new buyer, but the delta (i.e. - profits, losses, rents, costs, etc. are all accurate).

Initial Figures:

• Purchase for $80,000 in fall 2014
• $16,000 down payment
• $4,000 transaction costs (loan, inspection, appraisal, etc.)
• $1,000 per month rent
• $80/month property management fee
• $563 monthly payment (PITI)
• $357 monthly cashflow when rented, prior to any repairs/vacancy

End of 2014 figures (partial year):

• $3,600 in rent collected
• $2,030 in mortgage payments (PITI)
• $240 in property management fees
• $575 in repairs & other costs
• Net profit of $755

End of 2015 figures:

• $12,000 in rent collected
• $ 6,800 in mortgage payments (PITI)
• $960 in property management fees
• $700 in repairs & other costs
• Net profit of $3,540

End of 2016 figures:

• $8,900 in rent collected (tenant stopped paying in fall)
• $6,800 in mortgage payments (PITI)
• $1,262 in property management fees + placement fee for new tenant
• $1,300 in repairs & other costs
• Net loss of $462

Partial Year 2017 figures:

• $0 in rent collected (tenant stopped paying in fall 2016)
• $3,400 in mortgage payments (PITI)
• $1,400 in court & legal fees 
• $2,500 in repairs, utilities, & other costs
• $20,000 for renovation/flip
• $3,000 credit to seller and $1500 in post-inspection repairs/concessions
• Sold for $124,000: $49,000 back to us after paying off mortgage, some title fees, notary, etc.

It's times like these that I wish I majored in something other than English, because it's hard for me to analyze the figures above. Looking just at the income, the vacancy in 2016 and 2017 killed us: that period wiped out all the profits from the prior years, netting us a $3,467 loss after paying the mortgage during the lengthy process to take possession of the home, and during the repairs for the flip.

We got lucky that we were able to sell the property for enough to cover the cost of the $20,000 flip and to eek out a tiny profit after paying ourselves back the costs for the flip and our own down payment. For now, it seems like we netted about $9k in profit overall, when accounting for the loss we got from just renting the house.

But we'll owe taxes on the gain, and we'll also owe for the depreciation we took over the past three years. I suppose I could say the depreciation is a bit of a wash: the same deductions from deprecation in 2014 to 2016 are just going to be added to our income next spring. Maybe if I majored in accounting I could make better sense of all this.

Anyway, maybe one of you savvy readers can point out if and where we went wrong with the analysis. 

I'm honestly just happy that we just have this chapter of our investing lives behind us, without losing any real money in the process. We thought we would enjoy being landlords, but the more houses we own, the more we like index funds. 

We're going to invest the funds we got from the sale into our brokerage account today, and I'm going to feel a little gratitude for how mutual funds can be bought or sold with a click, any day you want, without debt, or repairs, or court fees. 

*Photo is from PHOTO/arts Magazine at Flickr Creative Commons.