Rental Property and 400% ROI – Part 3

This is the third of a 3-part series on my real estate experience. Start with Part 1. Review part 2.

Being a landlord isn’t as difficult or exciting as I expected. Some things went wrong and I’d have to call the plumber or electrician, but most months were uneventful. Connie and Jake were ideal tenants, but small issues pop up.

For instance, we had a one lane driveway, three cars, and rarely used the garage. More often than I care to admit, when running late for work I’d drive across the yard to get around their cars blocking mine instead of asking for them to move. 

House Hacking: Living Rent-Free

Before moving into the upstairs apartment of the duplex, I rented a condo downtown. I had a great deal – how I arranged that is a topic for another article – paying just $825/month. The mortgage payment for the duplex was ~$750/month, which was mostly covered by Jake and Connie’s $725/month rent payment. 

This process of living nearly expense-free via roommates or tenants is called “house hacking.” I saved about $750/month by living this way in the duplex. 

Let’s consider what saving $750 each month meant for me. $750/month equals $9,000 (tax-free) annually that I was able to put toward debt, savings, travel and investments. How much more would I have to earn at my job to equal this?

Considering income taxes, it’s more like $12,000 1 annually in additional salary earned. In two years, it was the equivalent of earning an extra $24,000 at my job.

That meant even if I sold the property for 25% less than I paid, I’d still have a financial win. These small downside, large upside opportunities are the type I look for.

Looking back at my Net Worth spreadsheet, 2 the money went toward travel, paying off credit card debt, and saving for an engagement ring. 

If it worked so well, then I should have quit my job and begun investing in real estate full time, right? Well, not quite. I don’t enjoy owning and renting real estate as much as expected and I don’t have the means to find opportunities or make the most of them. I couldn’t have done this once except that Brian was willing to help me. 

So, when I had the opportunity to sell the duplex, I took it. 

Selling

An out-of-state investor wanted to buy turnkey rental properties. The investor made me an offer sight unseen based on the description, leases and my rental tax return. 3

Without sharing all the details, after fees the sale provided me a gain of just over $21,000, more than a 400% return on the $5,000 investment I made. Include the $24,000 value of living rent-free and my return on investment was over 800% in two years. Any way you measure it, this was a financial homerun. 

Since I lived in the house for two years I did not have to pay tax on the $21,000 gain. And, in the two years that I owned the duplex, after repairs, maintenance, real estate taxes, interest and depreciation, I only recognized $400 of income. This is the difference between investment real estate and your home.

Your home is not an asset. An asset is only something that puts money in your pocket.

-Robert Kiyosaki, author of Rich Dad, Poor Dad

I put half the gains from the sale into my savings to use for an emergency and eventually other investments. The other half I invested in Fundrise 4 to invest indirectly in real estate across the country. Fundrise has provided 7.3% return in 2 years, and I expect that to increase.

Fundrise as of July 1, 2020

I learned thoroughly the ups and downs of being a landlord and will continue to hold off on investing directly in real estate for now. While $21,000 won’t allow me to retire anytime soon, it did jumpstart my investing, finish my emergency fund and gave me confidence. Seeing the money deposited into my account was a rush like I’ve never felt before. 

What’s in it for you?

If you made it this far in these articles, you may be thinking, “ok, Matt, that’s great you bought and sold some real estate, but how does that help me?” My hope is that I’ve made the notion of investing in real estate less intimidating and given you the first steps to make it a reality.

I hope you will see more opportunities for yourself. Whether it’s starting a business, changing careers, or house hacking. Find people who have done it successfully, make it easy for them to help and (here’s the key) follow their advice. Networking isn’t just important for your job, it can impact your whole life.

But more than anything, I hope you realize that while It’s not easy or certain, it is possible for you. Take the next step. Maybe it’s reading a book, setting up your 401K, buying real estate, finding a mentor or learning about Net Worth

Want more? Reach out and ask. I received emails after parts 1 and 2 that resulted in interesting conversations and new friendships. I’d welcome a conversation with you, too. 

Thanks,