400% Return On Investment over 5 years: Why I Sold My Real Estate Investment
I’ve had a pretty good run with my first investment. It’s made money every year and I’m confident I could repeat it (if the market conditions ever change).
But for a few major factors I’ve decided to list it and sell it (for a nice gain). The following reasons are my high level thought process around my decision.
Future Capital Expenses
My building was OLD. And with age comes capital expenditures. Things like the furnaces, Air Conditioning, plumbing fixtures are ALL up for replacement within the next few years.
Based on my general estimates, I’d be spending 30-40k to replace all the things that aren’t up to standards (and probably some that I don’t know about yet).
Now there is generally nothing wrong with maintenance expenenses, you build it into the profitability of the building when you first buy it. However, it’s worth considering your immediate exposure (risk) to repairs when deciding whether or not to sell NOW.
Real Estate Cycle (Macro)
These past 10 years have been the longest uninterrupted cycle of property and stock market growth in history. And while real estate values haven’t gone to the moon and back, they have been steadily creeping up since the madness of 2009.
History tells us that property does not in fact go up forever, and down cycles/recessions are a natural part of the game.
Basic logic dictates that since we haven’t had a down cycle in awhile we are due for one sooner rather than later. Add the greatest economic contraction of all time (thanks to the virus) and it seems pretty obvious real estate won’t just keep shooting up.
That being said, by the magic of low interest rates (the lowest in history) and limited supply (places for sale) prices haven’t dipped yet, and I was able to get out of the property quickly and profitably.
Market liquidity is a HUGE factor in when to sell your place. Usually people wait until times are tough and EVERYONE else is trying to sell. This leads to lower prices and increasing desperation on your part.
The best move is to sell when the market is still ‘strong’ and there are more people buying than there are homes available (this is the case right now).
Real Estate In My Neighborhood (Micro)
My property is located in a lower middle class neighborhood in Chicago. While the neighborhood will likely improve over the next 20 years, there are no real catalysts for change over the next 2-4 years.
If I had a property rapidly appreciating in a HOT neighborhood, it may change my decision to sell.
Bearish On Chicago
Chicago has several big things working against it.
First, the city is dead broke (beyond broke) and has a strong history of raising taxes and mismanaging the shit out all the money the take in. This will only worsen and continue with the current ‘crisis’.
Rents are not going up. In my neighborhood, the prices of my rentals have barely moved in years (sagged if anything).
Evictions are banned. Currently, you can’t even evict a tenant if they spit on your shoes and stop paying for months. On my little 2 unit apartment building that could mean over a year without income (and no recourse).
Sell Near the Top
Selling near the top is hard to do because things are going generally pretty well. There’s always the worry of selling and watching your property continue to climb in value….
But in today’s uncertain times, it makes sense to have teh cash available to be opportunistic and invest in something bigger. My ultimate decision was to take my profits, remove the risk (of continuing to own it) and be perfectly positioned to buy again when the market truly falls.
Until then, it’s time to do the hard thing. Sit and patiently wait for the right opportunity….
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