I was recently out to lunch with a friend and his wife. They’re a great team in so many ways, the least of which not pertaining to the wonderful business they run that centers around single-family rental investing. During our time together, they told me they were selling off their 15 rental homes and converting everything to cash. When I asked why, they told me that the return just wasn’t there and that they no longer wanted to handle maintenance or even actual property management, so if they turn that over to a professional organization, their returns would be even less.
While I couldn’t argue with their personal thoughts – it is their life and their dream, plus I’m not a huge fan of judging – I did offer why I feel differently about owning rentals for the long term.
My main thesis here isn’t new; I like passive income.
However, my twist is that I like it for later in life. This helps me to not “live” off the cash flow I have right now from rental units while taking on debt obligations because that balance sheet isn’t very peaceful to me. However, knowing that the cash flow I do have helps me to build a bank for issues that will come up over time with rental units (things like vacancy when notes still need to be paid) and the cash flow helps me to pay down the debt, I am comfortable knowing that over time my debt burden will be significantly less and thus the rentals throwing off more cash until the debt is eventually paid off.
So, back to my friends. Why are they selling their 15 rental homes? Their primary reason was return on investment (ROI), followed by not wanting to be burdened with maintenance.
Remember when I mentioned this couple had other businesses in single-family residential real estate? All of those hustles surrounded the opportunities they saw to make money while trying to grow their cash position initially. So, going back to their humble beginnings, with little cash and two full-time jobs, they originally sourced units to “wholesale” which meant they sourced and contracted to purchase a unit that they simultaneously sold to someone else and made a spread on the difference in price. Once their cash position was built up, they began to buy homes themselves that they “flipped” to owner occupants after they added value by renovating and repositioning those assets. Then, when the downturn occurred and they had more money, opportunities were abound and they did everything in greater scale including wholesaling and flipping, while adding rentals and even learning to purchase non-performing loans (NPL). Needless to say, they did very well and they earned all of their success through diligence, hard work, belief in themselves, being opportunistic, smart, not developing egos, and of course, taking advantage of market opportunity.
So now that inventory is much lower and opportunities for all of these hustles are limited, why sell your cash-flowing rentals? Assuming their income has come down somewhat or even a lot while their lifestyle hasn’t changed, I do not understand their “low return” reason for selling rentals. I certainly do “get” wanting to eliminate the headache of handling your own maintenance issues and not wanting to outsource to a property management company, especially if you already are not happy with your investment returns.
When I asked, “where are you generating returns with your cash including this new cash from your rental unit sales” this couple had no answer. They weren’t freeing up cash from the sale of these rental units for the doomsday scenario, they weren’t shouting out that we are in a “bubble” or offering up other asset classes where they are investing in asset backed securities with better returns, so I was left dumbfounded.
What would you do?
Kick back, travel, get better at golf, volunteer to serve the community, party harder…all of this and more, sure, why not? I mean, in this scenario, the inventory and opportunity for what this couple did to make money is way down so they must break discipline and take on more risk to continue to wholesale and flip which they are not stupid enough to do, and they are cool enough to enjoy other aspects of life besides working. And again, I understand not wanting to handle your own maintenance. But man, the cash flow from the rentals which all have reasonable to a lot of equity built in them at current pricing levels, with rehabs done, so I just can’t understand why disposing of these assets right now makes any sense. The hard work has been done!
Personally, peace of mind is very important to me, especially with passive investments like dividend paying stocks and real estate rental units. In Part II of this blog series, I will attempt to explain this further and possibly revert back to this couple for more color on their thinking.