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April 2014

Doing a little horse trading

Selling Off Rentals and Replacing Them With New Inventory


I've owned rental properties for more than 10 years now. I was buying just 1 or 2 a year up until 2009 when everything I love to buy went on sale. From 2009 until the end of 2012, I partnered with another investor and we bought quite a few houses together to hold as rentals. Starting this year, we decided to sell them off as they go vacant. The properties produce a nice cash flow, but most of them have at least doubled in value and I think it is a good time to liquidate any that go vacant and cash in some of those chips. Not wanting to walk away from the cash flow that I do so enjoy and which allows me to live the lifestyle I've chose (I got out of bed at 12:30PM today), I decided I would replace every partnership house I sell and only own 50% of, with one that I will own 100% of. I may not get dollar for dollar cash flow out of them, but I'm still able to buy properties far enough below market that I can make them cash flow and capture a decent equity spread.


The first for sale rental house sold quite quickly. We actually sold it As-Is to another investor who for some reason thought he was getting a good deal. Our tenants had recently moved out and left the place a mess. I'm not sure we even cleaned it. I replaced that house with a nice seller financed deal in a better part of town. I had to do almost nothing in rehab and was able to rent the house within the first week. (See November's DOTM.) 


The second for sale rental house as been in and out of escrow several times now, but hopefully this latest round will pay off. I'm somewhat sad to see this property go as we own 3 others in the same neighborhood and one of those is just down the street. It's nice owning several rentals in such a tight market. I replaced this house already with a subject to deal that is turning out much better than I originally thought it would. As it turns out, there are actually 2 houses on the lot and I expect to get 50% more rent than I had budgeted. Both houses are currently under construction and I'll get pics up of them soon. Here is what the back house looks like now.


















OK, so it's not so much of a house as it is a mother-in-law's quarters, but I've got plans for this little bungalow. I picked up an apartment sized fridge and stove already. The right side is going to be a small kitchen. The left side already has a laundry area, sink, toilet and shower. The house even has gas lines for a fireplace that has already been demoed by my crew. I plan on framing in the front and adding a window and front door. The attached screen room is actually called a Sear's patio. I'm having it rescreened. This will be one cool little house for someone looking for an inexpensive place to live. I think I can get $600-700/month for it.


We've had 2 more houses go vacant and I put both on the market already. One we paid $108K for and we're selling it for $270K and the other is currently listed for $220K. The next house to be sold is one we own with an equity partner. He asked us to liquidate the property so that tenant has been served a 60 day notice.


Always being an overachiever, at least for my gene pool, I have already replaced these next two houses as well, even though we haven't yet received any offers on them. One is a very nice house with a long term tenant. I paid $100K and it was appraised for $158K by the hard money lender who is giving me a 5 year, 9.9% I/O loan. The house is currently rented for $1,000, but I intend to increase that by at least $100 or $200. The next is a property I had intended on flipping. I paid $120K for it. Current comps are $185K. After looking at the house and analyzing what I will get from the sale of some of my partnership rentals, I decided to keep this property. Mainly because it was built in 2007 and also because I discovered after some market research, that I can rent it for $1,600. It will be the newest house that I own.


I have one more house to acquire to keep the balance. I don't see this as a problem as I'm currently acquiring at least 1 house per week and am on a 9 week run. I bought 2 on Monday alone and wholesaled them both already.


Since the income I expect to get from the sale of all these rentals is much higher than I need as down payments on my new acquisitions, I am also implementing a definancing strategy. I have a few properties I'd like to free up that will increase my cash flow dramatically. One of them I owe $108K on and am paying 9.9% I/O. That's an extra $891/month in cash flow. Another I only owe about $35K on, but the payments are almost $900 because the property is on a 15 year loan. Paying both these properties off, although it liquidates $143K in cash, the additional $1,700 / month is money I don't have to work for and gets me that much closer to my net cash flow per day goal.