Why I’m Transitioning Away from Rental Properties
First, I must preface: this is not an anti-real estate post. I think real estate is an excellent wealth building tool, and don’t want to discourage anyone out there from buying rental properties.
That being said, I’m thinking about downsizing my rental portfolio this year, and don’t have any plans to buy more properties in the near term. A few people reached out and asked why I was selling, so here are my thoughts and feelings on the matter.
I’ll begin with some background info on which hopefully provides a more complete picture of how I got to where I am today.
A Real Estate Focused Upbringing:
My grandpa was a successful realtor. My favorite uncle was a successful mortgage broker. They both owned a handful of rental properties, and I grew up wanting to be like them. I heard from school friends that “most rich people are rich because of real estate”. Whether that’s a right or wrong statement, I didn’t care. I was always focused on owning real estate.
When I was 18, my parents had an opportunity to buy their first investment property. I jumped at the chance to invest with them, and put all my hard earned savings from McDonald’s to work. I was finally the proud owner of ¼ of a little 2 bedroom townhouse. Mum made me manage the books, and I quickly learned how cashflow worked. I loved it.
I remember my uncle sat me down one day when I was 19. He said, “Joel, you should save up enough money to buy out your parents’ share of the rental. Then, save up and buy a full place on your own. Then buy 2 more properties, then another 4 properties after that. Real estate multiplies.” This didn’t really make sense to me at the time, but now I understand. I pretty much followed his exact advice, and 15 years later I owned over 20 doors (some myself, some with investing partners).
Anyway, the reason I am so real estate heavy today is because I had tunnel vision growing up. I never learned another way.
There Are Other Ways To Build Wealth?
I owned 3 properties before I really learned how a 401k worked. I had zero knowledge about mutual funds, index funds, or how to evaluate publicly traded companies (still don’t know how to do that actually). I was almost 30 before I began educating myself on other types of investments.
I started hanging out with a new crowd at work. These people were maxing out their 401ks, always talking about the stock market, and they seemed to be making money hand over fist. (This was in the mid-2010’s). This was the moment I realized I should probably have a broader view about how to build my fortune.
Specifically, I recall 2 moments that humbled me:
- I ran some numbers on the very first investment property I bought when I was 18… I compared its performance over 15 years of ownership to how the stock market performed over that same 15 years. Guess what I found? If I invested my cash in the SP500 back then instead of buying that rental, I would have earned almost the exact same ~9.5% YoY return (Comparison figures posted here if you’re interested).
- I realized saving up cash for many years to build up a down payment had great opportunity cost. It took me about 7 years to save up 60k for my duplex. If I had been trickling that money into an index fund instead (better yet, inside a tax advantaged account like a 401k), I would be in a much better position today.
While investing in real estate matched my experience, personality and skills earlier in life, I’m not sure it matches my future.
So, here are the list of reasons — some technical, some emotional — why I’m slowly transitioning away from rental properties.
1) I don’t really find it fun anymore
This is listed as reason #1 intentionally. When my heart’s not 100% in on something, it’s very difficult for me to wake up every day and try to be a master at it.
I used to dream about buying large apartment complexes. In my sleep I would create imaginary rent rolls, vacancy rates, maintenance costs, and try to calculate the ROI in my head. (I know, this is really nerdy! But I couldn’t help it. That’s just where my mind drifted.)
Today, I don’t fantasize about real estate any more. I dream about other weird problems. Like, Why are so many people out there in consumer debt? How can I help this situation? Why isn’t personal finance taught as a mandatory subject in middle/high schools? How can I help change this?
2) Trying to better adjust my asset allocation
You probably gathered this from my backstory… I am heavy in real estate holdings and need to play catch up on the stock side of my portfolio. Some experts recommend having a 20% steak in real estate investments (not including your primary home). I’m like over 50% currently.
Since my wife and I don’t have great incomes right now, we can’t contribute huge amounts of new money into the stock market to correct our asset allocation. Selling a few rental properties and reinvesting that money into stocks is a quicker way to lower our overall real estate percentage.
Stephen Covey says, “begin with the end in mind”. If you asked me 10 years ago what my end goal was, I would have told you I wanted to own 100 x rental properties. These days, my perfect retirement portfolio is more like ~$1M in a pre tax IRA, ~$1M in a after-tax brokerage account, and 2 small rental props.
Since my end goal is changing, my strategy is accordingly.
3) It’s more work than I thought it would be
Owning a rental property is not “passive income”. It requires ongoing work. Owning 2 properties requires double that work. Owning 3 starts to bog you down more, and the problem only gets worse from there.
There are certainly systems and automated processes to help you manage scaling, but those systems also require more money and maintenance. All businesses reach a point of diminishing returns, and I’ve hit mine.
Don’t get me wrong – I’m not scared of hard work. I actually love working hard. But I’m chewing so much right now I don’t have room to bite into other projects I want to pursue. So I need to spit a little bit out.
Part of this realization — and this is completely my fault — is messing up on property classification. A few properties I bought thinking that they were “B class” and wouldn’t be much effort or hassle. Turns out they are more like “C class” properties, and have more maintenance and issues than I accounted for. Another time I’ll go into the massive differences between A, B, C, and D class properties, and why it matters greatly!
4) I own a couple of sub-par performers
My plan is to keep the best performing properties with the most prosperous outlook, and sell some of the lower ones that give me the most headaches.
They aren’t terrible investments, but they certainly aren’t winners either. My feeling is that I can make the same amount of returns with that money invested elsewhere, for less ongoing efforts.
I’ve asked other investors and mentors about holding onto low-performing investments, and I get split responses… Some people say, “Just wait. If you hold property long enough it’ll eventually make money”. Other investors say, “Get out ASAP. Sitting, waiting, and hoping for appreciation isn’t a good investment strategy”.
I kind of agree with both sides. So I’m going to do both. I’m going to keep a few rentals and sell a few rentals. Only time will tell if I’ve made the right decision. I’m not worried because my wife and I will survive either way.
5) Emotional Simplification 🙂
This might not make sense to some of you, but it’s weighing on me more and more.
When you own rental properties, you take on a certain amount of responsibility for other people’s livelihood. I have 20+ families living under roofs that I own… And even though I’m not responsible for them living their life, I can’t help but wonder if there’s something more I could be doing to help them.
Sometimes running a business means turning off your emotional side. It’s about numbers, profit, and what makes sense for the business. But, I am finding it harder and harder to do this. I’ve tried to play the role of ruthless asshole unemotional landlord – and it’s just not me. I don’t like doing business that way.
Maybe it’s the pandemic. Maybe it’s all the late rent, job loss stories, squatters, and evictions that are getting to me. Offloading some of my properties to another young enthusiastic entrepreneurial investor would be a win/win.
6) My relationship with “cash” is changing
As I’m learning more about investing, earning less income, and slowing down our route to FIRE, my feelings about cash are changing.
I used to LOVE storing up huge amounts of money in my checking account (it gave me freedom and flexibility to jump on new opportunities). But now, I feel the opposite. Any cash I hold is money that isn’t working for me. It’s a burden.
There are 2 problems I have with real estate investing and cash needed:
First, any new real estate purchases require a good sized cash deposit to begin. (yes, I know all about the $0 down options and OPM strategies – they are not for me). Since my wife and I have lowered our income, it’s difficult for us to save up a large deposit. Saving up money in cash over many years means it’s not earning good compound interest in the meantime. I don’t want to do this anymore.
Second, owning rental properties means you gotta have large amounts of cash reserves for each property you own. It feels good when you only own a few places, but as you scale you realize that you’re holding onto multiple emergency funds. I’m uncomfortable with how much cash reserves I’m sitting on.
7) I can always buy more real estate later, and in other ways.
Buy and hold rental properties isn’t the only way to invest in real estate. There are a ton of strategies out there, each with different pros and cons. Private partnerships, money lending, REITS, crowdsourced investing, etc.
I’ve got decades to study, learn, and experiment with different methods of buying more real estate. While none of these excite me right now, that doesn’t mean I can’t change my mind and invest more later.
My reasons don’t need to be your reasons!
Sorry if some of my dot points above sounded complain-y. They are all good problems to have! Hopefully you have insight now into why I’m transitioning away from owning individual rental properties.
But just cause I’m selling stuff, that doesn’t mean you shouldn’t be buying stuff! Real estate has been a wicked (and fun!) vehicle for me so far in life, and I LOVE helping beginners roll up their sleeves and get involved in new rental projects.
Would love to hear from you guys with similar experiences, or opposing views. Shoot me a note or post in the comments below. 🙂