Why I Am Selling All My Rental Properties

Mike DeHaan: [0:00] I've been a full time real estate investor since 2018, and I think it is finally time to cash out. At my peak in 2022, I had 54 units, 26 individual properties. And now as of September 2024, I've been slowly selling these off, and I'm down to 26 units, 17 individual properties. And I think it's finally time to just get rid of all of them. In this episode, I'm going to talk about a situational slash mathematical reason about why I'm choosing to get rid of all my properties, and it might make sense for you too as well. I'm also gonna talk about some macroeconomic factors of why I think it's probably a great time for everyone to potentially look at selling out. But first, if it's your first introduction to me, my name is Mike DeHaan. I am the host of the Collecting Keys Real Estate Investing podcast. I own a real estate company called Backyard Home Buyers. And I also run a community called Scale, which is a group of investors that are looking to scale their real estate businesses to 7 figures and beyond. In early twenty eighteen, I quit my w two at Boeing as an engineer, started getting into real estate shortly after that, and have done coming up on 500 transactions in the last four years. I've generated millions of dollars in revenue. And at one point, I owned a portfolio valued at about $15,000,000. And I've been slowly selling it off since I've maxed that thing out in 2022. So given all that and the growth that I had, why would I consider selling?

Mike DeHaan: [1:30] I mean, the reason people get into real estate is to build assets and hold on to things forever. But sometimes it doesn't just completely make sense for people to do that. Right? So if it's worth $50,000,000, kind of the general thought people have is in the future, as all the loans are paid off, it's gonna be a pretty sweet retirement, especially if things continue to appreciate like real estate historically does. And you're absolutely right. But I have my reasons for one to go a different direction with things. So for me, I acquired many of my properties between the years of 2018 and 2020, when properties were valued at a lot less than they currently are. It's 2022 stuff was kinda starting to reach a higher mark. But in 2018, I mean, those properties that I was buying were worth half as much as they are currently today. And so in 2022, I refinanced a lot of those into nice low rates. And my intention with that was to have healthy, healthy cash flow and bring my payments down a ton while being able to cash on my equity and continue to have rents increase. And while I was able to get 3.5% rates and my cash flow was awesome for a couple of years, the problem is since then, everything has kind of started to catch up. Right? And so now property taxes have started to catch up with the increase in property values, which is really starting to take a huge chunk out of my cash flow, especially because I live in Washington state where property taxes are not exactly low. Insurance has started to increase as well because as property is worth more, insurance companies are wanting to to carry a higher insurance premium, which are gonna charge you more money for because if the house were to burn down, they're going to need to bring more money to the table to pay it off.

Mike DeHaan: [3:13] And so all of a sudden, what has happened is I've started to take a huge hit on my cash flow that I was not anticipating when I refinanced a couple of years ago. And so this is pretty much just because the monthly holding costs have increased an incredible amount, but the rental rates have not increased at the same time. And so historically, when this would happen, it would happen at a more reasonable rate. And so, you know, the holding cost would increase on a rental property, the landlord would be able to increase the rents appropriately, and it would all kinda balance out. The problem is now just due to the affordability crisis that we have in The United States, rental rates are not keeping up with this increase in holding costs for these properties. Right? One property in particular, I had the but just just between the tax and insurance, my monthly holding cost of that property has increased $700 a month. I can't just go and increase rent $700 a month on that property. A, would not be fair to the tenants at all. B, that is not what market rent is for that property in this market. But because it's in a better area, it is a slightly larger property. It has a little bit of extra land associated with it. So it's actually a little bit higher. The city decided to make the property taxes $6,000 a year or $500 a month increase, plus the insurance increased as well because you've had an increase of forest fires in the area, it's kind of a wooded part. And so that all of a sudden went from being a cash cow to making barely any money at all.

Mike DeHaan: [4:40] Ultimately, what it's all panned out to you is instead of having about ten to twelve thousand dollars a month in passive cash flow, I have now gotten down to about half of that, which is unfortunate. And my return on equity in the property is down to two or 3%. K? And so I look at all that money that's tied up in there. I'm only getting a two or 3% cash on equity return, and all of a sudden, it doesn't make as much sense for me to just keep all of this equity parked there. When realistically, I can take that money, I can reinvest it in my wholesaling and flipping business, which already gets a repeatable return on that money every single month. I can take it. I can put it into notes and hard money loans, which I already do anyway with my scale community, and I can get a 12% return plus a couple of loan points and just doesn't start to make sense from a cash perspective. K? You know, this isn't even considering the potential expenses that I will have outside of the holding cost, things like maintenance, things like general repairs that happen on property, things like capital expense items that will ultimately happen. That's not even taken into account. This is just if things go perfectly, my cash and equity return is down to a couple percentage points, and it just probably doesn't make sense for me to keep literally millions of dollars tied up into these properties for no real estate return and just hoping that things continue to grow. So it's a common mindset with real estate people to think that holding properties should kinda be a forever thing. But if you're an entrepreneur, if you're someone that wants to use money as a wealth building tool and not just as something that you sort of keep in a bank account or you just keep in assets, then you need to be analyzing your returns on a regular basis. And so if you've noticed your cash will start to take a dip, these are the first things that I'll start to look at is does your return on equity really make sense for the cash you're getting out with the increased costs that we've had just with, you know, the current environment going on in The United States?

Mike DeHaan: [6:33] And does it make sense for you to take that money out, sell the properties, and move it somewhere else because it just might. So that's kind of the situational reason that applies to a lot of people. You know, if you've had properties you've owned for a long time, you're one of those people that got in early kind of before the big boom in 2021, it's highly possible you have a ton of equity and not a ton of cash flow anymore. It's important to realize that. So that's one piece. The second piece that I'm looking at selling is more around the macroeconomics and where I kind of think the country is headed. And this is not a political thing. It has nothing to do with Democrats or Republicans or whatever. This is purely just what we are seeing as a society. It has me a little bit concerned about what things you wanna look like. K? And so since the year 2020, we all remember what happened in the year 2020. I'm not going to say it outright because I don't wanna get shadow banter something about talking about this. We have seen an unbelievable societal shift in The United States. And I'm not talking, like, again, not political at all, but we have seen a massive widening of the wealth gap, and a lot of that is heavily driven by the real estate market.

Mike DeHaan: [7:39] Everyone that was an owner before or during the boom has gained a ton of wealth. Right? They saw that meteoric rise in their properties, whether that was their homes, investment properties, things like that. Everyone that didn't own any of those assets has missed out in comparison, and that's unfortunate, but that is the reality of situation. To make things worse, due to a lot of millennials and Gen Zs and younger people who are now becoming the primary working force very, very quickly, A lot of us, you know, myself included in this in my early thirties, we were pushed to go to university. We racked up student loan debt, all those costs associated with doing that. We now have this huge missing population of trades workers and laborers because everyone kinda got pushed into blue white collar jobs, right, and sort of like traditional, you know, go to school, work in an office, do that sort of thing. And so as a result, we have a huge shortage in people that are actually able to, you know, do work or maintain houses. And in many places, it's gotten extremely expensive to be able to just, like, maintain your properties. And I'm anticipating kind of, like, all the traditional numbers that investors have normally used to, I would say, like, project their expenses or project the growth on their properties to kind of, like, stagnate or honestly put it into an almost like a negative growth sort of situation, purely because the cost to just, like, own property in general and maintain property and keep it in a leasing shape is going to increase so much that it will probably lead to the capital expenses outpacing the growth and appreciation of a property.

Mike DeHaan: [9:15] You know? And I Sean, you believe that, like, if you hold properties over the next ten years or so, you're gonna start to see, like, losses, like, an actual net losses just because for you to do all of the basic things that will happen to a property in ten years are gonna cost more than the property values will grow, because I do think you're gonna be kind of in the stalemate. And so let me to put put this in numbers for you. Let's say you have a property that right now is worth $300,000. If it goes up in ten years by 20%, which would be awesome, you know, 2% per year, which at how flat things have been would be pretty dang reasonable because I don't expect any major growth. But let's give it a best case and say it's gonna go up 20%, or we were at 360 k in ten years. K? Over that ten year span, you're realistically probably gonna need to replace a roof, which has increased from what was about $7,000 five years ago to now being up to $15,000 on a roof that I replaced recently, which was identical to the $7,000 roof five years ago. You're now likely have to replace the HVAC system, which has increased from 6,000 to $12,000. K? You'll have general tenant wear and tear repairs that you will have to do from it being lived in for ten years, which will include things like paint, like flooring, you know, odds and ends with light fixtures, windows, things like that. I'm currently turning a a unit that's about 1,500 square feet, and it's costing me $12,000 to do that. And now if you assume just a basic $2,000 a year for things like general maintenance, you know, furnace filters, fixing dents in the walls, things like that, as well as an occasional vacant month when you bring in a new tenant. So that would be $20,000 over ten years. All of sudden, have 15,000 plus 12,000 plus 12,000 plus 20,000.

Mike DeHaan: [10:58] 59,000 total dollars just to basically own and maintain that property. And if you go back, that all of a sudden is equal to that $60,000 worth of growth that happened with that property. Now if you were to go back in time when these expenses were significantly cheaper and would would have probably been half that or even less to do all these same items, sure. It could make sense. You could make $3,040,000 dollars on the growth of the house. But this is also with best case scenario on the appreciation, which I don't think is going to happen, while also having current reality with the expenses, which I don't think are going to go down. K? We are not suddenly gonna have cheaper labor, cheaper trade. Right? Those things are going to stay expensive for the long term. And I think it's highly, highly possible that we will end up with a bunch of people who in five, ten, fifteen years from now have owned properties that are looking at a total net loss in their entire investment because they haven't been cash flowing because their taxes and insurance went up went up faster than rented, and so they're not really cash flowing anymore. And you have all these capital expense and maintenance items that are so much more expensive than they were. And so all of a sudden, you know, you're not even getting the appreciation. You're basically getting debt pay down, and that's it, which can be decent. But in the first ten years, that's not an incredible amount.

Mike DeHaan: [12:13] K? And so at that point, should you have taken your equity and moved it to anything else? You know, maybe. Who knows? Right? It sort of depends on you. Am I saying everyone should sell all their properties? Not necessarily. But you need to look at your situation and what you can do with your money and decide what makes sense for you. K? Like, if you wanna be a real estate entrepreneur or you are already, like, a sort of half real estate entrepreneur, instead of keeping that money parked and hoping that, you know, maintenance and repairs go down or rents continue to increase or your property taxes go down, which is not a guarantee, those are all things that are kind of outside your control. You can instead take that equity and invest it in your systems, in your marketing to flip a house or two, to wholesale a house, to invest in some loans or notes to get a more fixed guaranteed return, it's highly possible that you will come out significantly ahead. Sure. Those things are more active, but if you wanna make a return on your money and you don't wanna leave things to chance, sometimes you're gonna have to work a little bit more, and that's definitely worthwhile if you look at the big picture. So, ultimately, long story short, I guess what I'm trying to say is if you look at kind of, like, the larger social and economic factors that currently exist in The United States, I don't know if I necessarily believe in holding real estate over, like, I would say, like, the middle long term right now, like, long over fifty years.

Mike DeHaan: [13:30] I think that could be decent. But if you look at, like, the ten to fifteen year standpoint, which for me as a person in my early thirties, feels like a long time because I'll be pushing 50 by the time we get to that. Right? That's a good chunk of my working life. I don't think it makes sense to keep all that money parked there and just hope that things come together Because it's very possible that down the line, I could be looking at properties that I have spent just as much as they have grown to try and maintain and keep them in a state where I can actually sell them again. I think probably the primary exception to this would be if it was a property where you could, like, truly force equity. You only have, like, a longer term play. Like, let's say you own a home that has some additional land that you could eventually subplot and sell out to build new homes on, but that's gonna be the minority of what a lot of people's properties look like. So in the next six to twelve months, I personally will be selling off the rest of my portfolio and investing in the ventures that I think will continue to give me actual returns and not just, like, hopeful future returns. Right? It's not the most popular view in real estate, but just because real estate has been good in the past and that's what kind of gotten me to where I am doesn't mean that it's going to be a guarantee in the future. You know, pretty much anything that relies on growth that is completely outside of your control, such as, you know, the entire, you know, US and global economy, needs to be taken with a little bit of a grain of salt. Right? And, you know, keeping some money parked there is good. But if you're looking at the bulk of your net worth and the bulk of your cash availability being tied up in properties and you are not doing anything to kind of multiply that that you have control over, you're probably leaving a bunch of opportunity on the table.

Mike DeHaan: [15:03] So it's up to you. You can decide if you want to take all of that precious equity that you have tucked away and leave it there, or you wanna follow suit with me and sell things off and go on multiple items, more active ventures. Who will be right in ten years? I don't know. But I at least know that in the short and middle term, I will have total control over the growth that I get with that money. So, hopefully, I gave you some food for thought. Maybe it was even helpful for you. Regardless, you should go and comment on this video on YouTube. That would be great. You should also subscribe to me at all podcast channels that you you listen to your shows. I'm on Spotify. I'm on iTunes. I'm on everywhere. And I would love to have a good conversation around this because I think it is a slightly unpopular opinion about real estate, but it is a very realistic thing that people should be thinking about. So appreciate you guys, and I'll see you next time.