So today’s question came in this afternoon, shortly after the release of my episode this morning titled the real returns of real estate investing. Now as a side note, I want you to know that you should really listen to that episode. I recorded it relatively quickly, but I spent dozens of hours preparing for it in terms of crunching numbers and working on a spreadsheet because I wanted to make sure that I can illustrate it at least verbally to make the case of how powerful real estate investing really is in terms of its returns. Because at the end of the day, real estate has several pillars of returns, both realized and unrealized. And I explained that in the episode. So most people only look at it superficially. They understand cash on cash return, and they don’t understand how really powerful the returns are, even in the first year of investment.
And I break that down numerically, but in an easy to follow and hopefully easily digestible format. So it’s one of those perennial and cornerstone episodes so that content can live forever because the principles and the formulas don’t change. So I believe that’s episode number 299 and it’s called The REAL Returns of Real Estate Investing. But what’s interesting, and this just might be pure coincidence, but I got an email this afternoon from someone I know, I certainly won’t mention their entire name, asking a question, and it just seems to be triggered from that episode. So you’ll understand what I mean after I go through this question, and then you go back and listen to that episode.
So this email came in this afternoon from Larry, Larry. I hope you’re doing well. I think you’re great. I’ve enjoyed spending time with you. He writes in and he says, Marco, I think I screwed up huge selling my principal residence instead of turning it into a rental it’s in a hip and trendy neighborhood. That’s appreciating nicely. It was just built new three years ago when I bought it and moved in, plus the price I’m getting is probably 4% less than I should have. Questions – How do I recover from these mistakes and the psychological torment from making a bad decision? What’s the next best move. Thanks much, Larry.
Larry, I appreciate you actually sending this in. I hope you don’t mind me actually recording this as part of my episode here, but I think it’s a great question because there’s a lot to be learned from this for everybody. So indirectly. I think you’re helping some people out there. So first and foremost, stop beating yourself up. Just stop doing it because we all make mistakes. We all go down the road of tripping and falling and picking ourselves back up. And that’s assuming that you actually made a mistake because I don’t have enough information and the facts to actually know if you truly made a mistake.
Maybe this is a blessing in disguise. I don’t know. I mean, if I had more information, I could probably give you some deeper insight but wasn’t a mistake. Let’s just assume for a moment that you did make a mistake. It wasn’t the best decision. You always have to remember that mistakes have the power to turn us into better investors, much better than we were before. I’ve only become a better and stronger investor because I have fallen down on my face multiple times and I’ve made many mistakes and I’ve lost money multiple times. And it was a painful lesson and I probably could have avoided it if I had the right help or counseling, or just thought it through a little more. But you know, I like to run with all guns blazing, but you have to look at mistakes as something that will make you better and stronger.
So it may not have been a mistake, but don’t beat yourself up over it. And you know, if you call it a failure, which is an extreme, you always have to remember that we learn from failures. And I’ve said an early episode, long ago, probably four or five years ago, that if you’re going to fail, you want to fail fast and fail forward. So always pick yourself up and move forward and learn from that failure. See humans are designed to learn. That’s just inherent in our brain. We learn by making mistakes. So, I mean, just look at a kid. If a kid falls down, when they’re learning to walk, they have to pick themselves up and continue to walk. That’s how they learn. If they never fall down, they probably would never learn to walk. So you have to make these mistakes. Sometimes we make big mistakes, but probably more often than not. We make smaller mistakes and we just move forward from there.
And I’ve made a lot of mistakes. I mean, I’ve sold my first rental property that I ever bought when I was 18 way too early. I mean, I know what that property has done over the years. And looking back, I completely realized that I should have never sold that property, but I didn’t know what I know today back then. So that was a lesson learned. I learned that later in life. I didn’t know what the mistake was back then, but it’s all hindsight. I’ve made mistakes, hiring the wrong property managers. Many of them have ripped me off. I have literally stolen thousands of dollars from me. So again, lessons learned, I’ve been ripped off by multiple contractors, general contractors over the years. In fact, I’m literally suing three of them today, as we speak in different markets because they have flat out stolen money from me, they’ve gotten their draws, but they misrepresented the work that was being done. And when I finally caught them through a third party, I realized that they weren’t doing any work. They were taking my money and showing me pictures of properties being renovated from the inside, but they weren’t my property, you know, I could go on. So you can’t really beat yourself up. You have to just learn from that and do better and better and better.
So you ask what’s the next best move. Well, again, I don’t have enough information as far as how much you’ve made from this property, but if you’ve lived in it for three years as your principal residence, clearly you’ve got exemptions for capital gains. If it’s solo, one person’s 250,000, if it’s you and your spouse, then it’s 500,000 tax-free in terms of capital gains. So it’s kind of like doing a 1031 exchange in a way, but I don’t know if you’ve walked away with net proceeds more than that or less than that.
But as far as your next move again, without knowing more about your situation, what I would be doing is replacing that property with something that is equal to or better sooner than later. Now, maybe it was in the right market, in a good market where you should still be located. If that’s the case, see if you can find some good replacements, some good deals to replace that property that you had with one or more in the area that will continue to profit from the appreciation that you’re experiencing there. And maybe you can find some better deals that will have better numbers, better cash flow. So maybe this is indirectly a way of doing a tax-deferred exchange by selling one property in lieu of one or more, two or more three or more.
The other thing too is maybe it was the right time to get out of the market that you were in. I honestly don’t remember what market you’re in, but maybe you’re nearing a top. I’m assuming but granted you were in a great location, a good neighborhood, maybe a great street in terms of being hip and trendy, but maybe you can do better and diversify into a couple of other different markets. Again, I don’t know what your net proceeds were, but I’m sure it’s six figures. And if that’s the case, you have the ability to set up a footprint in two markets, two different markets. Maybe that’s a conversation you can have with my team here, but at the end of the day, you can’t beat yourself up over what is already done. Just take what you have and look how you can turn it into something better. You may be better off by just redeploying the equity that you pulled out of that property into better and more properties.
And hopefully, the capital gains are zero because you are within the exemption amounts that you’re allotted for living in a principal residence for two or more years of the previous five. That’s the general rule. Well, Larry, I hope that helps. If that doesn’t give me a call and maybe I can make you feel better. So good luck to you. And I appreciate you submitting the question again. I hope you don’t mind me just sharing this. Nobody knows who you are, but I think the lesson to be learned, applies to everybody because we all make so-called mistakes.
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