Selling The Ravenna House // The Final Numbers: How We Made $460,000 in 5 Years
THE RAVENNA HOUSE
The Ravenna House closed last month and today we're running through the final numbers. This house is a great example of our real estate model and while we've shared stories and photos from the renovation for years, we've never pulled back the curtain on the finances before. So today you're finally getting the full picture on what exactly it is we do with a property and why. For those thinking about buying a home, taking on a renovation, or becoming landlords, we hope you take something away from this post that's useful. Read on for how we made $460,000 on the Ravenna House in 5 years.
photo by Meghan Klein for the Grit and Polish
Four-hundred-and-sixty-thousand dollars is a TON of money. Especially considering the bulk of it was tax free (more on that in a moment). And we earned it all in just 5 years from a total investment of $60,000 including renovations, down payment, everything.
Before I dive into the numbers, I wanted to mention that Garrett and I are self-taught DIY-ers in renovation, real estate, and landlording. We fixed up the Ravenna House while working 9-5 jobs and raising our first son. We got our start in real estate with little more than a can-do attitude, helpful families, and visions of renovations dancing in our heads. Ha! While we've certainly been lucky along the way (scroll down to the takeaways section for more on that), we've also put in loads of hard work and been persistent. You can read more about our background here.
photos by Meghan Klein for the Grit and Polish
how much money we made
We bought the Ravenna House - a 1926 Tudor in Seattle - in 2013 and proceeded to renovate every square inch of the property. Our small family lived in the house for two years while fixing it up and then moved on to our next project and turned Ravenna into a rental. In September of 2018, just 1 month shy of the 5 year mark, we sold Ravenna and walked away with a big fat check. You can read a more detailed timeline of the investment below (including the unique way we financed this property), but first, let's get to the numbers.
Sale Price $775,000
Net Rental Income (2.5 years) $70,000*
Purchase Price $270,000
Initial renovations $50,000
New Roof $7,700
Selling Preparations $2,000
Real estate fees (4%) $31,000
Excise Taxes (King County, WA) $13,800
Closing Expenses $3,231
Total Return $467,267**
* Rental income from ~2.5 years less expenses (mortgage, insurance, utilities, cleanings).
** At some point while living in Ravenna, we took out a large HELOC against the equity we had built up, which we used to buy the Dexter House, and later the Farmhouse. We counted that expense against those later properties so you don't see it here, but we did pay it off when we sold Ravenna.
photos by Meghan Klein for the Grit and Polish
Timeline and More Financial Details on Ravenna
There's a lot to unpack in those numbers, so let's run through some key moments:
Summer 2013: Have our first baby and finish a kitchen and bath remodel on the Bryant House
Received an inheritance and Cathy can’t help but look for a fixer upper (well she's always looking for a fixer...).
Sept 2013, find a great opportunity 10 blocks away from Bryant House and it's right in our sweet spot: built in 1926, ~900sqft 2 bed 1 bath in almost original condition, and an unfinished basement listed for $230k
The house smells like animal and has a very scary basement, rats in the attic, and a tiny kitchen with no place for a fridge or dishwasher. There is no heat source, the yard is a jungle, and the detached garage is literally falling down. Only cash offers are being accepted.
Our family pretty much thinks we’re crazy but are willing to loan us $210k and we come up with the rest of the cash to put an offer of $270k in. We're one of 11 offers. The owner likes that we're a family (the rest of the bids are from developers) and picks our offer even though it's $16K under the highest bid. We pay $270k for Ravenna and close a couple of weeks later.
Weekends and evenings are now spent remodeling the main floor. We replace all the plumbing and electrical, bring gas to the property, add a new furnace, remove the oil tank in the backyard (we hire that out), gut the kitchen and open it up to the living room, renovate the bathroom, and refinish the original oak floors (we also hire that out).
After the main floor is done, we turn our attention to the basement and begin finishing the unfinished ~600sf into a family room, bedroom, laundry room and bathroom.
Six months after purchasing the home, the main-floor reno is complete and downstairs is framed and roughed-in. We use delayed financing (more on that below) to mortgage the property for $270k and payback family members. We created enough equity in the property with renovations that no cash downpayment is required.
After finishing the basement 8+ months after buying the home, we have the home appraised at $550k and apply for a HELOC. At this point, we've spent ~$50k in renovations to completely update the house, which is a return of about 460% on our cash investment [($550k-$270k-$50k)/$50k]. Not bad for a couple crazy love birds but it gets better…
We decide to use the HELOC to purchase another property and so 2 years after purchasing Ravenna, we move on to Dexter and turn Ravenna into a rental. Over the next ~2.5 years we net just over $70k in rental income.
Two months prior to our capital gain exclusion running out (more about that in the tax section below) we give Ravenna a new roof, a master bedroom refresh, and some staging before putting it on the market for $775,000 with Redfin. We receive a full-price, cash offer 5 days later.
photos by Cathy Poshusta
Why Most of our Profits are Tax Free
Our net rental profits from Ravenna were not tax free, but our sale profits are, according to our accountant. Sellers are required to pay capital gains taxes on real estate profits to the tune of around 15%. But there's an exemption for primary residences as long as you live in the home for 2 of the last 5 years. Our exemption was coming up in October of 2018 and that's why we started to consider selling the home in the first place (you can read more about that here). If we had sold Ravenna after our 2-in-5 exclusion ran out we would have owed over $60,000 to the federal government. If you’re looking to claim a similar exclusion, I definitely recommend talking to a tax accountant to get a full understanding of applicable tax laws.
What is Delayed Financing
We bought the Ravenna House for cash and then financed it within the first 6-months, a process called delayed financing. There are some specific requirements for delayed financing (you can read more about that here), but we love that it allows you to make an appealing cash offer and still finance quickly. Plus, if you're doing renovations like we did on Ravenna, you can use the equity you've built in the property as the down payment so you limit the amount of cash you have tied up in the property.
TAKEAWAYS from the Ravenna House Sale
There are a lot of reasons why we believe we made so much money on Ravenna and we wanted to distill those today for anybody getting into real estate, renovating, and/or landloring.
Location // The Ravenna House is located in a desirable, close-in neighborhood of Seattle (called Ravenna). There are great schools here, parks, community centers, restaurants, and easy access to downtown. All that adds up to expensive home prices. And of course Seattle has had one of the hottest real estate markets in the nation for the past 5 years. Taking a step back and looking nationally, I have to say that this kind of profit would not likely have been possible outside of a few large urban centers, mostly located on the coasts. Of course there's money to be made in residential real estate most everywhere, but just not as much. We were really lucky to have landed in Seattle, but we stayed for as long as we did in large part because we saw the income potential. It's much easier to make money in a big city and retire to a small town and that's what we did in 2016.
Timing // Buy Low, Sell High. We bought Ravenna in 2013, which was basically the low of the recession, and sold it in 2018, which feels near a high (at least for a bit). Timing is everything and we were lucky to have been able to buy a home in 2013 and even luckier that we were able to hold on to the property for as long as we wanted. If we had sold Ravenna after one or two or even three years we would not have made nearly as much money. We're really partial to the buy-and-hold model.
Luck // We were luuuucky. The only reason we got this house to begin with was because the previous owner took a shine to us (more here). We probably, tipped fate a bit by submitting a heartfelt letter (with a picture of us and our newborn son standing on his front steps, which you can see at the bottom of this post), but even so, there's an element of luck in everything...timing, being in Seattle, having family that could loan us cash. Lots of luck everywhere.
Fixer // buying a fixer is one of our core principles in real estate. If it doesn't need work, we're not interested. Sweat equity is our thing.
Make Smart Upgrades // Every dollar you have has the potential to make money for you. Here at the Grit and Polish we're always talking about being financially-responsible with renovations, but what exactly does that mean? Well it means $460,000 payouts instead of a Pinterest dream kitchen. It means buying a second property (and eventually a 3rd and 4th...) instead of putting $50,000 more into our beloved Wallingford house. We don't talk a lot about the Wallingford House here on the Grit and Polish - mostly because we bought it long before I started this blog or got a good camera - but it's our favorite Seattle property by a long shot. We would have enjoyed creating a second story master retreat and expanding the kitchen and living a block from the park on a quiet side street in Seattle's best neighborhood (yes, best ;). But rather than retire at 34, we would have worked for decades longer. Rather than film an HGTV pilot and help our families and friends with renovations, we'd be dealing with commutes and spending every day in a cubicle. Don't get me wrong, that's not a bad road to take (and if that's your dream, more power to you!), it just wasn't the road for us. We took the house hacking and early retirement road and we're glad we did. The lesson here is be smart about the money you put into a property. Think about the return you'll get on that money and if a renovation is worth delaying retirement for or skipping vacations or missing out on the fixer down the road. Every dollar you have has the potential to make money for you.
DIY // Do everything yourself that you possibly can. I even added the title "DIY real estate investing" to the pin-friendly images in this post because it's been that important to our success. Doing it yourself saves a ton of money and gives you the opportunity to learn. We've become proficient DIY renovators, landlords, property maintainers, plumbers, framers, decorators, stagers, and lots more. I can't begin to guess what DIY has saved us to date, but it's certainly in the hundred of thousands.
Playing the Long Game // Garrett and I have always treated real estate as a long game. We are willing to delay the payout on a property for a very long time in favor of rental income. Not only did that make the difference between a small payout and a giant payout at Ravenna, but it meant we could retire at 34 and live off of our rental income. Of course I'm not saying to hold on to an income property that isn't positive every month (we make sure our's bring in at least 10%), but being patient can pay off. Real estate is considered a fairly safe investment that increases in value pretty reliably over time.
Those are all of our takeaways, but we'd love to hear any wisdom you may have. Or if you're just starting out, are there any questions you have? Please add to the conversation in the comments below!
kitchen photo by Cathy Poshusta
How to Sell a Home - What we did to Prepare Ravenna for Sale // Why we Decided to Sell One of Our Seattle Rentals // How we Saved $5k on Ravenna's Roof // What to look for in your first home (House Hacking edition) // Our Story: Old Houses and Early Retirement //
photo by Robin, our first Redfin agent
photo by Cathy Poshusta