I was just 29 years old when I closed on my two-unit building in September 2015. As a real estate reporter, I knew the local market in Chicago pretty well and had an understanding of which neighborhoods I could afford, and which neighborhoods would likely offer a good return on the investment. But in terms of actually owning and managing a property, I had no idea what I was doing.
It turned out that within a year of purchasing the property, I was already getting phone calls from investors and developers looking for new opportunities in the neighborhood. While I initially rejected the idea of selling to a developer — for the fact that they all requested a zoning contingency clause which could not only take months to wrap up, but also upset direct neighbors — as time went on and I received more interest from investors, I decided to entertain offers.
The building is situated on a double lot less than two blocks from a major public transit station, so for the right investor, there is a lot of value in redeveloping the property with ground-level retail and condos on upper floors. Over time, I had gained more knowledge about the local zoning process and had negotiated with a handful of developers. At one point, I entered into a contract with one of the developers, but eventually got out of the deal once their zoning contingency period ended and discovered that they had not made much (if any) progress on that front.
However, in the weeks before the pandemic, I had been negotiating with two separate developers who were interested in buying only the side lot to build a few condos on, while I would keep the existing two-unit building on the adjacent lot. I thought, well, if I can get one of the developers to pay me enough to cover the remaining balance of my mortgage, then I could own my building free and clear and then live off of the rental income. Sounds easy enough, right? Wrong.
"This would screw everything up," my accountant said to me when I told him about the plan to enter into a zoning contingency contract with a developer for the side yard.
In the first year I did taxes with my accountant, he assigned different values to the building and the side yard in my depreciation schedule in order to help me get the biggest tax refund each year. He assigned a higher value to the building than the land — which is customary — meaning that I would likely owe tens of thousands in capital gains if I sold just the side yard alone. And after paying capital gains tax, I'd still likely need another mortgage or some kind of loan to cover what I would still owe on the house after completing such a deal.
He suggested that I go back to the developer to renegotiate the deal and to sell the entire property, but at this point, I realized that I had already screwed up and wasted everyone's time. Even if I did sell the entire property in one deal, I'd still owe tens of thousands of dollars in depreciation recapture — or essentially, I'd have to pay back much of the taxes that I had written off in the years that I have owned the property. In the end, we decided that the smartest decision would be to just kill the deal and keep the property.
This was only one lesson I learned in the first few years of my experience as a first-time homeowner and landlord.
To read the three lessons in full, see our story below: