Sell or Keep rental properties?

[5brown1]

Hi Everyone,
I'm new to the forum and also to retirement planning. I have basically put all my eggs in one basket - real estate. I have 24 rental units personally, am 1/4 owner and the manager of 13 more units. The 13 will be sold in the near future. My question is what is the best way to handle the remaining units? If I sell everything there will be $1,225,000 + after taxes and paying off the mortgages. By the way I'm 59 and DW is 52. We have one daughter in college for 2 more years.
I would like to hear how others have dealt with their accumulated rental properties and how they fared. What would they do differently if anything. I'm currently thinking of easing into the retirement mode over the next 3 year time period

[Martha]

Is your goal to be completely out of real estate? Or are you considering keeping real estate but using outside management?

A good portion of our money came from rental properties which my husband managed. We sold the properties when it seemed like valuations were getting pretty high. We sold over a period of several years. We did not rollover the gain via a 1031 exchange into like kind property. That meant we had to pay the tax on the gains as well as on recapture of depreciation. I know there are a number of people here who delay the tax by doing 1031 exchanges.

If you get out of real estate, what are you going to invest in? We have struggled at times trying to figure out the best place to put that chunk of cash you get when a property is sold.

We still have significant investments in real estate, but as passive investors.

[Arif]

That's a tough one. Especially when you figure how much taxes you have to pay. We have 28 units right now and plan to buy 18 more. After we get the 18 we are going to concentrate on paying off the mortgages in about 10 years. We'll pair it down to 39 units and live off the rents. Have you looked into selling the nonperforming RE and use the proceeds to payoff the ones that are returning a solid gain each year?

[foxhuntr]

I only have one SFR, but I plan to keep it during all or most of my retirement. It is in a good location and the rental income is one leg of my 3 legged plan (along with SS and nest egg). I like having inflation protection and income. I bought this place in 1976 and have experienced about a 15X appreciation.

[califdreamer]

Most of my eggs are in the real estate basket too.* My plan is to grow equity in the properties so that eventually they will yield enough cash to retire on.* My plan is to "swap til I drop"... in other words, never cash out.* I would continue to 1031 if necessary.*

As an example, let's say an investor has 1M in investment RE equity yielding 5.4% (which would happen if a new loan at 500k, 6.5%, 30 yrs were financing a propty with a 6.5% CAP rate).* that's 54k/yr.*

If investor sold and had to pay cap gains tax (15% fed, 7% Calif) she or he would be left with 780k (actually less due to tax on deprec'n recapture but we'll ignore that to simplify).* Put that into a diversified portfolio with a withdrawal rate of 4% and the investor has 31,200/yr.*

Unless an investor really wants to get out of real estate, and maybe for some that is the case, it pays to hold or exchange forever.

[5brown1]

I haven't decided if I wish to totally get out of the rentals yet. I just wanted to see what others might have done and their results. I also have questions about how to invest the money if I did get completely out. I really would like to have an nice income stream without diminishing the principle so it could go to my children.

I have thought about selling the older units and paying off the new ones and then hiring a manager. I have been doing all the maintenance as well as building units for over 20 years now and I'm ready for something else. I guess my main goal is to get rid of the day to day hassles of rentals. I also am thinking of moving to a more temperate climate which would necessitate at least hiring a manager.

How about comments from the folks who have actually made the move.
How has it work out with a manager? What did you do with the money if you cashed out? What would you do different if given the chance?

[Arif]

Quote:

I also am thinking of moving to a more temperate climate which would necessitate at least hiring a manager.

Quote:

How has it work out with a manager?

We moved from Georgia to Panama and hired a property manager to take care of the properties. They've been managing them since last December and so far so good. I think the most important thing when working with a management co. is communication. We talk atleast once every two weeks about the rentals, who is moving, repairs that need to be done (over a certain amount), etc. Even with a manger it is not a passive investment and takes a little bit of work. I don't think I would go back to chasing rents and showing units. I would rather look for deals and turn them over to the pm.

[Jane_Doe]

Husband & I have dabbled in Real Estate off and on for about 25 years. You really need to compare pros and cons of each. We have decided to sell out in the next year or so and be able to be "free" of obligations and worries. We have never and probably would never use a Property Manager/Mngmt Service. Husband is too picky and would worry anyway. A 1031 exchange is still keeping you in RE. Possible to trade (1031) into a triple net? I know nothing about those - need to ask others here about that option.

Sit down, have two different legal pads, write out the pros and cons of each solution - maybe even do a third scenario with a combination. You need to know how much realistically you need to live on (budget) and see if you can live off of the safe 4% withdrawal recommended from your $1.225 mm vs. the NET income from your rental units. Take into account income taxes. Many people here recommend using a a computer program such as Turbo Tax to simulate different tax situations for planning purposes.

As many have said before me, take also into consideration: health care/insurance costs, long term care insurance?, social security, any pension or other sources of income.

Wishing you the best,
Jane

[2B]

Real estate is loverly but it's only part of a smart portfolio of assets. Diversify. Diversify. Diversify. With real estate, it's important to also diversify geographically. I lived in Baton Rouge when Jimmy Swaggert was caught with a lady of the evening, a lady of the afternoon and a lady of the morning.

Real estate should be about 10 to 20% of an investment portfolio. Any more than that and you are either a speculator or that's your job.

On this board a "job" is a 4 letter word.

[macdaddy]

I wonder if it's possible to transfer each property into a land trust and then transfer all of the land trusts into a corporation.* Then you could work with someone who would buy out your shares of the corporation over time, and in the meantime, pay you your share of rents in the form of dividends.* This may be an easier way to handle the taxes.* I know that in CA some apartment complexes can be purchased and sold without triggering a reassessment in the tax base under proposition 13, because what is actually changing hands are shares in the corporation that owns the complex, not actual property.* (ridiculous)

If you are over the limit of the estate tax (or worry you may be when you kick the bucket) then you could also pass some of these shares to your kids with no tax burden.

Where are your properties located?* I am looking to make some investments of around your portfolio value in certain areas, using this method to buy out people with 8-10 properties.* Maybe we could work something out, at the very least I can keep you informed of what I find out as I go through the process.

[Martha]

Quote:

Originally Posted by macdaddy I wonder if it's possible to transfer each property into a land trust and then transfer all of the land trusts into a corporation. Then you could work with someone who would buy out your shares of the corporation over time, and in the meantime, pay you your share of rents in the form of dividends. This may be an easier way to handle the taxes. I know that in CA some apartment complexes can be purchased and sold without triggering a reassessment in the tax base under proposition 13, because what is actually changing hands are shares in the corporation that owns the complex, not actual property. (ridiculous) If you are over the limit of the estate tax (or worry you may be when you kick the bucket) then you could also pass some of these shares to your kids with no tax burden.

These kind of things get fancy so you need to discuss possibilities with a lawyer. What I have seen done in some areas is to put a property into a single member LLC and then transfer the membership interest to a buyer. For example, in Wisconsin if you tranfer property into a corporation the transfer would be generate a transfer fee, but transfering to a single member LLC would not.

I also see people transfer property into an LLC and then over time gift membership interests to the next generation.