Making the Best of Investment Real Estate

[emi guy]

I hope this topic is not off track for this portion of the forum. I am relatively new here and amazed at the breath and depth of the knowledge on the board.

I'm hoping some/many of you own investment real estate as one prong of your early retirement strategy. I own eight units in partnership with a good friend. During the past two years we have been able to improve the property, raise rents and essentially make the place cash flow positive. Now that we are over the hump with that aspect of owning the property, I'm starting to think about how to best leverage this investment for the future. I see my options as:

1. Simply sit on this and wait for appreciation & mortgage paydown, eventually selling the property?

2. Let the property cash flow, saving the proceeds eventually adding the income to my cost of living in ER.

3. Occasionally borrow on the equity, investing the cash.

Are there any good books out there that describe ways to optimize the benefits of rental property? Any ideas from any of you ERs?

I'm hoping to down size my working hours in the Fall and completely retire in 10 years, at 59 1/2. I'm hoping this property can play a role in making it all possible.

thanks!

[tryan]

Quote:

1. Simply sit on this and wait for appreciation & mortgage paydown, eventually selling the property? 2. Let the property cash flow, saving the proceeds eventually adding the income to my cost of living in ER. 3. Occasionally borrow on the equity, investing the cash.

One you missed is carrying a note for a buyer. Second positions are hard in a downward market ... but nobody knows the property better than you to make that call.

As for RE books ... your hands on experience will trump anybody's RE book. 8)

[unclemick]

Remember me - duplex - took depreciation down to zero - carried the note for the buyer - who fell in love with his shrink - in the subsequent divorce/sale - I got a big payoff and cap gain tax.

Some of my best friends are real estate cats - but I believe tryan's 'not for the faint of heart'.

There is a definate skill and mind set to be mastered.

heh heh heh - oh yeah - location, location ,location - all this happened years before Katrina took out the neighborhood.

[tryan]

Quote:

but I believe tryan's 'not for the faint of heart'.

Story time ..... knew I had a vacancy coming so I decided to prep a duplex for sale. Hired a crew to clean out 15 years of accumulated basement "crap" (not mine; the tenants). 2 dumpsters later they're all done BUT during the work somebody unplugged the basment freezer chest.

Couple months go by ... my vacancy materialized. So I hire a crew to prep the vacancy before listing the place in the MLS. AND - oh while you're here, haul that freezer out of the basement. One of the crew opens the door .... PUKES. 4 deer hoves sticking straight up at him and a belly full of maggots! Apparently my tenant stuffed a road kill deer in the freezer chest (which had sat for the couple months in a warm freezer chest).

Soooo, I said REFREEZE it; 3 days later they duct taped it shut and hauled it out of the basement. But no dump will take a full freezer ... sooo one of the crew got a full days pay for 30 minutes work.

I drove to the site a couple days later ... you could smell rotted deer from 200 yards away (nothing bleach and and garden hose couldn't tackle ).

Like I say ... 'not for the faint of heart'.

[bearkeley]

We are 2 years away from FIRE and RE definitely was a big part of it. We got lucky these past few years (like a lot of people) given the housing market, but who knows what will happen 8 years from now when you too, will be 2 years away from FIRE, right? Here's how we applied the 3 options you mentioned:

1) We sold a rental property (condo) and reinvested in 3 SFHs. Luckily, we had immediate cashflow (it was in a high rent area despite the low RE costs at the time). 2) We enjoyed the positive cashflow on a new boat (getting a low interest rate Equity Loan paid off monthly with the rent) 3)We sold one of the SFH with a 100% gain after 2 years and did a 1031 to buy multi-family housing. We also were able to leverage some equity and were able to invest in additional property.

Our exit strategy includes a mix of things, from moving into one of the rentals to benefit from the home exclusion to taking a hit on the cap gains at the right time (optimized tax bracket based on ER from full-time job)....

Our plan is to keep some of the rentals but since we're not there yet, all we can do is plan...just like you're doing now. Ideally, we'd like to hang onto the easiest properties to manage but I would feel more comfortable taking the gain and increasing the diversification of our assets.

Pitfalls?: Clearly, like all investments, there's risks. We got lucky but there is a lot of stress - as you well know - involved with landlording. If we trusted the stock market more, we'd probably opt out of it, but....I guess as long as we can see the benefits of having the "legs in the freezer" type of life, we'll continue to be landlords throughout retirement.

[calmloki]

Ah the joys of common areas! Every year or so I send letters to the tenants telling them to grab their stuff in the laundry rooms and that a week later the room will be cleaned out. Amazing the amount of dead tvs, boxes of stuff, kids toys that build up as tenants move on leaving their debris behind. dead refrigerators & freezers with contents are really special - specially if you strap them to a handtruck, tip them up, and soak your shoe in the liquid goo that emerges.

Having done the eight units for a couple years you have a pretty good handle on how it's all going to work. We borrowed against our paid off properties to buy more - looking back we were dumb lucky - felt no compunctions about putting a much more valuable property at risk for a relatively small amount. Our best cash flow came from multi units - economies of scale. Glad your partnership is working out - the gal and i tried a partnership with a good friend on a triplex - we ended up buying her out because we were doing the work and when we wanted to spend $$ on the place she wasn't eager or ready to spend it on our schedule. Didn't lose the friendship over it, which is a credit to our former partner.

Probably the best real estate book (yardsale find) i read was written by someone who was investing in the WW2 aftermath. And the best line from it was him quoting his old landlady: "People stays to suit themselves, and if they don't be suited, out they go"! Which I took to mean, fix the places up to your tastes and standards - don't change colors or carpets to suit some great tenant, 'cause as soon as you do so.... they are going to move within the next 2 months, leaving you with the one-off seafoam green livingroom paint!

Getting out of the real estate biz is kinda tough - the tax man whacketh! Did walk a developer through 2 contiguous lot little houses this afternoon. Sure got the tenants nervous! Really don't care if he buys or not at the price we gave him - selling them now would be kinda like dollar cost averaging out of property. Will values go up? Down? Taxes? up or down? loss of rental revenue vs. using the aftertax $$ somewhere else? Probably smart to sell a bit, hold off, sell a bit more...

[Anansi]

You left out a forth option - which may be the most advantageous - which is to save up the positive cash flow to use to purchase additional income property and never sell the units you have now, at least not until you really are ready to retire.

The downside, of course, is that unlike stocks and bonds, this is a business not a passive investment and more property means more work and more annoying tenents to deal with. But componding your RE investment this way can create considerable wealth.

[tryan]

Quote:

Probably smart to sell a bit, hold off, sell a bit more...

This is exactly what I did ... been a seller since 2000. Consolidated debt (paid off loans) on the good properties - SFH for me. So the dough was still in RE ... but the management was WAY easier. Doing all 23 by myself was simply too much.

Typing this from the lake, light snow fall ... skiied the last two days. Will ski again this morning. Then friends are coming for the rest of the week. Couldn't be here if I still had 23 units. 8)