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Sell Condo, buy REIT ETF?
Old 07-24-2008, 02:38 PM   #1
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Sell Condo, buy REIT ETF?

Hi Guys! Long time sense I last posted...

Next spring, my wife and I will be retiring to Costa Rica. We own a nice condo that would sell for $200k, or rent for a grand or so a month.

We have been playing with a few ideas of what we want to do with our place, the first option, is to rent it out with the HOA, we would clear around $800 a month. The second option is to sell the condo, and buy a multi-unit property, and rent that out with a property manager. We would have better cash flow, but being a landlord isn't something I'm really keen on doing. Not sure if I'm up for being an out of country landlord at that.

Today, I decided to look up some REIT's. It seems to me, that I could sell the condo and roll 100% of the proceeds to an REIT and then just live off the yield. Less headaches all around, no? What am I missing? Will I have to pay cap gains on the sale? Any way around that?
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Old 07-24-2008, 07:56 PM   #2
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Quote:
Originally Posted by Breitling View Post
Hi Guys! Long time sense I last posted...

Next spring, my wife and I will be retiring to Costa Rica. We own a nice condo that would sell for $200k, or rent for a grand or so a month.

We have been playing with a few ideas of what we want to do with our place, the first option, is to rent it out with the HOA, we would clear around $800 a month. The second option is to sell the condo, and buy a multi-unit property, and rent that out with a property manager. We would have better cash flow, but being a landlord isn't something I'm really keen on doing. Not sure if I'm up for being an out of country landlord at that.

Today, I decided to look up some REIT's. It seems to me, that I could sell the condo and roll 100% of the proceeds to an REIT and then just live off the yield. Less headaches all around, no? What am I missing? Will I have to pay cap gains on the sale? Any way around that?
If this was your residence you should be clear on CGs. Look up any conditions, as I am not up to date.

If it were me, I would do something like what you propose with the REITs- maybe diversifying among several blue chip REITs in the apartment space. The apartment building seems like a non-starter. It would take much more of your money to get into it, and the opportunities for headaches with you thousands of miles away would be interesting to say the least. There was some guy who used to post here who was an absentee landlord in Atlanta, while he lived in Panama. He said it worked for him. It's hard to imagine how, but his experience is what it is.

The only reason to consider keeping your current unit is if it turned out that you didn't like Coasta Rica, would you want to return to your present unit? If so, that changes the equation. In that case, my vote would be to keep it.

Ha
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Old 07-25-2008, 12:58 AM   #3
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We sold our house in 2005. We were looking at a 10 year horizon. We put the money in OAKLX - a balanced mutual fund with a good dose of energy sector. REITs seemed too toppy at the time. REITs are much more reasonable now.

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Old 07-25-2008, 01:06 AM   #4
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I would sell the condo. One less thing to worry about. But then I do not have the aptness to be a landlord, leave alone a long-distance one.

How's the RE market where you are?

Keep us informed on your Costa Rica experience.
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Old 07-25-2008, 12:00 PM   #5
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Interesting question. Long-term, I might be facing the same decision. I also don't think I'm cut-out to be a landlord, and being a long-distance/international landlord even less. But I have no idea how much of the hassle factor a management company could remove, so maybe it would be worthwhile.

I don't know ... I'm interested to hear what everyone else's opinion is.
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Old 07-25-2008, 12:02 PM   #6
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The more I think about it, the more i like the idea of selling the condo and putting the money in different dividend investments. The real estate market here is strong, condos are still selling really fast, price has not dropped much. I bought the place 3 years ago and would be selling it for around $55k more then what I paid.

Once in Costa Rica, my living expenses should be under $1k a month. Thats about 2% of my portfolio a year.

My main concern is being an absentee landlord. I simply want to simplify everything possible and owning a condo in the states while living in Costa Rica doesn't sound all that simple.

I guess my next stop would be a tax adviser to find out what cap gains taxes I would owe on the sale, if any.

Thanks for the responses guys, it really helps organize all the thoughts floating around my head!
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Old 07-25-2008, 12:14 PM   #7
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I believe if you have lived in your primary residence two years within the last five years, then up to $250,000 of the capital gains on the sale would be tax-exempt. Don't quote me on that, but pretty sure about it.
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Old 07-25-2008, 12:18 PM   #8
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I think its only tax exempt if you roll over the gains into another primary residence. I need to research this...
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Old 07-25-2008, 12:25 PM   #9
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Don't quote me on that
I quoted you on that!

This agrees with you:
Selling Your Home - Capital Gains Tax on the Sale of a Main Home

As does the IRS: Publication 523 (2007), Selling Your Home

Complete with examples!!!!1
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Old 07-25-2008, 08:37 PM   #10
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Once in Costa Rica, my living expenses should be under $1k a month. Thats about 2% of my portfolio a year.
I'd sell the condo. The economics of RE rentals gets tough when you live out of town.

Not meaning to hijack the thread, but are you renting in Costa Rica ? Where ? Expenses truly below $1k/month ?
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Old 07-26-2008, 01:20 AM   #11
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We will be building, we own land in northern CR, away from beaches and any expats. We have friends who live down there comfortably on $800 a month.

The $1k a month obviously wont cover the cost to buy and built our or future home, thats going to be our target budget once we are settled in.

That said, a nice tico home rents for about $60 - $100 a month, the vast majority of people down there do not own cars, and most families in the area we are living in bring in around $6k a year. We will live very comfortably on our budget.
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Old 07-26-2008, 11:10 PM   #12
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I'd vote for the REIT option, too. I was a landlord for two years, not really by choice (house couldn't sell). Although my renters were pretty good and always paid on time, there is always the concern on the back of my mind about what could happen.

I don't have experience with management companies, but I am guessing if there is a plumbing issue, etc., the renters would call the management company, who will in turn call a plumber. Minor problems that the landlord can do in an hour by himself will now cost at least a couple of hundred dollars. Also it's not uncommon to have tenants that pay late or don't pay at all after a while. I know I wouldn't want to worry about it when I am supposed to be relaxed and retired in a different country.
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Old 07-27-2008, 01:14 AM   #13
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I would sell the condo and buy a REIT. My wife and I have been weighing the pros and cons of REITs vs. rentals and we came up with a few reasons why REITs make more sense for us:

1) REITS are more diversified: If you buy an investment property and you can't find a tenant for a couple of month, your income from that property goes to zero for those few months (yet your expenses stay the same). A REIT usually own many properties and even if one of them is vacant, they are still collecting rents from other properties. Plus some REITs also have a geographical diversification component which is important for us.

2) REITS are liquid. In a pinch, you can sell your REIT in a few seconds and get cold hard cash in a few days. With an investment property, it could take months before it sells and you get your money back.

3) REITS are portable. With a REIT you can move halfway across the world and take your REIT (and its income) with you. (my wife and I also contemplate retiring abroad and we don't want to manage a rental property from halfway across the globe, so the portability of REITs is very attractive to us).

4) REITS are hands off. No finding and screening tenants, no repair works, no paying property taxes and insurance...

5) REITs have no negative impact on your monthly cash flow. When you buy a REIT, the cash is going only one way: in (in the form of dividends). When you own a rental property you have to worry about how to pay for outflows (taxes, insurance, repairs...) and you have to make sure that the income you receive from that property covers those outflows if you don't want it to negatively impact your budget.
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Old 07-27-2008, 02:18 PM   #14
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"Send me the money"

I can't make a recommendation on real estate vs. your own business vs. a stock portfolio (REITs or otherwise) because you have to go with the type of income-producing assets that work best for you.

For myself, I prefer owning great businesses that are available on the public exchanges (i.e., stocks). Right now, I favor businesses that pay dividends because I would rather have the cash pass though my hands for me to decide what to do with it (i.e., pay living expenses or buy income-producing assets).

If you want to let your dividends compound, consider companies with a dividend-reinvestment plan (DRIP): http://link.brightcove.com/services/link/bcpid203719194/bclid86272812/bctid1690279290

Many brokerages will also allow you to set up DRIPs for free (because they would rather have you keep the money with them than send it to comanies with DRIP plans).

When you get ready to FIRE, turn off the DRIPs and have the dividends sent to your checking account.
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