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Should I keep rentals in the mix?
Old 03-12-2019, 12:24 AM   #1
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Should I keep rentals in the mix?

My long term plan has always been to keep my rental properties (8 apartments in one 32 unit complex) until I was 70 or 80 (cashing out so my kids don't have to).

Real Estate Net Income is 57k per year (gone up the past 2 years after several years stagnation). Nice, steady income.

I have a property manager to deal with the tenants and I am active in the HOA. Mildly frustrated with the hassle of dealing with the HOA.

Purchased 1st 4-plex 15 years ago with a 1031 exchange
Purchased 2nd 4-plex 14 years ago.

No mortgages on either. At 15 years old, maintenance might start increasing.

Currently both are valued a little bit below what I paid (the joys of the real estate crash). Very little appreciation in recent years.

ROI is about 6% per year (which I thought was good, but maybe it's not)
The unknown is if appreciation will finally kick in .... I certainly didn't think I would be underwater after 15 years.


Now I'm wondering if I should
1) stick to my plan. Keep this as a steady income stream ...Sell one or both if/when needed. Best case I never need to sell and my kids inherit at a stepped up market value.

2) Sell the 2nd building for $450k, match the net loss against the recaptured depreciation.

3) Sell both for $900k and be done with them. Gains in the 1st building would be offset by the loss in the 2nd building. Likely taxes (state & fed) on the 1031 exchange about 100k, still take home $300k to invest elsewhere.

4) Do another 1031 exchange at some point in the future (to get into a newer building) and keep it going.


This rental income, Wellington dividends and a CRT provide sufficient income to cover my annual expenses. I will have additional income from 401k/IRA funds when I reach that age. I'm 56 now. <Went off the ACA cliff this year thanks to the unexpectedly strong dividends. >

I want to find a way to better manage the taxable income in my portfolio. Would look at that carefully if I have $$ to invest from the sale of the rental properties.

I am wondering if I really can replace this income stream with investments that are less hassle, tax efficient, and similar (or better) risk these properties?
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Old 03-12-2019, 06:06 AM   #2
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Should you keep rentals in the mix? Well, you indicated that this is has been your plan but now appear to be questioning that plan. You also pay a property manager even though you appear to perhaps be living in a unit of this building since you are on the HOA.

I dumped active rentals a few years ago and instead invested in REIT's, preferreds, and other interest bearing investments. While I lost approximately 1% of real return, I gained diversification and don't have to even consider issues relating to my properties. Unlike me, you may want to still be involved. However, when I retired, I made it my goal to totally check out and have my money make me money the passive way. I focus on my health at the gym in the morning, do my hobbies, and kick back at the pool in the afternoon.

It is a matter of what you really want for your retirement.
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Old 03-12-2019, 06:14 AM   #3
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Originally Posted by Col. Klink View Post
Should you keep rentals in the mix? Well, you indicated that this is has been your plan but now appear to be questioning that plan. You also pay a property manager even though you appear to perhaps be living in a unit of this building since you are on the HOA.

I dumped active rentals a few years ago and instead invested in REIT's, preferreds, and other interest bearing investments. While I lost approximately 1% of real return, I gained diversification and don't have to even consider issues relating to my properties. Unlike me, you may want to still be involved. However, when I retired, I made it my goal to totally check out and have my money make me money the passive way. I focus on my health at the gym in the morning, do my hobbies, and kick back at the pool in the afternoon.

It is a matter of what you really want for your retirement.
How much capital gains tax did you pay? How much depreciation did you recapture?

While I dislike what the OP owns, because owning multi units that are part of a larger project puts you at the mercy of the worst landlord in the project and the HOA, the exit strategy is not very appealing.

In the OP's shoes, I would probably 1031 into an easier keeper and let the next generation get the property tax free.
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Old 03-12-2019, 06:29 AM   #4
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How much capital gains tax did you pay? How much depreciation did you recapture?

While I dislike what the OP owns, because owning multi units that are part of a larger project puts you at the mercy of the worst landlord in the project and the HOA, the exit strategy is not very appealing.

In the OP's shoes, I would probably 1031 into an easier keeper and let the next generation get the property tax free.
CG - yes, depreciation - yes

Good point about multi units of a larger project.

In my case, the next generation was not interested in owning or disposing real estate but that may well work for the OP.
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Old 03-12-2019, 08:40 AM   #5
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Surprised that after 14 years of depreciation your depreciation recapture would match the loss you would take on the sale though both properties are valued at only a bit under what you paid for them. At 56YO and with relatively new buildings and making 6.3% net AFTER paying for management I'd keep them. Classic rental real estate conundrum: after taking the tax and cost of sale beating what do you invest in with the fractional amount of money left from your equity that will do as well?

We were going to sell off a place/year when I got to 60, taking the tax hit gradually. Unfortunately that happened to coincide with 2009 so rather than give the places away we kept chugging along. Rent kept coming in even if property values had tanked. Rent kept coming in when stocks crashed. Our newest building is over 50 YO and yes, there is constant maintenance that my 69YO self whines about. That said, our net worth has climbed at a surprising rate even though our rental income in small town Oregon is slightly lower than yours at 6%. Mostly that is due to having excess money to invest in other things. Our lifestyle is modest - we could walk away from our places with $0 and still have enough to sustain ourselves but I just can't do it. Like making money and hate giving up control.

Face it: your $900k equity brings in 6%. If you sell and walk away with $300k you need to make three times as much with that 300 to match what the rentals are making. Secure hands off investment bringing in 3*6%= 18%? I don't think so. Suck it up and bank the bucks buttercup.
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Old 03-12-2019, 09:07 AM   #6
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we could walk away from our places with $0 and still have enough to sustain ourselves but I just can't do it. Like making money and hate giving up control.

Face it: your $900k equity brings in 6%. If you sell and walk away with $300k you need to make three times as much with that 300 to match what the rentals are making. Secure hands off investment bringing in 3*6%= 18%? I don't think so. Suck it up and bank the bucks buttercup.
Haha, DF refers to his rentals as his "other children". Secretly, I think he enjoys being in the business of providing housing to people. He likes money but never once has he ever been a braggard, he's just done the hard work and collected the checks. I do the same on my rental. Most people I mention rentals too, they just assume its a ton of work...sure sometimes it is but its great diversification on multiple fronts. Keep on depositing those checks man!
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Old 03-12-2019, 09:59 AM   #7
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Originally Posted by BeanCounter62 View Post
....3) Sell both for $900k and be done with them. Gains in the 1st building would be offset by the loss in the 2nd building. Likely taxes (state & fed) on the 1031 exchange about 100k, still take home $300k to invest elsewhere. ....
I don't get this part.... if you sell for $900k and both properties are debt-free... less $100k of state & fed taxes is taking home $800k to invest elsewhere (ignoring selling expenses)... why is it that you are only walking away with $300k? What happens to the $500k?
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Old 03-12-2019, 10:17 AM   #8
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I sold my last apartment building years ago. After 20+ years of owning rentals I just got tired of it.

But I would point out that with your thread title you have framed this somewhat as a false choice. With 2x4 units, you don't have to either sell or not sell. You can sell over a period of time, which would probably be wise anyway as putting 25% of the complex on the market all at once is not likely to yield the best prices. If you can sell individual units, you have an even smoother glide path.
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Old 03-12-2019, 11:03 PM   #9
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I don't get this part.... if you sell for $900k and both properties are debt-free... less $100k of state & fed taxes is taking home $800k to invest elsewhere (ignoring selling expenses)... why is it that you are only walking away with $300k? What happens to the $500k?
I also don't really understand what happened to the rest of the 500K....
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Old 03-13-2019, 12:56 AM   #10
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I've got a similar situation, smaller scale at $300k, an SFR that I've owned for 30 years (wow!) with no debt. It nets $13k/year after expenses which is on the low side, but the tenant of seven years never asks for anything and does his own repairs. I'd love to sell it but after expenses and taxes I might net just $200k. So, I just keep waiting, putting it off, year after year. I'm thinking of a way to exchange it into a nicer rental that is suitable to convert to our residence. Maybe some day.
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Old 03-13-2019, 11:32 PM   #11
Confused about dryer sheets
 
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I posted a reply yesterday that is lost in CyberSpace!
Might be shorter this go-round.

First - thank you to those who joined the conversation.

Second - some clarifications:
No - I don't live in one of the units. Since they are 100% rentals, the HOA members are the owners of each building - 1 vote per building (6 owners across 8 buildings).

I can't sell individual units as the 4-plexes are not designated as condos (the HOA started down that path before the 2009 crash - spending a lot of $$ getting nowhere because of loans on the properties).

The "missing" $500k noted by pb4uski is the sale of the 2nd building. It was an unclear paragraph.

The $300k was just the net from the sale of the 1031 building.

The 2nd building if sold now would net $400k or so (have to pay commission, taxes for recaptured depreciation) <I finally ran the scenario through TurboTax>

So $900k real estate is bringing in non-stock market income at 6%
Sold, this would be maybe a bit over $700k ... and would need 7.7% to bring in the same cash flow.

It's a decent return as is -- and there's a reasonable chance that appreciation will return to this investment.

This income stream is a large portion of my income until I start pulling from my IRAs/401ks. Making decisions to change my current path are always harder than just maintaining the status quo. So I appreciate being able to "talk it out" with others. In this case, I think it makes sense to hold them awhile longer.

Also interesting concept to consider another 1031 exchange to a property that would continue to bring in monthly income which could also possibly (way down the road) turn into a primary home again (thinking that I could land in Southern California where it might cost $900k for a tiny condo!)
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Old 03-16-2019, 11:04 AM   #12
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Iím in process of selling my one rental house (around $360k value.) Itís had amazing price appreciation and rent increases since purchase in 2011, so between cap gains and depreciation recapture itíll be a big tax bill. The reasons Iím doing it are: 1) I believe the easy price appreciation money has been made and prices are more likely to flatline or fall in coming years 2) Iíve enjoyed hard money lending much more than ownership. You get comparable returns with more safety, though admittedly no tax advantages.
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