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Valuating rental property for retirement
Old 04-26-2019, 07:07 PM   #1
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Valuating rental property for retirement

We own a 2-unit rental property in Hawaii that brings us in what I call a "small pension." Wife handles the property, which Zillow values at $1.2 million, but is only bringing us in $30K/year because she likes the fact that our tenants have been there for more than a decade. After property taxes, we net $25K.

I'm wondering how to value the property for retirement: the amount it SHOULD bring in (approx. $50K/year, going by similar rentals), or the income we'd have if we sold it & invested the approx. $1 million we would net?

We've done major upgrades to the property since we bought it in 1987, & it's fully paid off, but we would have to sink another $25K before we sold it, just to upgrade it after so many years of renting the units out. I'm retired, & wife retires July 1. Hawaii has a 10% capital gains tax for our situation.
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Old 04-26-2019, 08:15 PM   #2
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It depends... what are your plans with respect to the property?

If you keep it and operate it as is netting $25k a year, then reduce your spending by $25k a year... your so-called pension.

OTOH, if you intend to sell, then include an addition to your portfolio for the net sales proceeds after fix up costs, selling cost and federal and state income taxes.
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Old 04-26-2019, 10:45 PM   #3
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Hopefully OP, your wife is at least raising the rent by a small amount per year. Otherwise you will continue to net less and less per year.
The tenants are not going to move due to a 2->3% raise per year, as you say it's already the cheapest place on the block and moving is a big hassle and cost.

Right now the value is worth.... $25K per year , if you want to compare it to a lump sum, then I feel if you don's sell it, it is worth $625,000
As $625,000 at 4% would generate $25K per year.

Basically, you would be better off selling it, investing the 1 Million and drawing on $40,000 income which is better than the rental.
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Old 04-26-2019, 11:03 PM   #4
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Hadn't thought about converting to an equivalent lump sum, so thanks. Of course, averaging 4% hasn't exactly been easy these past few years. And not sure I agree about selling it, as I would have the income PLUS the property, which will appreciate in value.
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Old 04-27-2019, 10:21 AM   #5
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Dear Valued Tenant(s),

We hope this letter finds you well. We are happy to announce that Mrs. Catii and I will both be retired as of July 1. We look forward to this next chapter in our lives.

Our Wikiwaki Road property is an investment we made to help us reach this goal. After reviewing rental rates in the area, and due to the fact we haven't raised your rate in XX years, effective July 1, your new rent will be $xxxx.xx, due on the agreed scheduled date.

After consulting with financial experts, we believe we could sell the property and make more off investing the proceeds than we can by keeping it. However, we prefer to continue as owners and keep you as tenants. We value our long, stable relationship with you and hope it can continue. Good tenants are a true gift.

Thank you for your understanding, and please let us know if you have any questions.

Sincerely,

Mr. and Mrs. Catii


***************

You get the drift. And I agree - this raise should be an annual thing until it gets closer to market rates. You sound like great people, and I truly mean that good tenants are a gift. A gift that is d*mned hard to find (speaking from experience).
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Old 04-27-2019, 11:00 AM   #6
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^^^^^ Funny.

This is very very similar to what I do each year. I write a letter to my tenants explaining how because they are such good tenants, I'm only increasing the rent by xx% which is less than allowed under the tenant act. ..... blah blah blah..

I've had the same tenants for over 15 years in my last rental unit, and will sell it when they move out, as I'll never get such good tenants again.

But I have increased the rent every year (except once very early on) as I realized the trap of not increasing the rent.
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Old 04-27-2019, 05:50 PM   #7
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... I'm wondering how to value the property for retirement:
What is the purpose of 'valuing' it?

It brings in money for you, and nobody is saying that you must assess a value to it, so why?
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Old 04-27-2019, 06:22 PM   #8
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What is the purpose of 'valuing' it?

It brings in money for you, and nobody is saying that you must assess a value to it, so why?
You value the property and the income it produces to compare it to alternative investments that might appreciate more rapidly and/or produce more net income.
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Old 04-27-2019, 08:51 PM   #9
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Originally Posted by SumDay View Post
Dear Valued Tenant(s),

We hope this letter finds you well. We are happy to announce that Mrs. Catii and I will both be retired as of July 1. We look forward to this next chapter in our lives.

Our Wikiwaki Road property is an investment we made to help us reach this goal. After reviewing rental rates in the area, and due to the fact we haven't raised your rate in XX years, effective July 1, your new rent will be $xxxx.xx, due on the agreed scheduled date.

After consulting with financial experts, we believe we could sell the property and make more off investing the proceeds than we can by keeping it. However, we prefer to continue as owners and keep you as tenants. We value our long, stable relationship with you and hope it can continue. Good tenants are a true gift.

Thank you for your understanding, and please let us know if you have any questions.

Sincerely,

Mr. and Mrs. Catii
Yes. But you might consider only raising ONE unit this year. Should those folks move on, you only have one vacancy, not two. Raise the others next year, and so on, back and forth.
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Old 04-27-2019, 11:38 PM   #10
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Yes. But you might consider only raising ONE unit this year. Should those folks move on, you only have one vacancy, not two. Raise the others next year, and so on, back and forth.
You would not have to wait a year, raise one, wait a month or two, then raise the other.

Note that certain times for certain folks are when they are a lot LESS likely to move; tenants with kids don't want to move after September. They are most likely to plan a move when the kids are out of school, as it may easily require a change in schools.
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Old 04-28-2019, 11:39 AM   #11
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$30k vs $50k seems like an enormous hit. I've seen landlords charge 5-20% below market rate for prime tenants but 40% seems quite high.

Say you clear $1mil after all is said and done. A 50/50 mix of BND and VTI would bring in close to $25k/year on just dividends alone, and the principle/dividends will likely, appreciate over time as well. And none of the hassles of being a landlord.

If you took in closer to $50k/year it'd be a different beast.
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Old 04-28-2019, 02:40 PM   #12
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I don't reckon OP would see $1 million on a 1.2 million Hawaiian rental they've held for over 10 years. Depreciation recapture, Federal tax, 11% state tax, cost of sale - maybe more like $850,000 or less, depending on appreciation and how long they've actually owned it. That's the problem I'm having selling our long held greatly appreciated rentals.
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Old 04-28-2019, 03:51 PM   #13
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First question for me would relate to predicted appreciation ....
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Old 04-28-2019, 04:04 PM   #14
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You could sell it, then 1031 the proceeds into another rental unit. I purchased another unit in Maui last year. Paid $1.2m, it grosses about $125k per year. Cash flow is about $53k. I use a management company that is factored in above. It is a short term rental, so I get to use it several weeks a year, the rents go up every year and I donít have any relationships/communication with the renters.
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