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*Question for current or former multi family landlords*
Old 07-22-2020, 12:02 PM   #1
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*Question for current or former multi family landlords*

Hello all,
I have a question for current or former multi-family landlords. I am being as thorough as possible in my explanation in order to minimize any questions, so I hope my listed information helps that. I'm 57 yrs old and I am retiring from my business of 20 years in November 2020. My oldest son (31 yrs old) has owned half of the business for the last 7 years. I started him 2 years after finishing his 4 year business degree and he has proven himself, so I am giving him my half. He's married 3 yrs, no kids yet but planing to start next year. My wife will retire June 2022 at 56 yrs old and her retirement will pay for our medical and a few bucks left over. I currently own 40 single family houses within 20 minutes of my house, I live in Midlothian, VA and my rentals are in Richmond City. I purchased 4 to 5 a year since 1997 to 2008. My question is to people who own or sold multiple rental houses: Should I sell them or keep renting them? The average stay for a tenant is 3 years and when they vacate I am doing total renovations to about 5 a year, (the other 5 to 7 houses are partial renovations) the total renovations include, new roof, kitchen, flooring, bathroom(s), windows, paint, lighting and HVAC if needed. I use a small company that gives me great prices so my average full renovation per house is costing $25k, and greatly increases the house by at least $40k if I sold it. Once you put a tenant in it, it's never "NEW" again after they leave.

Here is my current situation-
  • Houses after renovation are worth average $150,000 (some more some less)
  • Total value of houses: $6 million
  • 15 houses have been totally renovated in the last 3 yrs
  • Total rent per year that can be collected $535,000.00
Costs of operation:
  • Turn over 10 to 12 houses a year.
  • Each turn over is vacant before re-renting 6 to 8 weeks: -$25,000 in lost rent.
  • Total average yearly rent collection: $510,000.00
  • (Remortgaged 5 houses last year, bank appraised the 5 houses for $800k to pay the other 35 houses off, I have 19 yrs left, borrowed and owe $400k on the 5 houses, they let me borrow 50% of value)
Yearly expenses:
  • Mortgages: $39k
  • Tax: $20k
  • H/O insurance: $15k
  • Maintenance: $75k
  • Total for full renovations: $125k ($25k x 5 a yr)
  • Daughter management: $25k. My daughter will start managing my properties in November and will be building her portfolio for her property management company. She's 28 with a 4 year degree and with her background I believe she will do great. I will soon be very little hands on with some delegating until she is totally up and running.
That leaves me with about $200k a year.
I have a small annuity about $300k and won't touch it until I am 72 yrs old.
I have $200k in a money market.
The 10 year prediction in RVA says my rentals will go up around $1 to $1.5 million.
My primary house is paid off, worth $475k (taxes $4k a year).
I just put a new roof, HVAC and hot water tank in so no hidden expenses.
2 cars and 1 truck paid off and good for at least additional 5 years.
We paid off all 3 kids undergraduate degrees (My youngest son is starting Medical School this August and he will be financing that).

What I'm concerned about is capital gains, up depreciation, and taxes.
Should I sell, pay all the taxes and fees and put the money into something that gives me a decent return and never think about a rental issue or tenant again? OR should I keep them and have them managed and sell one every few years if I need extra renovation money or the wife and I want to buy something or to supplement my income.
Your advice would be much appreciated!
Thanks in advance.
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Old 07-22-2020, 12:16 PM   #2
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OP - you have a lot invested in one area, and 1 thing.

I'd look at selling one or two houses per year, possibly just one, idea being to extract out as much profit, by paying as little tax as possible or you are comfortable in paying.

The risk concentration is an issue with any investment most often thought of with stocks.
What if most of your tenants stop paying rent due to job loss/covid or bankruptcy of major town employers, while evictions are still outlawed.
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Old 07-22-2020, 12:29 PM   #3
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Hello Sunset, so far all 40 tenants are working and have paid rent every month, I have not missed getting a payment, basically nothing has changed with Covid-19 with my rentals (YET). The area my rentals are in rent quickly. If I sell one a year, what do I do with the money?
Thank you!
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Old 07-22-2020, 12:57 PM   #4
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I'm not a landlord at all, but to me the question is really about what do YOU feel about having almost all your wealth tied up in real estate, do YOU want diversification, do YOU want to keep managing the properties/work with your daughter to move management to her, etc.

There's nothing wrong with real estate if you like owning it and are comfortable with its pros and cons (I'm not, hence my wealth being entirely in stocks), there's nothing wrong with unwinding your ownership if it feels like it is time either, but it seems highly dependent on your needs and wants...
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Old 07-22-2020, 02:02 PM   #5
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Nicely done - starting a successful business and acquiring an enviable amount of properties!

It seems as if your disbursement of wealth is not evenly distributed from an outsiders perspective. One child gets a business, one child is gifted the property management role and the third paying their way through school. But i am sure it is more complex than that.

If your daughter is interested in property management, is there an opportunity to do a long term contract for deed, i.e. her paying you for the properties and then take them over on your demise at a stepped up basis? I am not sure if there is a way to do this or not, but worth looking into.

Similarly for your son running your business, can you cash out a little and make him "earn" it? You reduce your risk while making your son feel like he is not just given something that is not worth much because it was given for free. Not saying that is not worth much, but sometimes something that was paid for is worth more than a free gift.
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Old 07-22-2020, 04:18 PM   #6
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You might be able to sell one a year, pay the taxes and then invest the proceeds to reduce your concentration risk.

It's the same advice that we would give someone who came along and had 90% of their retirement funds invested in a single company.... even if it was a great company, stuff can happen.... think of how many well-regarded blue-chip companies are currently struggling.... GM, GE, AT&T and the list goes on. Also, what if your 40 top-grade residential rentals were in a good section of New Orleans when Hurricane Katrina hit and over half of the population moved out? You get the idea. Stuff happens and if you are unlucky and it happens to you then you're in a world of hurt.

Diversification reduces risk.
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Old 07-22-2020, 06:57 PM   #7
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Quote:
Originally Posted by Ed Waggoner View Post
Hello all,
I have a question for current or former multi-family landlords.
Congratulations. You have done really well for yourself.

I recommend that you ask a lawyer to draw the appropriate papers, so that each year, you can give each of your children the maximum allowed 'gift', in interest in a rental property.

Your total amassed Net Worth will slowly shrink and it will be moved to our children.



In 2005 I did a 100% refinance of a tri-plex I owned, and I used the cash to buy some rural land where I built a large cabin. Where we moved as our primary residence.

The renters continued to pay rent, and everything continued as normal. Until 2009 when we sold that property.

I feel that in 1990 its equity was near zero, in 2005 its equity was near $150k. I took that equity out as cash, and I was never required to pay tax on it.
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Old 07-22-2020, 08:30 PM   #8
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Thank you, your advice is much appreciated!
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Old 07-22-2020, 08:32 PM   #9
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Thank you for your perspective and I do agree with you. It is much appreciated.
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Old 07-23-2020, 04:57 AM   #10
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Mod note:

Multiple posts were removed.

Please keep politics out of this or the thread will be closed.
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Old 07-27-2020, 12:45 PM   #11
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Great job of building wealth. If you live in one for a while then sell it you don’t pay gains on it. Carry the mortgages on them and pay taxes on interest income.
I’d have a session with your kids and see what they are interested in and try to get an agreement on what is fair.
Good luck
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Old 07-27-2020, 01:01 PM   #12
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Quote:
Originally Posted by Offgrid Organic Farmer View Post
......
In 2005 I did a 100% refinance of a tri-plex I owned, and I used the cash to buy some rural land where I built a large cabin. Where we moved as our primary residence.

The renters continued to pay rent, and everything continued as normal. Until 2009 when we sold that property.

I feel that in 1990 its equity was near zero, in 2005 its equity was near $150k. I took that equity out as cash, and I was never required to pay tax on it.
Sure, nobody pays tax on borrowed money.

But when you sell the property (for easy understanding if it was months later).
You would pay tax on the Capital Gain in Equity from $0 -> $150K , then pay off the borrowed mortgage money of $150K.
The net effect is tax was paid.

Now if you have some other view/method, please elaborate as I have a rental and would like to suck out $300K of tax free money, then sell the place and not pay any tax.
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