Sell apartment buildings or keep forever?

[calmloki]

Yes, I have that hesitancy with stock sales. Stocks should be easier to sell as the tax hit is substantially less, but my constitution just rebels against certain expenditures. I hate paying interest, no matter the dollar amount, and most commissions and fees disturb me. Strange thinking about it - property taxes don't bother me, and actually paying income taxes or writing quarterly checks is almost fun. It is a point of honor for me to pay workmen instantly.

Maybe it just takes a while for me to scrutinize paying for something of pretty intangible value.

[pb4uski]

As I understand it the tax bite on a rental property sale would be between 15% and 25% depending on how much of the gain is depreciation recapture vs 15% for most stock sales... certainly different but not so different as to cause one to become paralized.

I guess one difference is that if you had a $1million stock portfolio you can sell a little at a time to spread out the tax bite... but with a property it is more of an all or nothing proposition unless you do an installment sale but an installment sale introduces other risks (not getting paid, buyer not keeping property up, etc.)

[Mr. Tightwad]

Quote:

Originally Posted by pb4uski As I understand it the tax bite on a rental property sale would be between 15% and 25% depending on how much of the gain is depreciation recapture vs 15% for most stock sales... certainly different but not so different as to cause one to become paralized. I guess one difference is that if you had a $1million stock portfolio you can sell a little at a time to spread out the tax bite... but with a property it is more of an all or nothing proposition unless you do an installment sale but an installment sale introduces other risks (not getting paid, buyer not keeping proper up, etc.)

Perhaps rental real estate has a more painful tax bite psychologically because if you sell a primary residence you get the massive profit exclusion? So it seems like agony to pay tax on the rental property sale? (due to no exclusion).

I have sold one rental in my life. I remember telling others around me to remind me to never sell another, due to the tax bite.

[Sunset]

Quote:

Originally Posted by pb4uski As I understand it the tax bite on a rental property sale would be between 15% and 25% depending on how much of the gain is depreciation recapture vs 15% for most stock sales... certainly different but not so different as to cause one to become paralized. I guess one difference is that if you had a $1million stock portfolio you can sell a little at a time to spread out the tax bite... but with a property it is more of an all or nothing proposition unless you do an installment sale but an installment sale introduces other risks (not getting paid, buyer not keeping proper up, etc.)

This is the reason for me.... which also includes timing.
With stocks I can sell in one day and be done. With a rental if I list it November 1st , it might sell this year... or it might sell next year.
Makes it hard to plan some tax issues.

[Mr. Tightwad]

Quote:

Originally Posted by pb4uski I guess my point was that the $4,850/month of rent that you collect is more related to having 1/3 of your net worth tied up in properties than the 2 hours a month of yard work that you do.... so your post suggesting that tradeoff was 2 hours of yard work a month for $4,850 of rent was a bit disingenuious.

If you are saying if I had a gardener the rent would still be rolling in and I wouldn't be spending two hours on the yard, we agree. Otherwise I don't get it and it probably isn't worth discussing.

My rentals are 50% of my NW. Personal residence 25%. Other 25% stocks.

I do have a question for you. Do you view your stock accounts (I know you sold recently, but I mean normally) as having X amount tied up in stocks? Or is it just real estate you see it that way. Sure one is liquid and the other isn't. Does the liquidity difference determine the term "tied up"?

I have never thought of it as tied up. If it's tied up, I sure wish I would have tied up about 10x as much back when I was buying in the 90's.

[pb4uski]

I'm not sure if tied up is necessarily the right word... perhaps invested is better... my point was that the $4,850/month that you receive in rent is more due to having $x invested in a rental property than 2 hours a month of yard work.... if only for the fact that if you didn't have $x invested in the property then you wouldn't get $4,850/month for 2 hours a month of yard work.... or to boil it down for you... your comment that "I put in about 2 hours of yard work a month and collect $4850 in rent." was silly.

But to answer your question, if I had $x invested in real estate or stocks or bonds I think it would be fair to say that I had $x "tied up" in real estate or stocks or bonds. Clear now?

[38Chevy454]

Quote:

Originally Posted by pb4uski I'm not sure if tied up is necessarily the right word... perhaps invested is better... my point was that the $4,850/month that you receive in rent is more due to having $x invested in a rental property than 2 hours a month of yard work.... if only for the fact that if you didn't have $x invested in the property then you wouldn't get $4,850/month for 2 hours a month of yard work.... or to boil it down for you... your comment that "I put in about 2 hours of yard work a month and collect $4850 in rent." was silly. But to answer your question, if I had $x invested in real estate or stocks or bonds I think it would be fair to say that I had $x "tied up" in real estate or stocks or bonds. Clear now?

Maybe i can put to math to show what pb4uski is referring to. If we calculate $4850/mo x 12 months = $58.2K/yr; then if use the 4% withdrawal rate to get the same income your property has an invested value of $1.455M ($58.2K / .04 = $1.455M). You can use whatever rate of return you want instead of 4% as that is just a common value for a long sustaining portfolio withdrawal rate. If you assume a higher return, then your property can be worth less as equivalent investment (for example, 6% = $970K).

[Mr. Tightwad]

Quote:

Originally Posted by pb4uski I guess my point was that the $4,850/month of rent that you collect is more related to having 1/3 of your net worth tied up in properties than the 2 hours a month of yard work that you do.... so your post suggesting that tradeoff was 2 hours of yard work a month for $4,850 of rent was a bit disingenuious.

I never said there was a trade off.

Fact 1: rent collected monthly is 4850

Fact 2: I choose to do 2 hours a month of yard work.

I collect the $ whether I engage in fact 2 or hire a gardener or let the place go to seed. Fact 1 and fact 2 are not dependent upon each other.

Anyways, place me in the category of I love being a landlord and wish I would have bought more back in the day. Easiest money I've ever made. Down payment was $5800 and its worth 1.3 mil now.

[38Chevy454]

Quote:

Originally Posted by Mr. Tightwad I never said there was a trade off. Fact 1: rent collected monthly is 4850 Fact 2: I choose to do 2 hours a month of yard work. I collect the $ whether I engage in fact 2 or hire a gardener or let the place go to seed. Fact 1 and fact 2 are not dependent upon each other. Anyways, place me in the category of I love being a landlord and wish I would have bought more back in the day. Easiest money i've ever made. Down payment was $5800 and its worth 1.3 mil now.

So expanding on my post above, now with your estimate of the property value: $58.2K / $1.3M = 4.48% return currently on the equivalent invested value.

[Mr. Tightwad]

Quote:

Originally Posted by 38Chevy454 So expanding on my post above, now with your estimate of the property value: $58.2K / $1.3M = 4.48% return currently on the equivalent invested value.

Thanks. I think those that avoid rentals and stick with stocks look at those numbers and say "Those landlords are daft, they could be getting nearly 10% in the stock market." But besides those sweet rent checks that feed me and allow me to blow dough, I can cash out with maybe 800-900k after the sale or exchange it and skip the taxes.

[pb4uski]

Quote:

Originally Posted by Mr. Tightwad I never said there was a trade off. Fact 1: rent collected monthly is 4850 Fact 2: I choose to do 2 hours a month of yard work. I collect the $ whether I engage in fact 2 or hire a gardener or let the place go to seed. Fact 1 and fact 2 are not dependent upon each other. Anyways, place me in the category of I love being a landlord and wish I would have bought more back in the day. Easiest money I've ever made. Down payment was $5800 and its worth 1.3 mil now.

You surely suggested that there was a tradeoff when you wrote:

Quote:

Originally Posted by Mr. Tightwad I put in about 2 hours of yard work a month and collect $4850 in rent. The yard work gives me exercise and vitamin D. When I'm too old to deal with it I'll hire a gardener. One duplex is valued at a third of my NW. I didn't set out for that to be the case, property values have soared is the reason.

A good example that correlation is not causation I guess.

I think you misperceive that I have an axe to grind against owning real estate in retirement... I don't have an axe to grind... I just don't think it is a good idea because of the time involved, constantly being "on call" and the near impossibility of adequately diversifying geographically and by property type. FWIW, I manage a single tenant commercial property for my Mom that is about 1/2 of her income so I'm familiar with the issues.

And then there is the whole depreciation recapture tax thing if you want out.

[VFK57]

My point for not selling if it has a stable rent and normal rental market is:
When we moved to SF Bay Area in 1989 an average SFH of 1,500 - 2,000 sq ft was selling for $100,000 to $400,000 depend on a neighborhood. Thirty years later (yes, on the long run) the average house in SF Bay Area is $850,000 to $1,600,000 (and not in SF, Los Altos Hills, Saratoga etc where prices are much higher). It tells me that housing under normal conditions is a good investment and if brings stable income after your expenses, you better keep it.

[Letj]

Quote:

Originally Posted by pb4uski You surely suggested that there was a tradeoff when you wrote: A good example that correlation is not causation I guess. I think you misperceive that I have an axe to grind against owning real estate in retirement... I don't have an axe to grind... I just don't think it is a good idea because of the time involved, constantly being "on call" and the near impossibility of adequately diversifying geographically and by property type. FWIW, I manage a single tenant commercial property for my Mom that is about 1/2 of her income so I'm familiar with the issues. And then there is the whole depreciation recapture tax thing if you want out.

As a long time landlord, I most certainly concur with you. Being a landlord is the biggest pain in the rear when dealing with tenants and trying to maintain your properties. If you’re not handy, I do not recommend it. It’s really like buying a job. It’s also easy to get in but very hard to get out, mainly because you have to get tenants out, renovate and sell (in the case of single family rentals). Otherwise, investors won’t pay nearly what the property is worth. With that said, the leverage enables you to generate cash quickly which you can turn around and put in the market. To do that, you must buy undervalued properties, fix up, take out equity and rent and hopefully sell at a profit in the future.

[bearkeley]

We used to have 18 rentals (12 condos in 3 buildings and 6 SFHs) and each had FT jobs. Now down to only 4 SFHs and a vacation rental condo on the beach. FIREd early 5 years ago and last year, did a 1031 of 1 SFH to 3 DSTs. Essentially, got rid of a house with a non paying tenant who trashed our house and got a DST with A 55+ multi family, a hospital and Pepsi as our tenants with not having to handle tenant or repair issues! Plan was to sell a rental each year into a DST but with Covid, we’ll have to wait a bit. If you haven’t looked into DSTs, it’s worth exploring!

[Mr. Tightwad]

Quote:

Originally Posted by Letj As a long time landlord, I must certainly concur with you. Being a landlord is the biggest pain in the rear when dealing with tenants and trying to maintain your properties. If you’re not handy, I do not recommend it. It’s really like buying a job. It’s also easy to get in but very hard to get out, mainly because you have to get tenants out, renovate and sell (in the case of single family rentals). Otherwise, investors won’t pay nearly what the property is worth. With that said, the leverage enables you to generate cash quickly which you can turn around and put in the market. To do that, you must buy undervalued properties, fix up, take out equity and rent and hopefully sell at a profit in the future.

There are plenty that feel like you, here on this forum and IRL. I didn't do the fix up plan, didn't renovate anything. In 28 years I have only had one eviction. I certainly didn't buy a job (if I had 10 duplexes, then I would agree with you). And I'm very unhandy. I pay people once in a while.

Perhaps tenant selection is the difference. My landlord life has been a wonderful one.

[Another Reader]

My guess is pb4uski made more money in his high pressure consulting job than I did. He probably worked a lot more hours too. With my 22 mostly paid off single family rentals and one townhouse, the various IRA's, two pensions and social security, I would also guess my current income is equal or higher to his and my net worth is probably higher as well.

That's why I invested in real estate. I could have dumped the money into the stock market, and then spent my retirement worrying about a safe withdrawal rate for the sake of "diversification." I never ran a single retirement calculator before I pulled the cord. I could never make the rental numbers fit, and I didn't need to anyway.

[pjigar]

I am not quite in the same boat but I have been also trying to fight "The endowment effect" by using the "band theory" (my words for a theory). I would by a rental if the cash-on-cash return in over X% and I would sell a rental when cash-on-equity return fall below (X-B)%. Currently I am using B (band) percent of 4%. This keeps my behaviors logical and don't make things subjective. I did sell one rental last year applying the band theory. I should sell one more rental based on the theory but we have been busy building our dream home this year so following up on the second rental would have to wait till next year (I might regret this later). Some food for thought.

By the way, if a property passes the band theory then I am of an opinion where I would work a small number of hours to keep high returns on my rental portfolio. And yes, my rental portfolio has outperformed the market by far so far.

And yes, I am always cognizant about concentration risk. Currently rental to stock (no bonds) ratio is sitting at about 60/40. I would prefer it to be more like 50/50. I don't own bonds because I treat rental as bonds (another topic for debate).

[pb4uski]

Quote:

Originally Posted by pb4uski .... I think you misperceive that I have an axe to grind against owning real estate in retirement... I don't have an axe to grind... I just don't think it is a good idea because of the time involved, constantly being "on call" and the near impossibility of adequately diversifying geographically and by property type. FWIW, I manage a single tenant commercial property for my Mom that is about 1/2 of her income so I'm familiar with the issues. And then there is the whole depreciation recapture tax thing if you want out.

Quote:

Originally Posted by Another Reader My guess is pb4uski made more money in his high pressure consulting job than I did. He probably worked a lot more hours too. With my 22 mostly paid off single family rentals and one townhouse, the various IRA's, two pensions and social security, I would also guess my current income is equal or higher to his and my net worth is probably higher as well. That's why I invested in real estate. I could have dumped the money into the stock market, and then spent my retirement worrying about a safe withdrawal rate for the sake of "diversification." I never ran a single retirement calculator before I pulled the cord. I could never make the rental numbers fit, and I didn't need to anyway.

Jeesh Reader, I didn't realize that this was a contest. I'm quite happy with my station in life and hope that you are too. As blessed as I feel, I rarely have to look far to find someone with more wealth and I like having wealthly friends.

I'm not sure what any of the first part has anything to do with holding rental real estate in retirement and the issues that I raised of time involved, being "on call" and lack of diversification.

My dad was very into real estate. He had a number of commercial rentals when I was young, many pieces of land, and later some residential rentals and another single tenant commercial rental. He came to view the residential rentals (an 10-unit apartment building as I recall and at least one SFH) as a PITA and sold them. I am eternally greatful to him that he sold out of pretty much everything other than the one single tenant commercial building.

While I doubt that I would have chosen that path it really wasn't an option for me because of the hours that I worked and the extensive travel that I had with my career.... I just would not have been around enough to invest in rental real estate.

I have no doubt that real estate is a great way to build wealth, both dad and uncle did very well with it.... it just wasn't for me. However, to rely on real estate in retirement becomes increasingly difficult if one want to travel a lot or does a lot of their own repairs and maintenance work.... even thought the cash flows are quite attractive.

[BeachOrCity]

Did the OP mention how leveraged the rental properties are?
If the current ltv is well under 50% they are much lower risk than if they are 70% or more leveraged. That 50% of NW could much more easily disappear if they have a lot of leverage.

Personally I dumped most of my rental stuff b4 retirement bc I wanted the freedom from it. But I would say they can perform well on a risk adjusted basis.

[pb4uski]

No, OP hasn't indicated degree of leverage, but bought his properties 10-13 years ago, so unless he has refinanced probably not a lot of leverage I'm guessing.