Selling rental units

[Super Trooper]

Well done!

How old are you Dave? We are in a similar situation but my wife doesn't want to sell since the income is so good, in a market like this I wouldn't mind getting rid of them but that income is our bridge to 65+.

I manage the properties myself but I don't do the repairs. Much like you we paid cash even though financially it may have been "smarter" to finance them and invest the rest.

 

[calmloki]

How old are you Dave? We are in a similar situation but my wife doesn't want to sell since the income is so good, in a market like this I wouldn't mind getting rid of them but that income is our bridge to 65+.

I manage the properties myself but I don't do the repairs. Much like you we paid cash even though financially it may have been "smarter" to finance them and invest the rest.

Not Dave, but back in 2009 we were planning to bail out of our rentals - I would be 60 and we had hit a goal of a door for every year at 57. Unfortunately real estate fell on its face, so we just kept taking the rent. Now 72, and while we've unloaded most of the places, we still have a triplex and 16 unit. Also have plenty of resources to get us through to any reasonable checkout time even if we spent twice what our normal burn rate is. She who has half likes the income as well, and the security of a known asset - rental property. So we keep owning them and taking the money and banking the excess. 72. Time passes.

 

[mf15]

Selling my rental at jersey shore after 33 years.
Depreacation recaprture is a killer
Cap gian tax a killer,since NJ wants the same as the feds. So paying double.
Not happy.
Oldmike

 

[calmloki]

Selling my rental at jersey shore after 33 years.
Depreacation recaprture is a killer
Cap gian tax a killer,since NJ wants the same as the feds. So paying double.
Not happy.
Oldmike

Did you consider carrying the paper and paying capital gains on the principle received as you receive it? Agree that it hurts to pay the recapture, especially when you bought back in '87, as we did with a 9-plex. But having the interest payment on a big chunk of principal and being able to see your property vs. having shares of Netflix or something is sort of good.

 

[mf15]

Did you consider carrying the paper and paying capital gains on the principle received as you receive it? Agree that it hurts to pay the recapture, especially when you bought back in '87, as we did with a 9-plex. But having the interest payment on a big chunk of principal and being able to see your property vs. having shares of Netflix or something is sort of good.

No. Reason I am selling. Big time gut surgery last year. Can't maintain anymore,no interest in carrying the paper. Want to be done.
Oldmike

 

[calmloki]

Fair call. Sell, pay the bast*rds, move on. Best to you for a quick easy sale.

 

[Finance Dave]

How old are you Dave? We are in a similar situation but my wife doesn't want to sell since the income is so good, in a market like this I wouldn't mind getting rid of them but that income is our bridge to 65+.

I manage the properties myself but I don't do the repairs. Much like you we paid cash even though financially it may have been "smarter" to finance them and invest the rest.

60

If property values would not have skyrocketed, and if my knees were in better shape such that I could still work on the properties (having a partial meniscectomy next Wednesday), I probably would have kept the properties about 3 more years.

You say the income is good, but is it so much better than taking that same amount of money and investing it in something else? Maybe dividend paying stocks or muni bonds from your state or a diversified portfolio?

IMO it's never "smarter" to finance the properties, but you'll find plenty of people on this forum that disagree with me. As Warren Buffet said, "You never know who's swimming nude until the tide goes out."

Financing rentals usually results in a rate higher than your primary residence unless you get the seller to finance it. So your "spread" is your return less the rate you're paying.

There are many people who have been very successful using OPM, so there is evidence on both sides. Debt is not my cup of tea other than very low interest car loans where I can arbitrage on a near-guaranteed investment that pays more than the loan costs.

 

[Finance Dave]

How old are you Dave? We are in a similar situation but my wife doesn't want to sell since the income is so good, in a market like this I wouldn't mind getting rid of them but that income is our bridge to 65+.

I manage the properties myself but I don't do the repairs. Much like you we paid cash even though financially it may have been "smarter" to finance them and invest the rest.

Another thing to discuss with your DW...how will she feel if you pass away and leave her managing a bunch of properties while she's planning your funeral and grieving? Unwinding a rental business is no easy task.

 

[Super Trooper]

Not Dave, but back in 2009 we were planning to bail out of our rentals - I would be 60 and we had hit a goal of a door for every year at 57. Unfortunately real estate fell on its face, so we just kept taking the rent. Now 72, and while we've unloaded most of the places, we still have a triplex and 16 unit. Also have plenty of resources to get us through to any reasonable checkout time even if we spent twice what our normal burn rate is. She who has half likes the income as well, and the security of a known asset - rental property. So we keep owning them and taking the money and banking the excess. 72. Time passes.

A door at every year at 57 that's impressive, I'm not sure if it's a dream or a nightmare

Have you been managing and doing the repairs yourself?

 

[Super Trooper]

60

If property values would not have skyrocketed, and if my knees were in better shape such that I could still work on the properties (having a partial meniscectomy next Wednesday), I probably would have kept the properties about 3 more years.

You say the income is good, but is it so much better than taking that same amount of money and investing it in something else? Maybe dividend paying stocks or muni bonds from your state or a diversified portfolio?

IMO it's never "smarter" to finance the properties, but you'll find plenty of people on this forum that disagree with me. As Warren Buffet said, "You never know who's swimming nude until the tide goes out."

Financing rentals usually results in a rate higher than your primary residence unless you get the seller to finance it. So your "spread" is your return less the rate you're paying.

There are many people who have been very successful using OPM, so there is evidence on both sides. Debt is not my cup of tea other than very low interest car loans where I can arbitrage on a near-guaranteed investment that pays more than the loan costs.

Any reason why you were thinking to sell at 63 and not hang on to them and let a handyman do all the work?

If we knew how the market would be over the last 10 years it would have been wise to buy and finance more homes but I didn't have that crystal ball. We bought a lot of our properties +/- 10 years when prices were low, if we would have financed them we could have bought 3-4 times as many and if we unloaded them today we would be set.

In all likelyhood if my thought-process was to unload during a better market I would have sold them when they were up 10-20% We are in it for the cashflow and our plan was to go slow and steady and not have much risk and leave plenty on the table, it looks like we had the same strategy.

 

[Super Trooper]

Another thing to discuss with your DW...how will she feel if you pass away and leave her managing a bunch of properties while she's planning your funeral and grieving? Unwinding a rental business is no easy task.

We've talked about that a number of times it's a concern to her but she doesn't want to have anything to do with it she doesn't even want to know where all the files are... I may just have to email her everything once a year.

My other thought is I have a brother in the business, I may just email him everything and let him take care of it.

Why do you say that? Is it because when you sell you prepare the home differently than when you rent it? It seems like you went the path of least resistance selling it to investors and leaving a bit on the table.

 

[pacergal]

great job.
The house looks really nice.

 

[Finance Dave]

Any reason why you were thinking to sell at 63 and not hang on to them and let a handyman do all the work?

If we knew how the market would be over the last 10 years it would have been wise to buy and finance more homes but I didn't have that crystal ball. We bought a lot of our properties +/- 10 years when prices were low, if we would have financed them we could have bought 3-4 times as many and if we unloaded them today we would be set.

In all likelyhood if my thought-process was to unload during a better market I would have sold them when they were up 10-20% We are in it for the cashflow and our plan was to go slow and steady and not have much risk and leave plenty on the table, it looks like we had the same strategy.

Yes! A few reasons: 1) Most handyman work I see is shoddy! Remember, I was a licensed home inspector for years, and inspected over 1,500 homes. I see the work people do. 2) I don't want to even have to manage the handyman...making calls, scheduling, etc. 3) That still would not accomplish my goal of my wife not wanting to unwind the business when I pass

You sure are right about the crystal ball...if we knew 10 years ago how hot this market would be, I would have borrowed every cent I could to buy more...but alas we never know...and I like to sleep at night not worrying about a cave-in of the market.

 

[Finance Dave]

Why do you say that? Is it because when you sell you prepare the home differently than when you rent it? It seems like you went the path of least resistance selling it to investors and leaving a bit on the table.

Let me see if I can find a post I made on another forum and copy/paste it here...

 

[Finance Dave]

Let me see if I can find a post I made on another forum and copy/paste it here...

I wrote this on a different forum...may not totally apply here. I've been working on liquidating ours for the past year...about 80% done.


******************************
Let's say you have 5 properties and you decide to liquidate the entire portfolio.

What steps must you take?

1) Give notice to all tenants. You probably don't want to do all 5 at the same time, as you'll be overwhelmed with work all at once. So let's say you spread them out by a month each.

2) You notify tenant #1 via certified mail (requires drafing a letter and taking it to the post office) that they must be out in xx days. They will probably have questions, not want to move, or even maybe require eviction. This will take time to manage.

3) About 30-45 days later, tenant #1 moves out. At the same time you are submitting a certified letter to tenant #2 to move out. You again have to do the same with certified mail etc. You go to the vacant house of tenant #1 and change the locks. You have to call all three utilities to have them transferred into your companies name...this takes 30 minutes or so. You enter the house and have to do a full inspection of the house and document any damages. Lo and behold, the tenant has left some personal belongings in the house. By state law, you may be required to store these for 30 days...isn't that wonderful!

4) As you are dealing with storing the items, you are inspecting the house and find 8 things that need repaired before you can list the house properly. Drywall repairs, a leaky faucet, stains on the carpet, etc...you are calling contractors to fix all these items and arranging for them to do the work. But how do they get in the house? Ah, you must put a lockbox on the door for them...another step but easy.

5) Finally you get all the contractors lined up to do the work, and the utilities are turned back on in your name. You walk outside and notice the grass is getting long...now you have to contact a grass cutting service...that takes 15 minutes.

6) For the next few weeks, you have to go to the house to make sure the work is progressing as planned and that there are no more issues that arise. Just about the time that house is ready, tenant #2 has refused to move out...they say they can't find a new place...so you have to go to the courthouse to start the eviction process...oh joy!

7) By now you're writing the certified letter to tenant #3 to get them out. Tenant #2 wants to talk, as they want to pay you one more month's rent and stay there...but you say no...so answering a few emails it becomes tense.

8) You have to call the realtor to do a walk-through on house #1 in order to list it for sale in the MLS. There are forms you must fill out, such as the disclosure statement, lead based paint, agency agreements, and so on. The realtor wants to put their own lockbox on the house so their agents can get in...you agree.

9) House #1 goes on the market and you start receiving emails of the showings that are upcoming. You want to make sure the house is comfortable for the prospects, so you go over to turn the AC down and make sure it's all spiffy and swept. Maybe you should ask your agent to do this in the future?

10) Six days later you get an offer, so you have to read the entire offer and make sure it's reasonable before responding. What kind of financing are they going for? If it's VA or FHA, you'll have to make sure there is no peeling paint anywhere on the house or any broken glass...things that will automatically NIX an FHA/VA loan. What about the other terms...do they say this is contingent on selling their current house? Do they say there is max interest rate they are willing to take from the bank and if it's above that rate they can cancel the purchase? Is the house in a flood zone? After looking it all over, you agree to the terms and accept the offer!

11) Six days later you get a call from your agent. Evidently the buyer of house #1 had an inspection, and it turned up some defects they want fixed. You'll spend some time sorting that out and deciding whether to fix etc.

12) Now house #2 issue is heating up, court dates are set, and you have to make copies of the lease and some communications to give to the attorney for the court filings. Ugh.

13) By now you're into arranging for house #4 certified mail, and the other houses are in various stages of needs.

14) 40 days later house #1 finally closes and you get the funds...yay! You take the closing docs home and file them for tax purposes, and spend some time documenting everything

15) By now you have to send the security deposit settlement form to tenant #1, so that takes time to prepare, and you have to write them a check.

This cycle will continue until all 5 houses are sold and the money is in the bank...which likely will take about a year. Even then, you'll be dealing with taxation documents with your CPA.

Now some people might say just sell all 5 at once. That's fine, you can certainly do that...but then you're going to be like a cat in a room full of rocking chairs trying to figure out which house needs what attention at this time, and you'll be dealing with 5 sets of tenant issues...not much easier if you ask me. The pain will be 5x worse, but at least it will be over in 3 months or so.

 

[kgtest]

Similar situation. We unloaded 3 properties in the portfolio (family business) in the past month. We also achieved similar numbers. I calculated annual ROI of 8.5% including depreciation recapture + capital gains - expenses + tax benefits over the years.

There is probably some hidden ROI that I can't account for with being able to keep $ in the market the entire 12 years.

We bought into the market September 30th. Was it the absolute bottom, maybe not...are we close to timing the bottom...time will tell.

Either way, we sold our properties at the top of the market as interest rates are rising, getting top dollar setting records vs comparable properties in the markets we sold.

Then, we bought low into the market (perhaps we go lower)...but are already reaping the dividend rewards. I don't know if we got lucky, timed the market, or a little of both but I feel pretty good about what we just accomplished (Dad, sis and I). We do a really good job of keeping the business and interests in our family.

I won't miss the time and energy it took to maintain these properties. DF is in his 70s and although he passed the torch to my sister and I, we will be happy to collect dividends in the markets vs expending time and energy on screening tenants. collecting rent, fixing small repairs etc. We have 2 more properties but we are holding those for now as appreciation is solid, cash flow was better than the 3 we sold, and quite frankly we don't need to sell.

We may take our gains (once mr market pops again) and re-invest in other property...but the thought of just collecting those divvies and clickity clicking as we reinvest dividends is really appealing vs the hassle of all the paperwork and time it takes to run a multi-unit rental business.

Congrats to OP...We both made the right move IMHO.

 

[kgtest]

How old are you Dave? We are in a similar situation but my wife doesn't want to sell since the income is so good, in a market like this I wouldn't mind getting rid of them but that income is our bridge to 65+.

I manage the properties myself but I don't do the repairs. Much like you we paid cash even though financially it may have been "smarter" to finance them and invest the rest.

Assuming the markets recover, you can "replace" the cash flow from rental income with cash flow from dividends and market returns. A little less in terms of tax breaks on the equities, but also likely higher returns if you are invested wisely.

in our case we just unloaded roughly 850k (net income) worth of RE this past month. If we get a 10% pop in the market next year that's 85K of extra dough that will begin to compound into more dividends as well. Rents on these 3 properties were only $66k and we had some mortgages to service, HOA dues, annual expenses etc.

Maybe it turns out to only be an extra 1.5% annually, maybe we made a losing bet; only time will tell.

This is one of those examples where we did NOT stay the course. We are now heavy/overweight in equities and lost some hedging against bear market returns... but our earning power has continued and should continue to climb which is also a hedge against bear market returns as we can continue to buy low if needed.

Had to evict 2 people this past year. I never need to evict my AAPL equities.

 

[Super Trooper]

I wrote this on a different forum...may not totally apply here. I've been working on liquidating ours for the past year...about 80% done.


******************************
Let's say you have 5 properties and you decide to liquidate the entire portfolio.

What steps must you take?

1) Give notice to all tenants. You probably don't want to do all 5 at the same time, as you'll be overwhelmed with work all at once. So let's say you spread them out by a month each.

2) You notify tenant #1 via certified mail (requires drafing a letter and taking it to the post office) that they must be out in xx days. They will probably have questions, not want to move, or even maybe require eviction. This will take time to manage.

3) About 30-45 days later, tenant #1 moves out. At the same time you are submitting a certified letter to tenant #2 to move out. You again have to do the same with certified mail etc. You go to the vacant house of tenant #1 and change the locks. You have to call all three utilities to have them transferred into your companies name...this takes 30 minutes or so. You enter the house and have to do a full inspection of the house and document any damages. Lo and behold, the tenant has left some personal belongings in the house. By state law, you may be required to store these for 30 days...isn't that wonderful!

4) As you are dealing with storing the items, you are inspecting the house and find 8 things that need repaired before you can list the house properly. Drywall repairs, a leaky faucet, stains on the carpet, etc...you are calling contractors to fix all these items and arranging for them to do the work. But how do they get in the house? Ah, you must put a lockbox on the door for them...another step but easy.

5) Finally you get all the contractors lined up to do the work, and the utilities are turned back on in your name. You walk outside and notice the grass is getting long...now you have to contact a grass cutting service...that takes 15 minutes.

6) For the next few weeks, you have to go to the house to make sure the work is progressing as planned and that there are no more issues that arise. Just about the time that house is ready, tenant #2 has refused to move out...they say they can't find a new place...so you have to go to the courthouse to start the eviction process...oh joy!

7) By now you're writing the certified letter to tenant #3 to get them out. Tenant #2 wants to talk, as they want to pay you one more month's rent and stay there...but you say no...so answering a few emails it becomes tense.

8) You have to call the realtor to do a walk-through on house #1 in order to list it for sale in the MLS. There are forms you must fill out, such as the disclosure statement, lead based paint, agency agreements, and so on. The realtor wants to put their own lockbox on the house so their agents can get in...you agree.

9) House #1 goes on the market and you start receiving emails of the showings that are upcoming. You want to make sure the house is comfortable for the prospects, so you go over to turn the AC down and make sure it's all spiffy and swept. Maybe you should ask your agent to do this in the future?

10) Six days later you get an offer, so you have to read the entire offer and make sure it's reasonable before responding. What kind of financing are they going for? If it's VA or FHA, you'll have to make sure there is no peeling paint anywhere on the house or any broken glass...things that will automatically NIX an FHA/VA loan. What about the other terms...do they say this is contingent on selling their current house? Do they say there is max interest rate they are willing to take from the bank and if it's above that rate they can cancel the purchase? Is the house in a flood zone? After looking it all over, you agree to the terms and accept the offer!

11) Six days later you get a call from your agent. Evidently the buyer of house #1 had an inspection, and it turned up some defects they want fixed. You'll spend some time sorting that out and deciding whether to fix etc.

12) Now house #2 issue is heating up, court dates are set, and you have to make copies of the lease and some communications to give to the attorney for the court filings. Ugh.

13) By now you're into arranging for house #4 certified mail, and the other houses are in various stages of needs.

14) 40 days later house #1 finally closes and you get the funds...yay! You take the closing docs home and file them for tax purposes, and spend some time documenting everything

15) By now you have to send the security deposit settlement form to tenant #1, so that takes time to prepare, and you have to write them a check.

This cycle will continue until all 5 houses are sold and the money is in the bank...which likely will take about a year. Even then, you'll be dealing with taxation documents with your CPA.

Now some people might say just sell all 5 at once. That's fine, you can certainly do that...but then you're going to be like a cat in a room full of rocking chairs trying to figure out which house needs what attention at this time, and you'll be dealing with 5 sets of tenant issues...not much easier if you ask me. The pain will be 5x worse, but at least it will be over in 3 months or so.

Interesting thought process and I don't disagree.

My plan/theory is when that time comes have an 18 month window and have a good number of tenants on a month to month - give notice 30-45 days later walk the home with a handyman/contractor and let them do their thing. Maybe sell to an investor if they take more than one but likely go full "retail" and take what the market will give me.

Market "timing" is everything and that's hard to plan.

 

[Super Trooper]

Assuming the markets recover, you can "replace" the cash flow from rental income with cash flow from dividends and market returns. A little less in terms of tax breaks on the equities, but also likely higher returns if you are invested wisely.

in our case we just unloaded roughly 850k (net income) worth of RE this past month. If we get a 10% pop in the market next year that's 85K of extra dough that will begin to compound into more dividends as well. Rents on these 3 properties were only $66k and we had some mortgages to service, HOA dues, annual expenses etc.

Maybe it turns out to only be an extra 1.5% annually, maybe we made a losing bet; only time will tell.

This is one of those examples where we did NOT stay the course. We are now heavy/overweight in equities and lost some hedging against bear market returns... but our earning power has continued and should continue to climb which is also a hedge against bear market returns as we can continue to buy low if needed.

Had to evict 2 people this past year. I never need to evict my AAPL equities.

That's so hard for me to wrap my head around, I don't know the markets or dividends nearly as well as I know real estate.

I have a feeling if I needed to evict a few tenants the market would look a little more tempting (just not this year).

 

[retire to nature]

Ok, I'll provide a little more info here...have to get into the weeds a bit.

The two we sold to an investor were left in poor shape by the tenants. These would have been hard to sell to a retail buyer due to the condition. Most of it was appearance items...things like:

1) dogs scratching a 4' diameter hole completely through the vinyl sheet flooring so the subfloor was visible

2) 84 drywall damaged areas (I put post-it notes on all damaged areas, take photos of each wall with the post it notes there for court hearings...things like fist holes from fights, candle wax dripped on the walls, and places where they hung items with those "removable" hangers but they don't read the directions on how to safely remove them so they tear the paint off the wall)

3) Paint damage such that walls/rooms needed completely repainted, grease stains on kitchen ceilings, etc.

4) 9 electrical boxes (old work) pulled out of the walls, must have been done on purpose

5) Acoustical foam attached to walls with two-sided tape as the guy used one bedroom as his "music studio" since he plays guitar in a band...didn't remove the foam when he left

6) Nearly every mini blind in the house was damaged beyond repair

and so on.

Ok...so that was the starting point when they moved out. Remember that I'm a handyman, so I would be doing most of the repairs/paint myself. That's fine, I don't mind doing it...but I injured my knee and was on crutches. Having knee surgery soon...so I can't do the work for awhile...would have to hire contractors or leave the house sit and pay utilities, property taxes, etc. Called a few paint contractors, they are either backed up for months or want $3,000 to paint the house...no way.

My realtor knew a guy who is buying rental houses. He has a dedicated crew that does all that type of work. He will buy "as is", cash (no chance for financing to fall through), no inspections, and we closed in 6 days on one house and 9 days on the other. Money is in the bank earning interest and all the issues are GONE!

So yes, I could have got more had I fixed them up...which is what happened on the one house we sold for $166k...it was beautiful when I finished it...I'll post a few photos of it....but that was before I injured my knee.

I'm hoping my upcoming knee surgery heals by about early December, then we can give a non-renew notice on our last rental and I can start working on that house myself in about Jan/Feb timeframe, and get it sold by April or so...I've been in the house so I know it will need a fair amount of work...tenants have been in there 6 years.

Hope that helps explain...there is always more to the story!

I asked a tenant(contracted with my sister, and I got the house later) to move out because I didnt like their attitude. They lived there 7year. They left the house worse than yours, but I took all as usual tear, but didnt return $1200 deposit. I am doing all my handyman job too. I had to repaint the whole house including grease kitchen ceiling too. I didn't know or I didnt want to bother myself to going to the court. My first tenant left the house mess including not paid rent too. I went to the court and won the case, but it is still not paid.

 

[48Fire]

I appreciate all of the posts. My Mom and Dad, 85 and 87 years old, have two duplexes and a single family that my Dad insists on keeping to avoid Capital Gains taxes. I am the Executor, so I will deal with the sales after he is gone. Mom won't want to keep them and deal with them.

 

[pb4uski]

If you get a full or 50% stepped up basis on the property what happens to depreciation recapture? Do you end up avoiding it?

 

[Letj]

If you get a full or 50% stepped up basis on the property what happens to depreciation recapture? Do you end up avoiding it?

Yes. That’s the beauty of real estate.

 

[Mr. Tightwad]

Yes. That’s the beauty of real estate.

One of the many beauties.

Some landlords have nothing but problems.

Others make/made buckets of $ with little hassle.

I'm in the second group.

 

[NW-Bound]

Oh man! I am a handyman and do most of the maintenance on my 2 homes, but it is getting harder each year.

No way I can maintain rental units. Not when I was 30, and certainly not now. Of course, just paying for it to be done is easy, but cuts into your gain.

However, for people who do not mind doing this, I am sure they can get a decent return.