Selling rental units

[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]

Quote:

Originally Posted by Super Trooper 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]

Quote:

Originally Posted by Finance Dave 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]

Quote:

Originally Posted by kgtest 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]

Quote:

Originally Posted by Finance Dave 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]

Quote:

Originally Posted by 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?

Yes. That’s the beauty of real estate.

[Mr. Tightwad]

Quote:

Originally Posted by Letj 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.

[48Fire]

Quote:

Originally Posted by 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?

That's a great question, and something I don't plan on looking at too much to be honest. My mom and dad have a tax accountant who's been doing their taxes for years. My plan is to hand over everything to the tax accountant, and have her sort out all the details.

I started having some discussions with my dad on issues like this several years ago, and he seemed willing to discuss various strategies and selling. But, for a variety of reasons, he has dug in his heels, and plans to never sell. If he dies first, then mom gets the 50% stepped up basis, and I think it is likely she sells, unless she can hand the keys to a management company and manages them somewhat passively.

Whatever scenario, I am not looking forward to it. As a side note, I bought 1/4 of one of the properties 46 years ago when I was 16 with $2,000 from my lawn mowing I sold out 6 years later at $8,000, and used the money for a down payment on our first house. Bought 7 rental units after that, and learned that landlording was not for us

[48Fire]

Quote:

Originally Posted by Finance Dave 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.

Thanks again for the details. When I liquidate my mom and dad's rental properties, I assumed I would just sell as-is, including keeping the existing tenants. Just wondering - you took the approach of removing tenants, fixing up the properties, etc. Was there a reason why you did this, like advice from a rental expert that thought the value would increase if you cleaned up and cleared out? I am interested in the least painful process

[48Fire]

Quote:

Originally Posted by 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.

Definitely one of the reasons we bailed on our 7 units. We were 26 when we bought our first two units, 28 when we bought our next two units, and 30 when we bought our last three units.

In parallel with that, I was getting more and more responsibility at my job. It was too much mental distraction and time away from my home.

My wife stepped in, but the tenant issues became a safety concern. One tenants boyfriend murdered someone, a suspected suicide, and a prostitute. Just too much compared to the minimal ROI We sold out around age 34 when the 401k and a solid job were much easier to manage.

[jkern]

Quote:

Originally Posted by SheitlQueen I sold both of my rental condos in January. They made me a decent return but the state and local governments kept passing more and more land lord oppressive laws so I decided to bail and sell them. Plus I managed them myself and wanted to free up my time to travel. Turned out to be a great decision. Even after the taxes/depreciation I will have to pay, I'm coming out nicely. Best decision ever.

I have 3 rental Condos in California. I feel like I'm one bad Assembly Bill away from quitting. Virtually every law passed forces additional risk and liability without compensation. Everyone screams about a housing shortage yet every policy reduces supply.

[Super Trooper]

Quote:

Originally Posted by Mr. Tightwad 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.

Yeah I'd consider myself in the second group also, while I wouldn't say it's easy I certainly exert more effort earning money in other ways. We've been doing this for 20 years (?) and have a decent number of units it's a lot easier today than it was 20 years ago and a bit more profitable. I've never had to evict anyone, I've never been sued and in the last decade or so I've never had to ask for rent (I have sent a text or two). Most tenants leave the place decent and I'll spend $300-500 to have it ready for rent again and in the last 5 years I raise the rent when the tenant vacates.

[Letj]

Quote:

Originally Posted by Mr. Tightwad 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.

Me too! For me it was because we bought low and did a lot of the small maintenance job (not roof, HVAC).

[Letj]

Quote:

Originally Posted by 48Fire Thanks again for the details. When I liquidate my mom and dad's rental properties, I assumed I would just sell as-is, including keeping the existing tenants. Just wondering - you took the approach of removing tenants, fixing up the properties, etc. Was there a reason why you did this, like advice from a rental expert that thought the value would increase if you cleaned up and cleared out? I am interested in the least painful process [emoji23]

I sold over two dozen houses in the last couple of years as they became vacant due to turnover. The price differential is really really substantial when you renovate and sell so it’s worth it. You don’t have to evict tenants; just do not renew their leases. Most would leave on their own accord. If you don’t fix and flip, you are really just targeting investors who are looking for a deal/major discount. Home owner occupants turn up their noses and won’t generally be interested (the HGTV effect), at least in my market. I renovated and sold 6 at a substantial profit but sold the others as is to investors. I did the design and project management myself and 6 was enough for me to handle.

[captain3d]

My remote, property managed rentals have been hands off, except email decisions, for 14 years.

If I managed them myself I would expect to pay myself for this work. I do not want that job. I do not see self managing and maintaining the rentals as generating extra ‘rental’ returns. It is simply a component of the business that some one is paid to do. The rental return is after all expenses including the pay that goes to whom ever is doing the management and maintenance.

If you do it yourself then your pay is mixed with the net rent $. But clearly doing work for money is separate than the passive income part.

Even being ‘hands off’ requires accounting and thinking time on my side which is a paid job in the same sense. That has been well worth it so far.

I did sell some earlier this year as prices rocketed. Cashed out a few years living expenses that should be tax free given other tax loss harvesting and 1031 the rest into a cheaper area.

I am concerned with an almost certain house price decline (already started) and have hedged with some counter investments like ETF DRV (Direxion Daily Real Estate Bear 3x)

We will see. Good luck all property people.