What would you do?

[WhiskyDave]

Nice to find like minded people on this forum ...After giving out FI advice for the last 10 or so years, I'd love some feedback from the board on my situation, as I'm sure there are things I may not be thinking of.

51 Years old---want to retire next year...will live 1/2 year in US and 1/2 in South America

1. 550K currently in 401k & 60k liquid/cash ( the rest went to ex spouse)

2. House situation: (3)
a. Rental---value 500k--owe 160k---on 15y will pay off in 8-9 years. Rental Income is $2300 (note 1.9K)
b. Vacation Cabin also full time rental value 300k...owe 50k... 15y note with RI is$1400 (note $0.8k)
c. Primary residence...value 700k...owe 375k & (80k 2nd for my boat purchase) on 30y note (future rent would cover all note+ $400)

Currently plan is to sell (b), invest the 200k equity in an index fund...Live off that for 7 years until I collect 401k at 59.5 or Rental income from (a), qualify for ACA in year 2 until Medicare.


Will rent other (2) houses as I will live on my boat stateside and will only need about 1800 a month to live comfortably on boat or in South America.

Lately, been thinking about selling maybe (2) houses now and investing the proceeds, but also living in a very good housing market in Seattle with appreciation...Not sure I'm thinking about everything?, future tax implications? and capital gains and future tax brackets when I pay off rental with no deductions

What would you do?? sell 1, 2 or 3? and invest...I do like keeping 1 house for investment diversity and security?.


Appreciate any feedback---Cheers

 

[pb4uski]

So if you sell the vacation home and are renting the primary home and rental and there is a manitenance issue while you are in South America, who is going to handle it?

It seems like if you sold your primary residence you would net $245k tax free and that would provide more than the net $400/month that it would provide if rented and no worries about any maintenance issues... and your boat would be paid off. Ditto with the rental.

Plus, since your income will be negligible you will be in a low tax bracket so it is a no-brainer to do a 72t/SEPP and start draining the 401k at a low tax cost.... just because you withdraw it doesn't mean that you have to spend it but it wil provide some taxable account money so you'll have more flexibility.

You might want to think about establishing residency in a no income tax state first and then live on the boat and in South America.

KISS.

 

[jw72]

My advice,
Work hard to pay off the rental 160K and Cabin 50K before pulling the plug. Sell the primary house travel and rent the boat for year or two before you spend the 80k.
Down the road, make the rentals primary for 2 years and the gain is tax free.

 

[38Chevy454]

I agree with pb4uski, how do you plan to cover the maintenance issues on the houses when you are very long distance away? None of your rentals are significantly cash flow positive, so any lost rent income due to tenant changeover and you are barely breaking even. Throw in some expensive maintenance like HVAC, roof, or similar and you are now negative and taking your cash to cover. You can get approx $800K cash out of selling all three houses, less some depreciation recapture and cap gains tax one time hit. Not knowing your tax situation, call it $600K net to invest (25% reduction from $800K). If you use the 4% rule, 4% x ($600K houses + $600K existing 401k) = $48K per year, or $4K per month. Or to make it a little safer and have some cash cushion, make it 4% x $1M = $40K per year and have $200K cushion.

I would sell all of the houses, use the proceeds to invest and live off the income. I like pb's idea to do the 72t. Since WA is a no income tax state, you are good for that as residency.

 

[OldShooter]

* I would ditch all the real estate. It is a risky concentration of assets and the essence of being retired is not not be working. Managing rentals is work in the best case when you are nearby, much worse when you are thousands of miles away.

* I would rejoice in my luck at having appreciated Seattle real estate. If possible, ditch it in a tax-efficient way but do not let the tax tail wag the investment strategy dog.

* Re $200K in equities to sustain for 7 years, that is far too short an investment horizon for a 100% equity portfolio. Read up on "sequence of returns" risk. @pb4 can tell you how to invest your $200K; he is an expert at managing short-term money.

 

[WhiskyDave]

So if you sell the vacation home and are renting the primary home and rental and there is a manitenance issue while you are in South America, who is going to handle it?


Plus, since your income will be negligible you will be in a low tax bracket so it is a no-brainer to do a 72t/SEPP and start draining the 401k at a low tax cost.... just because you withdraw it doesn't mean that you have to spend it but it wil provide some taxable account money so you'll have more flexibility.

You might want to think about establishing residency in a no income tax state first and then live on the boat and in South America.

KISS.

Thanks for all the replies...The 72t/SEPP is a great idea that could really help bridge the gap until 59.5 or SS.

I have been a landlord for 18 years, so maintenance costs and issues are something I have dealt with and not too concerned about--but certainly need to included in the overall conversation

 

[WhiskyDave]

* I would ditch all the real estate. It is a risky concentration of assets and the essence of being retired is not not be working. Managing rentals is work in the best case when you are nearby, much worse when you are thousands of miles away.

* I would rejoice in my luck at having appreciated Seattle real estate. If possible, ditch it in a tax-efficient way but do not let the tax tail wag the investment strategy dog.

* Re $200K in equities to sustain for 7 years, that is far too short an investment horizon for a 100% equity portfolio. Read up on "sequence of returns" risk. @pb4 can tell you how to invest your $200K; he is an expert at managing short-term money.

Thanks OS..
I'm reluctant to sell them all as the appreciation in the NW has been unbelievable...My primary has increased 200k in just 2 years...It is hard to walk away from that type of appreciation which may or may not continue, but does not seem to be slowing down given job growth and housing starts here. I'm not really concerned about the monthly cash flow but more about future appreciation I could walking away from, even in the short term.


200k spend without even any AGR, would be approximately $2400 per month for the 84 months...That's without even investing. Seems like that would be enough based on my reduced living costs?

I may now also supplement with the t72/SEPP that PB4 wisely suggested.

I do appreciate everyone responding and I know you can look at it so many ways regarding RE.

 

[OldShooter]

... I'm reluctant to sell them all as the appreciation in the NW has been unbelievable...My primary has increased 200k in just 2 years...It is hard to walk away from that type of appreciation which may or may not continue, but does not seem to be slowing down given job growth and housing starts here. I'm not really concerned about the monthly cash flow but more about future appreciation I could walking away from, even in the short term.

Yup. But I think you'd agree that the historical appreciation is unlikely to continue at a similar rate. It's a classic risk/reward decision. Concentrate in a high risk/high reward asset and you probably either win big or lose big. William Bernstein has a good comment on retirement asset management: “Make no mistake about it: The object of this particular game is not to get rich – It’s to not get poor.”

Re rental management hassle, you get to decide. I owned and managed small residential properties from about 1972 through about 1996. The idea of doing that work now, even without your distance factor, is not something that I would even consider. YMMV.

... 200k spend without even any AGR, would be approximately $2400 per month for the 84 months...That's without even investing. Seems like that would be enough based on my reduced living costs? ...

Yes. I don't think you need that 8% given your stated numbers. The SORR risk is that your $200K turns into $120K the day after you start drawing, then you must sell stocks to put bread on the table, and that money is no longer in the portfolio to grow again when the bump in the road has passed. You have locked in your losses. I teach an Adult-Ed investing class and I tell them that investing starts with a minimum five year horizon. Anything supporting more near-in needs should not be in stocks. Again, YMMV.

 

[Sunset]

....
Lately, been thinking about selling maybe (2) houses now and investing the proceeds, but also living in a very good housing market in Seattle with appreciation...Not sure I'm thinking about everything?, future tax implications? and capital gains and future tax brackets when I pay off rental with no deductions

...

I'm zeroing in on this statement: with no deductions

Are you saying you are not taking depreciation on the rentals right now ?

 

[Arizona1]

If your going to be out of the country rentals will be a hassle. If you sell staggered to avoid capital gains you can stay there when in USA for a few years. I sold all my rentals before retiring so my life wouldn’t be controlled by it. It has been very liberating not to own anything. Profit is nice but total freedom is fantastic.

 

[WhiskyDave]

If your going to be out of the country rentals will be a hassle. If you sell staggered to avoid capital gains you can stay there when in USA for a few years. I sold all my rentals before retiring so my life wouldn’t be controlled by it. It has been very liberating not to own anything. Profit is nice but total freedom is fantastic.

Good feedback...Its is best to sell my Primary while working before retiring?.

Would it make most sense to sell them together in the same tax year or stagger them?

I suppose I could sell primary soon before retirement and then sell the cabin/vacation home rental, which has only been a rental for 1 of the past 4 years...I could move back in and sell that also as primary residence and avoid capital gain?

 

[38Chevy454]

Good feedback...Its is best to sell my Primary while working before retiring?.

Would it make most sense to sell them together in the same tax year or stagger them?

I suppose I could sell primary soon before retirement and then sell the cabin/vacation home rental, which has only been a rental for 1 of the past 4 years...I could move back in and sell that also as primary residence and avoid capital gain?

Tax rules require that you lived in home for 2 of past 5 years in order to qualify for the house sale tax exemption. You still need to factor in any depreciation you took.
Also the tax exemption for single person is half of married couples. I think it's $250k for single. So you may still get hit with some capital gains after first primary home sale. Good thing is capital gains are taxed at lower rates than income, 15% for capital gains.

 

[lordjust]

Good feedback...Its is best to sell my Primary while working before retiring?.

Would it make most sense to sell them together in the same tax year or stagger them?

I suppose I could sell primary soon before retirement and then sell the cabin/vacation home rental, which has only been a rental for 1 of the past 4 years...I could move back in and sell that also as primary residence and avoid capital gain?

Hope you looked at recapturing depreciation. It’s a fun one!!