FIRE and Rentals

[livingalmostlarge]

I'm sure many used rental properties to FIRE, so I was wondering did you keep your rentals after FIRE? Or did you sell and just chill with investments? Or did anyone do the opposite retire and start buying rental properties? If you FIRE with rentals did you mortgage all and keep the rent covering them?

Trying to decide if I'm too late to get into rentals. I always wanted to and never did. But I'm not sure it's the smart move to invest in rentals (effort).

DH already said he didn't want to (no time). This would be my pet project.

 

[freedomatlast]

I've had mine for over 35 years and no plans to sell yet. Although the depreciation deduction and the mortgage are long gone, I have great tenants and good cash flow so I'm keeping them for now.

With that said, I'm not planning on adding any more to the portfolio in retirement.

One of my friends sold his rentals shortly after RE which I really didn't understand because after RE I now have more time to deal with the issues that come up from time to time.

His reason for selling was that he and his wife wanted to do a lot of travelling and he didn't want to have to deal with rental issues while being out of town for extended periods of time. Also with the currently hot real estate market, he got offers he couldn't refuse.

 

[kyzymurgist]

I retired 9 years ago at 56 and purchased my first rental within a year - a duplex. Th j a townhouse the next year.

Kept looking for more but prices kept increasing and I got older. Don't plan to buy any more but also not selling

 

[Winemaker]

I have kept my 2 multi units, I had a SFH, but it was too much work. Trimming bushes, cutting grass, and other yardwork was too much. My multis don't require that much manicuring.

 

[rantk81]

I was a landlord in the past. I was fortunate to never have extremely problematic tenants. Even still, it was enough of a head ache (since I self-managed two rentals), that I would not want to deal with it in FIRE. Especially now, since the real estate market is red-hot in most areas, it seems like it would be an ideal time for someone to "get out now"

 

[calmloki]

We had planned to get out of our rentals gradually back in 2009 or so. oops - housing crash. Held on and kept landlording and it became more onerous. Now, at 72, we still have a triplex and a 16-unit. Money keeps rolling in and we have someone taking care of them mostly, but we aren't free. Any heirs will appreciate our efforts.

 

[HawkeyeNFO]

I've had mine for over 35 years and no plans to sell yet. Although the depreciation deduction and the mortgage are long gone, I have great tenants and good cash flow so I'm keeping them for now.

One more reason not to sell: Depreciation recapture (tax). Uncle Sam wants his money.

 

[l8_apex]

To the OP - if you haven't ever been a landlord before you need to either be prepared to pay somebody for maintenance, or you need to have the ability and desire to do it yourself. Don't underestimate the potential headaches you may be getting into.

I bought 6 rentals then ER'd. I'm not going to sell them as there is a significant cost and I don't see any place where I'd get the same kind of ROI with the cash I'd be trying to reinvest.

Prices for any real estate are so high now that I would be very reluctant to purchase anything.

 

[Sunset]

OP - don't do it.

If I knew then what I know now, I would have not gotten into it.
At first it seems great, the depreciation while working is terrific but it's a sneaky bad thing.

Now retired, and if I sell, I have to sell the entire building at 1 shot, paying tax on my increase in value + all that depreciation I was FORCED to take.

If I had just bought stocks instead, I could dribble out the selling, spreading the taxation over many years, not jumping into a new tax bracket.

The other issue is while everyone wants to be careful, it's a matter of luck as to the quality of tenants, the turnover, the neighbors, the neighborhood, crime rate change, the local gov't taxation, storms, etc...
All these things affect how well a landlord will do, and they can't really be controlled.

As for travel, I've been lucky, when on a trip nothing big has happened, but imagine the stress when on a cruise or in Europe and you get an email/text/phone call that some emergency has happened that needs to be fixed today. (broken pipe, plugged sewer, roof leaking in rain, smashed window by vandals, etc).

 

[youbet]

after RE I now have more time to deal with the issues that come up from time to time.

There's something about "after RE I now have more time" and "to deal with the issues" that don't seem to go together. Not quite an oxymoron, but along those lines.

 

[OldShooter]

... Trying to decide if I'm too late to get into rentals. I always wanted to and never did. But I'm not sure it's the smart move to invest in rentals (effort). ...

I had small residential properties for 25 years. From that background I see some red flags:

1) You learn about rentals through OJT. The toilet clogs at 11PM you get the call, for example. Late rent? You get to contact the tenant(s) and wheedle them into paying. With a few units this may not be a huge problem but the fact that you have no experience virtually guarantees you will be optimistic about the workload. Thinking about just hiring a manager? There goes most or all of your cash flow.

2) We're now at the age when we have realized that we are mortal. What happens to the rentals when (not if) you die? DH doesn't want this burden. If you both die, your executor has the burden in spades. In either case the properties will probably be sold at fire-sale prices, eating into your gains.

3) In many places, larger cities at least, the attitude towards landlords has become quite negative. Lots of new rules on what tenant screening criteria can and can not be used. Rules on nonpayment, evictions, eviction moratoriums, picky maintenance details, etc. seem to be proliferating. Even rent control in some places.

I was always on pretty good terms with my tenants. In this new adversarial age I'm not sure that is possible any more.

You could get lucky,though! Buy a duplex, luck into long-term regular-paying tenants, have no major maintenance issues, ... That would be the dream.

 

[pjigar]

I have kept my 2 multi units, I had a SFH, but it was too much work. Trimming bushes, cutting grass, and other yardwork was too much. My multis don't require that much manicuring.

It is customary for tenants to do the yard maintenance here in Dallas, Texas.

 

[pjigar]

There is money to be made from rental but I call it a sweat equity. You need the right skill set and the right mindset to make money in rentals. If you outsource management and/or repairs then you may not see a dime in your hand. Other standard disclaimer applies: location, tenant quality, price, etc.


Having said that, I have a few SFH rentals and I am slowly divesting from rentals before FIRE. I wouldn't want to buy a rental when I FIRE. YMMV.

 

[ScoopKona]

I'm sure many used rental properties to FIRE, so I was wondering did you keep your rentals after FIRE? Or did you sell and just chill with investments? Or did anyone do the opposite retire and start buying rental properties? If you FIRE with rentals did you mortgage all and keep the rent covering them?

Trying to decide if I'm too late to get into rentals. I always wanted to and never did. But I'm not sure it's the smart move to invest in rentals (effort).

DH already said he didn't want to (no time). This would be my pet project.

This is how we generated wealth. I could write a book on this.

We are in the process of selling our rentals and using the money to fund our farm in Hawaii. Basically, we're trading houses -- sell one in Las Vegas, build one or two in Hawaii on the farm.

We can't sell them all at once because of capital gains concerns. We'll only be able to 1031 one or two of them. So we need to 1031 wisely.

I think we are in a housing bubble. So if you're going to jump in, I'd wait -- you can get more house for the money, and perhaps more houses. You will also do much better with appreciation. We bought a the bottom of the last bubble crash in 2010 and 2011. (Luck more than anything.) Now all our properties are worth four times what we paid for them, and we've received 10 years of rent from each.

That's the good.

Here's the bad.

Being a landlord means cleaning up after other people's filth, correcting other people's mistakes, and having to deal with other people's bad financial decisions.

Even in our "stable" rental property -- one family lived there 10 years and paid on time -- the house was a mess and the carpet was a super-fund cleanup project when they left.

I had one tenant go off the deep end with drugs during the pandemic, and absolutely trash a house -- four of the big dumpsters, filled with garbage. Hauled out by yours truly. It took forever to evict her (and her druggie squatter "friends") because pandemic.

I had one tenant with a demon-spawn child, who flushed Barbie dolls down the toilet, broke the toilet (second-floor). Then the entire family went away for the day with a broken, running toilet. They returned to a flooded house. (Insurance claim meant basically a new house.)

And there is always an appliance that needs to be replaced. A GFCI circuit that needs to be replaced. Plumbing issues. (You will lose sleep over plumbing issues.) Tenants who find themselves in a family emergency and stop paying rent. And then property taxes, sewer and trash bills for each property. And having to save every receipt for tax time.

And every time you turn the property over, plan on new paint and carpets. Ideally, tile the entire house and have spare tile at YOUR house to replace what they crack.

And no matter how iron-clad the lease is, they'll find ways to push the boundaries regarding pets, relatives staying over and similar.

And if you think you're going to turn this over to a property manager, I'd say don't become a landlord. This is definitely a case of "if you want something done right, do it yourself."

 

[freedomatlast]

Yea, Scoop is right. If you're not an avid DYI'er, I would say you're better off with an REIT if you want more real estate exposure. It's just so much easier to take care of problems yourself than try to find somebody that's actually available, that will actually come out when they say they will, that will actually do the job right and will charge a reasonable price. About the only things I paid someone else to do in the last 35 years is to put on a new roof and install a new boiler. And I probably would have installed the boiler myself if it didn't have to be done quickly in the dead of winter.

 

[freedomatlast]

There's something about "after RE I now have more time" and "to deal with the issues" that don't seem to go together. Not quite an oxymoron, but along those lines.

I'll attempt to explain:
While working, if an issue came up, I'd have to find time to take care of it before or after, or even sometimes in the middle of, my work day.

After retiring early, every day is Saturday so my schedule became much more flexible in setting aside time to run over to the rental and deal with the issue.

 

[ScoopKona]

I'll attempt to explain:
While working, if an issue came up, I'd have to find time to take care of it before or after, or even sometimes in the middle of, my work day.

Every rental house I own comes with a big flat-head screwdriver, which is necessary to turn off the water at the street. I instruct them how to turn the water off at the street. And I don't take any money until the tenant demonstrates they are able to turn the water off at the street.

And *STILL* they'll call at 2am, "The water is spraying everywhere!"

"Turn the water off at the street."

"I don't know how! You have to come fast!"



You may have more free time now. But are you planning on ever going on vacation? Because that's when things will happen. And even if you have someone "on-deck" to take care of problems, tenants will find new and interesting ways of destroying your property at the least convenient time possible.

Finally, if you're going to do this, make sure all your rentals are within walking or easy-driving distance of your house. Because you do not want to have to drive half an hour across town with a plumbing issue and an idiot tenant who cannot perform a simple task under pressure.


PS -- They always steal the screwdriver on their way out, though.

 

[Mr. Tightwad]

I'm a small time landlord with 3 tenants.

I don't get calls at late hours. No Barbie's in the plumbing.

I did once have a murder at a unit. Re-rented it 3 days later.

Landlording is not for everyone.

I'll happily continue to cash my $5000 in rent checks until things become a burden. Landlording has mostly been a delight for me. And lucrative.

 

[kgtest]

I had small residential properties for 25 years. From that background I see some red flags:

1) You learn about rentals through OJT. The toilet clogs at 11PM you get the call, for example. Late rent? You get to contact the tenant(s) and wheedle them into paying. With a few units this may not be a huge problem but the fact that you have no experience virtually guarantees you will be optimistic about the workload. Thinking about just hiring a manager? There goes most or all of your cash flow.

2) We're now at the age when we have realized that we are mortal. What happens to the rentals when (not if) you die? DH doesn't want this burden. If you both die, your executor has the burden in spades. In either case the properties will probably be sold at fire-sale prices, eating into your gains.

3) In many places, larger cities at least, the attitude towards landlords has become quite negative. Lots of new rules on what tenant screening criteria can and can not be used. Rules on nonpayment, evictions, eviction moratoriums, picky maintenance details, etc. seem to be proliferating. Even rent control in some places.

I was always on pretty good terms with my tenants. In this new adversarial age I'm not sure that is possible any more.

You could get lucky,though! Buy a duplex, luck into long-term regular-paying tenants, have no major maintenance issues, ... That would be the dream.

I largely agree. My family owns RE and we have seen it all. During the pandemic, a few tenants decided to stop paying rent with eviction moratoriums in place. Once we did evict 1 of the 2 tenants it was a load of fun removing all his s#it from the property he left behind. And there is no recouping that time and lost money paying for dump fees and fixing up the property. The time and money are simply gone. No amount of rent increase on the next tenant will solve that.

Another thing on turnover. If you get a bad tenant, its almost guaranteed 3 months of lost rent with little ot no recourse. Sure small claims court, if they show up, and if they even pay after you get lucky enough for a ruling in your favor...then what? Garnish the wages of a self employed low-life. Sure screen, screen, screen. Its impossible to screen to the perfection your business minded self is thinking will be best case scenario.

The second tenant we are working to get rid of just installed a flag pole and flag over the newly wrapped garage brick mold. So now the association is charging us to fix the problem. Of course we would love to pass that cost onto the tenant, but he's already not paying his rent.

The saying is, they come in like a kitten and go out like a lion and its never been more true than in the landlording business.

Had a tenant leave there kitten behind and when we did find out 7 days after they moved out from another tenant in the building, we went in...found the kitten, and all the poop and damage it had caused. Did we allow animals...NO. Do the tenants care about your rules...generally no.

My equities never leave kittens behind. They never break a toilet at 11pm. They never decide they are going to just up and leave. Its a cost benefit analysis, but one bad year can totally screw you. The only time a rental is good is when it can constantly cash flow, and appreciate and when it's paid off its a very nice ROI. But getting from purchase, to tenant fully paying off the purchase price takes a decade. If you charge $2500.00 a month in 10 years that is $250,000. Good luck finding a decent livable unit for $250k these days. The hassles you will have in that 10 yrs is unknowable at best.

Sure, rents increase with inflation, tax breaks are great yadda, yadda yadda. It's no different than owning a business. Good years and bad years. Risk of liability and litigation. Investing into equities never has those issues.

You put 250k into an investment, in 10 years its doubled 2x to $1MM. Find me a property that can return that in 10 years. Even being conservative, let's say it simply doubles 1x to 500k. It would take 10 years of $50,000 in yearly returns to get that (unless you invest your returns into equities). In the long run you can make it work over 20-30 or 40 years, but like anything, buy low, sell high. And the asset depreciates. It physically depreciates. The roof needs replacing, the siding, the paint, carpet. All of that cost doesn't come with owning an equity.

I do own real estate...but its not a very great argument to keep at it when we've had such a phenomenal bull run in the markets. I think there can be a balance, and maybe the multi-unit owners will disagree...but its like franchising, sometimes one is bleeding out while the other is turning a hefty profit.

Everyone's views on this will vary wildly. i just personally can't stand the lack of respect many tenants have. Sure we get some good ones every now and then. DF has had the same tenants for decades on one property, but the n another one is constant turnover.

Then lets talk about heirs. DS passed away and left 3 properties. My other DS is not making a dime managing them, and in fact has drained out nearly all of the cash account supporting the properties, paying the mortgage and some of the utilities tenants stiffed her on rather than having solid tenants with positive cash-flow. 1 of the 3 properties is cash-flow positive since she passed away. Its pretty easy argument to sell, especially in the high -demand market we are in right now. DS has found out quick how "fun" owning rental property is, and its not even hers...its the trusts.

 

[ScoopKona]

My equities never leave kittens behind. They never break a toilet at 11pm. They never decide they are going to just up and leave. Its a cost benefit analysis, but one bad year can totally screw you. The only time a rental is good is when it can constantly cash flow, and appreciate and when it's paid off its a very nice ROI. But getting from purchase, to tenant fully paying off the purchase price takes a decade. If you charge $2500.00 a month in 10 years that is $250,000. Good luck finding a decent livable unit for $250k these days. The hassles you will have in that 10 yrs is unknowable at best.

Sure, rents increase with inflation, tax breaks are great yadda, yadda yadda. It's no different than owning a business. Good years and bad years. Risk of liability and litigation. Investing into equities never has those issues.

I agree with everything you say. 100%.

However, there are a few other things that are specific to real estate. A rental property can be insured. And if the landlord does his or her homework it can be insured for damage *and* lost rent caused by the damage. We have invoked that policy twice in 10 years.

If there is a way to insure 1,000 shares of Enron against loss, I am unaware of it.

Speaking of Enron, houses very, very rarely lose all value. Even if the structure burns to the ground, the property still has value -- often a fire is the best thing that could happen to a landlord. (Don't try that at home. Leave it to TV shows like The Sopranos.) It takes erosion, sinkholes, radiation and similar to zero-out a real estate investment.

As I said above, all my rental properties quadrupled in value over 10 years. And I received roughly 100 months of rent from each. (with gaps due to non-paying tenants, evictions, turnover and similar). That's not a bad gain and not bad passive income. We have plenty of equity positions, too. But real estate was the main springboard for our early retirement.

It is NOT for everybody. But for someone who isn't afraid to get their hands dirty, it is a reliable way to generate wealth.

 

[Mr. Tightwad]

I largely agree. My family owns RE and we have seen it all. During the pandemic, a few tenants decided to stop paying rent with eviction moratoriums in place. Once we did evict 1 of the 2 tenants it was a load of fun removing all his s#it from the property he left behind. And there is no recouping that time and lost money paying for dump fees and fixing up the property. The time and money are simply gone. No amount of rent increase on the next tenant will solve that.

Another thing on turnover. If you get a bad tenant, its almost guaranteed 3 months of lost rent with little ot no recourse. Sure small claims court, if they show up, and if they even pay after you get lucky enough for a ruling in your favor...then what? Garnish the wages of a self employed low-life. Sure screen, screen, screen. Its impossible to screen to the perfection your business minded self is thinking will be best case scenario.

The second tenant we are working to get rid of just installed a flag pole and flag over the newly wrapped garage brick mold. So now the association is charging us to fix the problem. Of course we would love to pass that cost onto the tenant, but he's already not paying his rent.

The saying is, they come in like a kitten and go out like a lion and its never been more true than in the landlording business.

Had a tenant leave there kitten behind and when we did find out 7 days after they moved out from another tenant in the building, we went in...found the kitten, and all the poop and damage it had caused. Did we allow animals...NO. Do the tenants care about your rules...generally no.

My equities never leave kittens behind. They never break a toilet at 11pm. They never decide they are going to just up and leave. Its a cost benefit analysis, but one bad year can totally screw you. The only time a rental is good is when it can constantly cash flow, and appreciate and when it's paid off its a very nice ROI. But getting from purchase, to tenant fully paying off the purchase price takes a decade. If you charge $2500.00 a month in 10 years that is $250,000. Good luck finding a decent livable unit for $250k these days. The hassles you will have in that 10 yrs is unknowable at best.

Sure, rents increase with inflation, tax breaks are great yadda, yadda yadda. It's no different than owning a business. Good years and bad years. Risk of liability and litigation. Investing into equities never has those issues.

You put 250k into an investment, in 10 years its doubled 2x to $1MM. Find me a property that can return that in 10 years. Even being conservative, let's say it simply doubles 1x to 500k. It would take 10 years of $50,000 in yearly returns to get that (unless you invest your returns into equities). In the long run you can make it work over 20-30 or 40 years, but like anything, buy low, sell high. And the asset depreciates. It physically depreciates. The roof needs replacing, the siding, the paint, carpet. All of that cost doesn't come with owning an equity.

I do own real estate...but its not a very great argument to keep at it when we've had such a phenomenal bull run in the markets. I think there can be a balance, and maybe the multi-unit owners will disagree...but its like franchising, sometimes one is bleeding out while the other is turning a hefty profit.

Everyone's views on this will vary wildly. i just personally can't stand the lack of respect many tenants have. Sure we get some good ones every now and then. DF has had the same tenants for decades on one property, but the n another one is constant turnover.

Then lets talk about heirs. DS passed away and left 3 properties. My other DS is not making a dime managing them, and in fact has drained out nearly all of the cash account supporting the properties, paying the mortgage and some of the utilities tenants stiffed her on rather than having solid tenants with positive cash-flow. 1 of the 3 properties is cash-flow positive since she passed away. Its pretty easy argument to sell, especially in the high -demand market we are in right now. DS has found out quick how "fun" owning rental property is, and its not even hers...its the trusts.

Example A) I put $6500 or so down on a property in 1996. Took me 12 years to pay it off. It's worth 1.3M-1.5M. One new roof. One eviction (the only one I've ever had in my landlording career- 7 tenants at my zenith).

I know some unhappy landlords. I'm not one of them.

 

[rantk81]

I agree with everything you say. 100%.
If there is a way to insure 1,000 shares of Enron against loss, I am unaware of it.

There is an almost perfect instrument to accomplish this: Put options.

 

[pjigar]

The rental yield was great when I bought SFH rentals during the last downturn around 2012-2013. We bought several SFH rentals for a leveraged cash-on-cash yield in range from 6% to 12%. The rental CAGR during that time has been about 18% including cash-flow and gain. The stocks CAGR in the mean time for my passive portfolio has been about 14%. Fast forward today, I cannot find any SFH rental with a positive cash-flow in our area. I cannot imagine future CAGR of SFH rentals be higher than that of the stocks for some years until housing market crash again. Not knowing the future, the only thing I can do is use the objective measures I have to guide my decision. I use two measures: Rental returns (Return on equity aka rental yield) and housing affordability (price/income ratio). Both those measure are out of whack from their normal range for our market. My objective beacons tell me it that is time to sell SFH. We sold one last year and selling another one this year. I might be wrong but I created the measures before I bought the rentals and I am sticking to them.


Long story short, don't buy rentals in today's market.


PS: We have shares of multi-unit appointments and they have provided vastly superior returns than SFH. YMMV.

 

[Souschef]

I remarried in 2007, and we moved from our homes to a +55 community. Since RE was in the dumper, I rented out my condo. The first tenant was there 3 years, and that was OK. The next 2 were there for a year each, and with the fix up expenses, I did not net much.

The market had recovered somewhat, so I sold it. I had a stepped up basis in 2005 when my wife passed away, which was more than I sold it for. However, the tax loss helped lower my taxes.

 

[friar1610]

I was a landlord twice.
- rented out my house in the DC area while I was transferred (military) out of the area for 5 years but knew I’d be returning.
- inherited my parents’ retirement home on Cape Cod and rented it to a year-round tenant for a couple of years before selling.

No major problems but a few minor hassles. Never considered investing in rental property in retirement. I’ve used up all my good luck with rentals. If I tried it again the law of averages would catch up with me.