Sell apartment buildings or keep forever?

[pb4uski]

I never said there was a trade off.

Fact 1: rent collected monthly is 4850

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

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

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

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

I put in about 2 hours of yard work a month and collect $4850 in rent. The yard work gives me exercise and vitamin D. When I'm too old to deal with it I'll hire a gardener.

One duplex is valued at a third of my NW. I didn't set out for that to be the case, property values have soared is the reason.

A good example that correlation is not causation I guess.

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

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

 

[VFK57]

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

 

[Letj]

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


A good example that correlation is not causation I guess.

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

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

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

 

[bearkeley]

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

 

[Mr. Tightwad]

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

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

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

 

[Another Reader]

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

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

 

[pjigar]

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

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

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

 

[pb4uski]

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

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

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

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

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

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

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

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

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

 

[BeachOrCity]

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

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

 

[pb4uski]

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

 

[Another Reader]

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

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

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

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

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

I dunno, pb4uski, maybe it's your tone...

Your dad did a great job of setting your mom up for a secure retirement with the wealth he built in real estate. For THAT you should be eternally grateful. I don't know what he did for a living outside of the real estate, or what opportunities you had that he may not have had. That may have determined the path he took. Whatever the reason, the real estate probably improved your opportunities as well. It was a successful path for your family, and that's what matters.

I think most people here with long term experience with rentals are well aware of the issues around how to deal with fully depreciated assets that have dramatically increased in market value. The answers are different for everyone. Sell and take the hit, exchange into something less management intensive, or outsource and accept the frictional losses of letting someone less interested in maximizing revenue while minimizing losses take over. Those are pretty much the choices.

And the Flint Michigan example of which you are so fond? Astute people take the loss early and move on. In equities, you diversify to avoid the Enrons you can't foresee and hope the returns on the larger portfolio outweigh the losses. In real estate, you can spot the losers and cut your losses.

So, maybe take the edge off your tone, and recognize that people, many of whom may not have started where you did, have accomplished a lot. They are not stupid. Most of them are certainly smart enough to spot the Flints. Remember that for every Flint, there is a place with an appreciation rate well in excess of inflation. Add in astute use of leverage, and some people have done very well as a result.

Maybe include the pluses as well as the minuses of real estate when you offer your advice, especially to people starting out. They might be more inclined to listen to your advice if you did.

That is all.

 

[pb4uski]

....So, maybe take the edge off your tone...

Look in the mirror...

You're the one who seems to be wanting to make it personal.

 

[pb4uski]

....Astute people take the loss early and move on.....

This is a very flawed idea based on thinking that you are the smartest girl in the room. For one, for even a slowly evolving geographic decline, the real estate investor may not see it before it is too late. Also, many declines in value happen too fast for the investor to "take the loss early and move on"... floods in Houston, California wildfires, tornados and hurricanes, fires from rioting in Minneapolis, even the problems in Flint happened fast.

So, for example, if a retiree had 40% of their retirement portfolio in rental properties in Minneapolis and were in the wrong spot and ended up burnt to the ground at best they have the insurance proceeds and have to figure out what to do next.

On the other hand, if the retiree had a diversified portfolio of properties across the country and their property in Minneapolis burns to the ground but is 1% of their total... it is a hit, but not a calamity. And it is very hard for the individual real estate investor to create a portfolio that is diversified both geograpically and by property type.

 

[captain3d]

I would turn everything over to property managers and see if you think it’s still OK a year later. I have rental properties that are managed and far away from where I live. Some have done great. Some just OK. But all worth it and I’ve never repaired anything. Just do the accounts and answer emails. I have Properties I have owned for 12 years and never seen them in real life.

 

[Iusta]

Keep -save tax forever

Keep em Forever if you can. Investment real estate Will go to your heirs tax free. If you sell you pay huge capital gains on depreciation and profit.

 

[Maidensong]

We plan to keep our ten rental units to hand down to our kids. As others have observed, they seriously outperform the market and since they're 100% paid for, they provide month after month of cash flow that allowed my DH to retire at 60. Even during this time of the virus, we've only had to forgive 1/2 of one tenant's rent for one month. Most of our people are in essential jobs. The DH will take SS this year and I'll file for my spousal benefits. After that, we'll only need a fraction of what our rentals generate, so if we want to hire a manager (or hopefully train one of the kids to take over those duties. I'd rather pay one of them!) we can step back from active involvement without taking a hit to our lifestyle. The money we have in the stock market (about 60% of our portfolio) is gravy. We just let it ride and don't worry about ups and downs.

If you're taking a poll, OP, I vote for keeping them! Good luck!

 

[boaski]

Every body seems to think leaving property to heirs and let them get the stepped up basis is always going to be there I am not counting on that being around to much longer so I am going to sell and take the tax hit.

 

[JDARNELL]

Every body seems to think leaving property to heirs and let them get the stepped up basis is always going to be there I am not counting on that being around to much longer so I am going to sell and take the tax hit.

Why do you think this is going to change?

 

[kevdude]

Yes, this is me/us. We started investing in residential real estate in 2003 and it makes up about 2/3rds of our investable assets, after selling costs and potential tax hit. We had as many as 34 units (combo of small apartments, SFHs, and individual condos) and are now down to 20, all in the Seattle area. All sold units were sold at nice profits and paying all taxes. The properties have greatly juiced our net worth and supplied a steady stream of income to us, allowing us to both be semi-retired at 49.

The remaining units we have only require about 10-15 hours/month unless we have a vacancy or emergency. (We're in the middle of one of those emergencies right now, so I certainly don't want to gloss over the major that headaches they can be.). These properties provide us with plenty of income to live on pretty comfortably and pay for college for our kids. I turn 57 next week and my lovely bride is 56. We have one child about to enter college and another that will be a sophomore in high school.

We currently get about a 5% return on the market rate equity, but overall our returns are closer to 20% annually on what we invested, including appreciation. We have enjoyed fantastic appreciation and rent growth on the properties, thanks to living and investing in a market like Seattle. I used to think that we would sell everything and pay all taxes owed after our daughter graduates from high school, and then just be totally retired. However, I now go back and forth between hiring a property manager and selling and doing 1031 exchanges into DSTs.

Would I do it all over again? Absolutely. My only regret is we didn't start investing in real estate earlier in life (started at 39). In fact, we cashed out 2 401k's, paid the taxes and penalties to invest in real estate, which turned out much better than if the dollars were just left in the 401ks. Now, what to do, what to do...

 

[laurence]

Could you sell sone and go with a property management company? We only have one rental but it represents 25% of our net worth ( thank you San Diego appreciation). We have a management company which helps a lot. At first I’m 2013 it was break even but with the new refinance it’s ~1,000 cash flow positive. We’ll keep it forever and leave it to our three kiddos.

 

[scottpush]

Not a factor... OP is only 54.... but definitely a factor to consider if on or near Medicare but usually the IRMAA premium isn't significant in the whole scheme of things.

I'm in the same boat about wondering whether to sell properties. I'm 61, single, and on ACA. So if I sell one property it kicks me over the cliff of $48k. I have 6 now and was thinking of selling 2 of them when I reach 65 when I'm on Medicare and paying off the four remaining. I didn't even know about Medicare also being a higher cost if your income goes up. But doesn't sound like it's as significant as ACA. I sold 3 properties this year (from 9 to 6 properties) and will pay $10k for ACA since I'll have to pay back subsidies.

 

[scottpush]

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

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

You're one of the lucky ones. My tenants under 9 properties have been basically good for the last 15 years but upkeep to the houses and mostly condos has been a major PITA. It's just dumb luck. Have had so many water issues of all sorts I can't even count how many. Some minor, some major. Very stressful. I'm very handy but I still don't like worrying about all of these issues. Although I do like the income. It's a hard decision for me but the thought of being free from the burden is very enticing.

 

[scottpush]

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

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

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

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

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

These are very good points. It comes down to risk tolerance and desire to be a landlord and put put up with the drawbacks. I had no idea it would be as time consuming and stressful as it has. I want to travel extensively in the future and having properties is a big hurdle to doing that. Property manager may or may not help with all of that but I don't really want to find out. I like the income but don't like being 'on call'. Hard decision.

 

[scottpush]

Every body seems to think leaving property to heirs and let them get the stepped up basis is always going to be there I am not counting on that being around to much longer so I am going to sell and take the tax hit.

Congratulations. Freedom.

 

[Earlygirl]

Wow, as a landlord of several single family homes I am amazed by some of the posts that say their rentals have been "no trouble." Seems incredibly lucky. We've been landlords for 45 years and have put on new roofs, A/C systems, water line replacements in homes built in the 80's, etc, a new sewer line on a home built in the fifties, as well as the usual carpet, flooring, water heater, appliance replacements. And used gallons and gallons of paint. My husband is extremely handy and has saved us thousands in repair costs, and I have definitely put in my share of the work also, as well as doing the bookkeeping.



We had a condo unit (won't go that route again) where the tenant accidentally set the place on fire and we were so lucky it didn't hurt anyone or hurt any adjacent units. We had a single family home that also caught fire and luckily no one was hurt there either. Now we are at retirement age and are thinking of selling one per year going forward, but have also considered just keeping them til we die to pass on to the children for them to sell. However, we would definitely need to start spending big bucks on cleaning, repairs, etc that we have been doing ourselves, so maybe it would be better to sell, pay the taxes, and invest elsewhere.



Repairs and liability is what I would be concerned about, going forward, if I were the OP. We are in our upper sixties and what you can do at 60 is very different from what you can do, or feel like doing, when you are close to 70. Just because you have had few repairs in the past doesn't mean you won't have more going forward as the building ages. That said, we traveled 75 days last year (not consecutive) pre-Covid and were able to manage the properties by phone. This year of course we haven't had the opportunity and not sure when that will happen again! Have been spending a lot of time on one property that is run down, getting it ready to sell. Not sure how much more of that we want to do.



I would be fine getting a property manager to manage, but if we have to pay for all the cleaning and repairs I wonder if it wouldn't be better to sell a home per year and pay the taxes. It's a conundrum. Have also looked into DSTs, though there are definitely fees associated with those, and quite a few DSTs are retail. Retail has taken a bit hit this year.