Selling rental units

[48Fire]

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]

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.


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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]

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]

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]

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]

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]

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.