A window to get rid of rental real estate and passing ...bad idea

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cryingshame
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A window to get rid of rental real estate and passing ...bad idea

Post by cryingshame »

We bought two Florida Condo's in 2006 on the wrong side of the bubble. (pre Boglehead days :oops: ) Both units are paid off if sold after all depreciation taxes/state taxes /realtor fees we would clear 500,000 total. Were only making around 3% return on these units per year. The market is hot we could sell but the dilemma that I'm sure many that might consider selling there rental real estate is where to park the money.

We are 61 and 62 years old and have 60/40 stock bond portfolio along with rental real estate were half owners of in California that could get us by when we choose to retire. I hate to even think about the opportunity cost of this bad investment but looking at it from where we are in our lives right now we have no need to take greater risk in stocks. No desire to do a 1031 exchange would rather be out of rentals. It's always been a strong rental market and although we live in the Midwest we have close friends there that we pay per job if anything needs done. The nice thing about condo's is nothing to worry about on the outside of unit. Back to the title of the post because I know the bubble could/will pop...is my reasoning sound for continuing to rent instead of selling even though the investment to begin with backfired on us terribly.
Last edited by cryingshame on Sat Jul 24, 2021 9:37 pm, edited 1 time in total.
deltaneutral83
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Re: A window to get rid of rental real estate and passing ...bad idea

Post by deltaneutral83 »

Reverse Engineer this. If you had the cash minus commissions and taxes on the RE would you go out and invest in these properties that aren't local or would you just drop it into your 60/40? Or, if you had the cash to the entire 60/40 would you go out and buy more RE? Both scenarios are easily executed.

If I have real estate, equities, bonds, and cash, you can liquidate rather easily if needed or wanted to on any given day. I am making decisions every day to hold my AA even if I'm "doing nothing." Being landlord "by default" is something that doesn't make a lot of psychological sense most of the time.
exodusNH
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Re: A window to get rid of rental real estate and passing ...bad idea

Post by exodusNH »

cryingshame wrote: Wed Jun 02, 2021 2:24 pm ...
about on the outside of unit. Back to the title of the post because I know the bubble could/will pop...is my reasoning sound for continuing to rent instead of selling even though the investment to begin with backfired on us terribly.
If you don't want to be a landlord anymore, sell. You could treat this as a windfall and reference https://www.bogleheads.org/wiki/Managing_a_windfall.

SPIA or MYGA, which are as safe as the issuing insurance company, backed up to whatever your state guarantees. Or go into a fund like Vanguard's LifeStrategy Income Fund, which is roughly 20/80.
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cryingshame
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Re: A window to get rid of rental real estate and passing ...bad idea

Post by cryingshame »

deltaneutral83 wrote: Wed Jun 02, 2021 2:35 pm Reverse Engineer this. If you had the cash minus commissions and taxes on the RE would you go out and invest in these properties that aren't local or would you just drop it into your 60/40? Or, if you had the cash to the entire 60/40 would you go out and buy more RE? Both scenarios are easily executed.

If I have real estate, equities, bonds, and cash, you can liquidate rather easily if needed or wanted to on any given day. I am making decisions every day to hold my AA even if I'm "doing nothing." Being landlord "by default" is something that doesn't make a lot of psychological sense most of the time.
This is the bucket of cold water that I need :D No way would I invest in more real estate locally or out of state if had the 500000 in cash.
On the other hand I don't want more stock exposure so that leaves me with allot of bonds which is why the 3% return of the real estate and the diversification of owning real estate made sense. I really need to examine why I can't just sell and stick with our 60/40 or go 50/50...
Last edited by cryingshame on Wed Jun 02, 2021 2:58 pm, edited 1 time in total.
Grt2bOutdoors
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Re: A window to get rid of rental real estate and passing ...bad idea

Post by Grt2bOutdoors »

exodusNH wrote: Wed Jun 02, 2021 2:36 pm
cryingshame wrote: Wed Jun 02, 2021 2:24 pm ...
about on the outside of unit. Back to the title of the post because I know the bubble could/will pop...is my reasoning sound for continuing to rent instead of selling even though the investment to begin with backfired on us terribly.
If you don't want to be a landlord anymore, sell. You could treat this as a windfall and reference https://www.bogleheads.org/wiki/Managing_a_windfall.

SPIA or MYGA, which are as safe as the issuing insurance company, backed up to whatever your state guarantees. Or go into a fund like Vanguard's LifeStrategy Income Fund, which is roughly 20/80.
It’s not a windfall, it’s a reallocation of assets. A windfall are monies or assets that were never in your portfolio to begin with. The OP has included it in his portfolio. As to holding it at 20/80? The OP would need to consider how holding $500k in a 20/80 slice affects the overall 60/40 allocation. Obviously it will make it more conservative but to what extent only he knows.
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cryingshame
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Re: A window to get rid of rental real estate and passing ...bad idea

Post by cryingshame »

exodusNH wrote: Wed Jun 02, 2021 2:36 pm
cryingshame wrote: Wed Jun 02, 2021 2:24 pm ...
about on the outside of unit. Back to the title of the post because I know the bubble could/will pop...is my reasoning sound for continuing to rent instead of selling even though the investment to begin with backfired on us terribly.
If you don't want to be a landlord anymore, sell. You could treat this as a windfall and reference https://www.bogleheads.org/wiki/Managing_a_windfall.

SPIA or MYGA, which are as safe as the issuing insurance company, backed up to whatever your state guarantees. Or go into a fund like Vanguard's LifeStrategy Income Fund, which is roughly 20/80.
so

Thanks for the link....another one of my pre Boglehead mistakes was a variable annuity ..I'm really leery of insurance companies...but I will research more....
deltaneutral83
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Re: A window to get rid of rental real estate and passing ...bad idea

Post by deltaneutral83 »

cryingshame wrote: Wed Jun 02, 2021 2:51 pm This is the bucket of cold water that I need :D No way would I invest in more real estate locally or out of state if had the 500000 in cash.
On the other hand I don't want more stock exposure so that leaves me with allot of bonds which is why the 3% return of the real estate and the diversification of owning real estate made sense. I really need to examine why I can't just sell and stick with our 60/40 or go 50/50...
When the answer to "would you do this again if given the opportunity" is emphatically "no," I think one has the answer. Sounds like you may be done with real estate and examining how aggressive 60/40 is. Possibly think about clubbing down to 55/45 at least, or the true 50/50.

I am agreeing to my AA each and every day I do not sell, with the hundreds of prior buying points completely irrelevant, I essentially "buy" every day I don't sell and cash out or reallocate.
jimkinny
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Re: A window to get rid of rental real estate and passing ...bad idea

Post by jimkinny »

I would take the opportunity to sell. The past is the past and if you had the cash now and would not buy now, the only logical thing to do is sell.

A separate issue is what to do with the cash from the sales. I understand and tend to agree with you about bonds. You could just park the money in a 0.5% savings account (stay within FDIC limits) and buy periodically over the next year or so.

I am not going to buy any bonds until the Fed stops QE. They are still buying 120 billion in bonds each month in an effort to keep interests rates low but I am reading fairly frequently now that some at the Fed are expressing some concern about the unintended consequences of these purchases.
exodusNH
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Re: A window to get rid of rental real estate and passing ...bad idea

Post by exodusNH »

Grt2bOutdoors wrote: Wed Jun 02, 2021 2:51 pm It’s not a windfall, it’s a reallocation of assets. A windfall are monies or assets that were never in your portfolio to begin with. The OP has included it in his portfolio. As to holding it at 20/80? The OP would need to consider how holding $500k in a 20/80 slice affects the overall 60/40 allocation. Obviously it will make it more conservative but to what extent only he knows.
I understand it's not a windfall, but effectively it is. It's simply a different way of asking, "If you came into 500,000 would you use it to by investment real estate?" It seems like that answer is "no", so treat it like getting a windfall.
exodusNH
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Re: A window to get rid of rental real estate and passing ...bad idea

Post by exodusNH »

cryingshame wrote: Wed Jun 02, 2021 2:55 pm
exodusNH wrote: Wed Jun 02, 2021 2:36 pm
cryingshame wrote: Wed Jun 02, 2021 2:24 pm ...
about on the outside of unit. Back to the title of the post because I know the bubble could/will pop...is my reasoning sound for continuing to rent instead of selling even though the investment to begin with backfired on us terribly.
If you don't want to be a landlord anymore, sell. You could treat this as a windfall and reference https://www.bogleheads.org/wiki/Managing_a_windfall.

SPIA or MYGA, which are as safe as the issuing insurance company, backed up to whatever your state guarantees. Or go into a fund like Vanguard's LifeStrategy Income Fund, which is roughly 20/80.
so

Thanks for the link....another one of my pre Boglehead mistakes was a variable annuity ..I'm really leery of insurance companies...but I will research more....
Oh, yeah, variable annuities are tricky. SPIA and MYGA are different beasts. The latter is, essentially, a CD issued by an insurance company. As long as you get it from a reasonable insurance company and stay within your state's guarantee limits, you're about as safe as you can be.
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David Jay
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Re: A window to get rid of rental real estate and passing ...bad idea

Post by David Jay »

cryingshame wrote: Wed Jun 02, 2021 2:51 pmI really need to examine why I can't just sell and stick with our 60/40...
This should be your top priority, find an AA that you can live with and just throw everything in to that allocation.

You are playing a market timing game when you are saying things like: "stocks are too high" and "bond yield is too low". At your ages, one spouse is probably is investing with a 30 year timeframe. Don't get sucked into worrying about how individual components of your portfolio are going perform in the short term.
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ResearchMed
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Re: A window to get rid of rental real estate and passing ...bad idea

Post by ResearchMed »

cryingshame wrote: Wed Jun 02, 2021 2:51 pm
deltaneutral83 wrote: Wed Jun 02, 2021 2:35 pm Reverse Engineer this. If you had the cash minus commissions and taxes on the RE would you go out and invest in these properties that aren't local or would you just drop it into your 60/40? Or, if you had the cash to the entire 60/40 would you go out and buy more RE? Both scenarios are easily executed.

If I have real estate, equities, bonds, and cash, you can liquidate rather easily if needed or wanted to on any given day. I am making decisions every day to hold my AA even if I'm "doing nothing." Being landlord "by default" is something that doesn't make a lot of psychological sense most of the time.
This is the bucket of cold water that I need :D No way would I invest in more real estate locally or out of state if had the 500000 in cash.
On the other hand I don't want more stock exposure so that leaves me with allot of bonds which is why the 3% return of the real estate and the diversification of owning real estate made sense. I really need to examine why I can't just sell and stick with our 60/40 or go 50/50...
[emphasis added]

To make this extra easy... :happy you wrote:
"No way would I invest in more real estate locally or out of state if had the 500000 in cash."

You really answered that question, right? :wink:

Now, just *what* you do with the $500,000...??
That is a decision to make, with or without assistance from The Boglehead Group Advisory Service.
But it seems obvious what you would NOT do, correct?

Sell, make your terrific profit, pay any taxes, park the money safely for a while until you decide what to do with it, and then perhaps have a celebratory <insert choice here>.
That may yield enough that you don't need to do the same thing with all of it.

Doesn't that appeal much more than continuing to deal with the rentals, while you also wonder if when the market will come back down?

You have a nice problem (if one must hava a problem at all, of course), and what appears to be a terrific "solution".

Cheers!

RM
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Raabe34
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Re: A window to get rid of rental real estate and passing ...bad idea

Post by Raabe34 »

You could look into a Delaware Statutory Trust(DST). I'm just vaguely familiar with the concept in that you put your rental money into it and it operates like a 1031 that you no longer have to self manage and can diversify into whatever DST you see fit. You would avoid the taxes and have a whole lot bigger pot of money that way and still have the ability to have a stepup in basis and probably earn a better return than currently.
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Watty
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Re: A window to get rid of rental real estate and passing ...bad idea

Post by Watty »

cryingshame wrote: Wed Jun 02, 2021 2:24 pm We are 61 and 62 years old and have 60/40 stock bond portfolio along with rental real estate....
Just a quibble but your investments are not currently invested at 60/40. I don't know what your actual numbers would be but it is really something like 50/30/20 where the third number is investment property.

You may also have a lot more exposure to real estate than you realize since many of the companies you own stock in through mutual funds have a lot of exposure to real estate too. For example McDonalds is in many ways more of a real estate company than a hamburger company. You may also own a house that you live in.

Just for diversification selling the rental properties may make sense.
Uncle Morris
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Re: A window to get rid of rental real estate and passing ...bad idea

Post by Uncle Morris »

deltaneutral83 wrote: Wed Jun 02, 2021 2:35 pm Reverse Engineer this. If you had the cash minus commissions and taxes on the RE would you go out and invest in these properties that aren't local or would you just drop it into your 60/40? Or, if you had the cash to the entire 60/40 would you go out and buy more RE? Both scenarios are easily executed.

If I have real estate, equities, bonds, and cash, you can liquidate rather easily if needed or wanted to on any given day. I am making decisions every day to hold my AA even if I'm "doing nothing." Being landlord "by default" is something that doesn't make a lot of psychological sense most of the time.
This is an excellent method to solve dilemmas. Should you pay extra for a better flight/seat/whatever? Turn it around, and imagine that someone offered you the same amount provided that you take the worse one. Somehow, this makes it easier to see the value involved, positive or negative.
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cryingshame
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Re: A window to get rid of rental real estate and passing ...bad idea

Post by cryingshame »

Watty wrote: Wed Jun 02, 2021 4:53 pm
cryingshame wrote: Wed Jun 02, 2021 2:24 pm We are 61 and 62 years old and have 60/40 stock bond portfolio along with rental real estate....
Just a quibble but your investments are not currently invested at 60/40. I don't know what your actual numbers would be but it is really something like 50/30/20 where the third number is investment property.

You may also have a lot more exposure to real estate than you realize since many of the companies you own stock in through mutual funds have a lot of exposure to real estate too. For example McDonalds is in many ways more of a real estate company than a hamburger company. You may also own a house that you live in.

Just for diversification selling the rental properties may make sense.
True Watty as I mentioned in the opening post we also half owners of California real estate.
We inherited this and at this point it is harder to unwind from so really were more like 30/20/50 not counting our house. At one point the write offs from the rental real estate and being able to control my magi a bit with my small business we saved on the aca front , but not anymore. Glad I posted my question, I thought there might be more who thought to take the 3% return on the real estate because of the current environment on bonds/fixed income. As many have pointed out I need to focus on the bigger picture.
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cryingshame
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Re: A window to get rid of rental real estate and passing ...bad idea

Post by cryingshame »

Raabe34 wrote: Wed Jun 02, 2021 4:53 pm You could look into a Delaware Statutory Trust(DST). I'm just vaguely familiar with the concept in that you put your rental money into it and it operates like a 1031 that you no longer have to self manage and can diversify into whatever DST you see fit. You would avoid the taxes and have a whole lot bigger pot of money that way and still have the ability to have a stepup in basis and probably earn a better return than currently.
Thanks for the suggestion
Maybe more will jump in on have had experience doing this. I have researched but don't feel confident going this route to date.
LazyByNature
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Re: A window to get rid of rental real estate and passing ...bad idea

Post by LazyByNature »

I second Raabe34's suggestion to look into DSTs. You would have a much larger sum to invest by paying no taxes. You would likely get 4.5%-5.0% cash on cash monthly income and enjoy the advantages of owning real estate without the management problems.

You could purchase the DST(s) from the usual suspects doing a lot of advertising and who take a large commission or perhaps use a Registered Investment Advisor who has a fiduciary responsibility to you. I went the RIA route with four of my recent rental sales. I realize more net cash than before, have appreciation potential, and remain diversified into an asset class that may perform well in an inflationary environment.
av111
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Re: A window to get rid of rental real estate and passing ...bad idea

Post by av111 »

LazyByNature wrote: Wed Jun 02, 2021 5:49 pm I second Raabe34's suggestion to look into DSTs. You would have a much larger sum to invest by paying no taxes. You would likely get 4.5%-5.0% cash on cash monthly income and enjoy the advantages of owning real estate without the management problems.

You could purchase the DST(s) from the usual suspects doing a lot of advertising and who take a large commission or perhaps use a Registered Investment Advisor who has a fiduciary responsibility to you. I went the RIA route with four of my recent rental sales. I realize more net cash than before, have appreciation potential, and remain diversified into an asset class that may perform well in an inflationary environment.
Hi LazyByNature

Your handle matches my way of thinking 😊. Tell us more about your experience with the dst process. Who was the RIA
AV111
ralph124cf
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Re: A window to get rid of rental real estate and passing ...bad idea

Post by ralph124cf »

It is not clear if this includes federal income tax on the properties.

Are you still working? If so, it might make sense to wait until you stop working to sell.

It might make sense to sell one this year, and one next year.

Ralph
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cryingshame
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Re: A window to get rid of rental real estate and passing ...bad idea

Post by cryingshame »

ralph124cf wrote: Sat Jul 24, 2021 6:34 pm It is not clear if this includes federal income tax on the properties.

Are you still working? If so, it might make sense to wait until you stop working to sell.

It might make sense to sell one this year, and one next year.

Ralph
Yes I run a small business and have decided to wait until we stop working. Most likely will wait until were 65 to sale.
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