Sell Rentals?

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mdavis6890
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Joined: Wed Jan 27, 2016 11:19 am

Sell Rentals?

Post by mdavis6890 »

Question: Do we sell one of our rentals (and likely others as well shortly)?

My wife and I have 4 rental houses left out of 17 units (a 9-unit and 4 other singles) that we've been divesting out of over the last 5 years or so.

We're debating whether to sell these remaining four as well, which are basically the most stable and trouble-free of the bunch. They are not super profitable in an absolute sense. In total they are worth maybe $400k or so, and yield $2k/mo = ~6% cap rate, which does include management fees as well as a set-aside for anticipated, long-term expenses . There are no mortgages.

These do not represent a meaningful portion of our income today, though we would like to retire early in the next few years, at which point having an extra $2k/mo coming in would certainly be nice. And somehow rental income just feels different, more stable, or more real than stock income.

One of these rentals is coming up for lease renewal in November and my very-proactive management company is asking me to renew at the current rent of $1025, which is below the market rate of more like $1150-1200. Of course we could just ask to jack up the rent - but an extra hundred bucks a month just doesn't matter much to us right now. If we decide not to sell, I'll probably ask for a rent increase so we don't get too far behind the market.

We're considering selling them all soon, with this one coming up in November being the next to go. If we did sell them, we'd just put the money in with the rest of our pile, which mostly goes into Vanguard Total World and US Bonds. The $400k total value represents maybe 20% or so of our total portfolio outside the house we live in - and most of that portfolio is in retirement accounts.

We also occasionally get irritating stuff that we have to deal with, like a notice about the weeds being too high, for which the penalty is a $1000/day fine and/or 30 days in jail (really?!), or some 'business privilege tax' that we didn't know about, but which is now late.

Reasons to keep:
  • Stable income in retirement
    Inflation hedge / appreciation
    No real issues with any of these properties
    The current yield of 6% is higher than what we can expect from stocks and bonds
Reasons to sell:
  • Risk - Lawsuits, etc.
    Risk - Bad, delinquent tenants, major repairs
    Game mostly won, no need to keep playing
    Hassle reduction
Anyway, just looking for some words of wisdom here that can help break our mental log-jam. We've been talking about this for a couple of years and just don't have a clear feeling about either choice. We're each leaning in a different direction, but not strongly and both would support either decision. With the other properties it was a lot easier because in each case they really did feel like a burden and we felt great to be rid of them. But these are the last, best (least-worst?) of the lot, and honestly not much trouble.
Mike Scott
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Re: Sell Rentals?

Post by Mike Scott »

Why not finish what you started getting rid of rentals? If you are still on the fence, price them high and see if anyone bites. It does not sound like you are in a hurry so it's OK if it takes a while.
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gwe67
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Re: Sell Rentals?

Post by gwe67 »

Congratulations on almost winning the game. I wouldn't wish being a landlord in "retirement" on my worst enemy.
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k8n
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Re: Sell Rentals?

Post by k8n »

One thing that you can consider, since you are on the fence, is how your tenants would be affected. When I was younger I wouldn't have cared out being kicked out as a renter, but we now have 3 kids, built a playhouse, etc and it would be quite the hassle if we had to move.
Jack FFR1846
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Re: Sell Rentals?

Post by Jack FFR1846 »

I've used your words below. Literally cut out the rest of the words and left what matters.
mdavis6890 wrote: Fri Jul 23, 2021 6:18 pm They are not super profitable in an absolute sense.

These do not represent a meaningful portion of our income today,

management company is asking me to renew at the current rent of $1025, which is below the market rate of more like $1150-1200.

We also occasionally get irritating stuff that we have to deal with
Why again are these not already on the market? The hassle free income you can get from market or bond returns won't even fine you for not trimming the weeds out of the ally.
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Watty
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Re: Sell Rentals?

Post by Watty »

One advange of selling now is that most housing markets are very strong and it likely will be easy to sell them quickly and at a good price. In a sellers market buyers may not be too picky about every little problem that comes up in a house inspection.

If you keep them and then change your mind in a few years you could be trying to sell them in a bad housing market.

One of the reasons that I do not own any rental property is that I do not want to be trying to deal with it even with a property management company when I am in my 70s or 80s. Think through how that will work for you.
cat_guy
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Re: Sell Rentals?

Post by cat_guy »

mdavis6890 wrote: Fri Jul 23, 2021 6:18 pm My wife and I have 4 rental houses left out of 17 units (a 9-unit and 4 other singles) that we've been divesting out of over the last 5 years or so.
...
The $400k total value represents maybe 20% or so of our total portfolio outside the house we live in - and most of that portfolio is in retirement accounts.
Just curious - If you've liquidated 13 rental units in the last 5 years, before that did you have almost nothing in your retirement accounts? Seems like you have a pretty typical situation now but it's interesting that you were so heavily invested in real estate 5 years ago. Would be interested to hear more of your story / timeline.
Ependytis
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Re: Sell Rentals?

Post by Ependytis »

I thought I was killing it when I bought my home in 1999 for $295,000 and today it’s worth $900,000. However, when I look at the return on the S&P 500 over that same time, I would have $1,346,000. You could argue that the house is something that you both live in and enjoy the appreciation, true, but a rental is not.

I can’t imagine the rental market has done that well in comparison to the S&P 500. Also with the S&P 500 you have absolutely no chance of tenants calling you in the middle of night complaining that the toilets clogged, or risk of getting sued because little Johnny broke his arm, or violating some obscure city law. In summary, get rid of the rentals ASAP.
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Wiggums
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Re: Sell Rentals?

Post by Wiggums »

Watty wrote: Fri Jul 23, 2021 7:41 pm One advange of selling now is that most housing markets are very strong and it likely will be easy to sell them quickly and at a good price. In a sellers market buyers may not be too picky about every little problem that comes up in a house inspection.

If you keep them and then change your mind in a few years you could be trying to sell them in a bad housing market.

One of the reasons that I do not own any rental property is that I do not want to be trying to deal with it even with a property management company when I am in my 70s or 80s. Think through how that will work for you.
+1

This was the first thing that occurred to me.
"I started with nothing and I still have most of it left."
Tal-
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Re: Sell Rentals?

Post by Tal- »

We're in a somewhat similar boat.

I'd consider keeping them and selling them in a few years after you don't have a W2. As you must know, taxes on the sale of a rental can be really really high due to both cap gains and deferred income. Our plan is to wait until our W2 income goes away, and then sell our rentals then when everything will be at a lower tax rate.

It's not a hard and fast rule, and I wouldn't object to any option you outlined. But, for the simple reason of optimizing taxes, I'd consider waiting the couple years until you don't have the W2 income.

Just a thought. You may want to model it out.
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illumination
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Re: Sell Rentals?

Post by illumination »

What about splitting the difference and selling 2 of the 4 you own now, and maybe looking to sell 2 later?

For me personally, a 6% cap rate for a rental property, I just don't think it's worth the hassle to be a landlord in retirement. I can concede that the rent plus appreciation might outperform the market, but I'd rather take the "hit" and not fool with 4 rental properties. The exception would be making a judgement call and feeling the area is in some sort of boom and will greatly appreciate holding on a bit longer.
NMBob
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Re: Sell Rentals?

Post by NMBob »

sell them tomorrow.

The guy who said its a sellers market that also could decline significantly is describing exactly what happened to my friends years ago, The husband wanted to sell their rentals and the wife said no. And then boom, the bubble popped, they lost out on almost enough money to retire on when they where in their 40s. they won't hold rentals now due to things mentioned here. The annoyances of managing and the possibility of a significant decline. They buy and refurbish a house and then sell it.

perhaps keeping them now is taking higher risk that is usually accepted over a long term investment, but now you are viewing it as a short term investment ?
Havoner
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Re: Sell Rentals?

Post by Havoner »

mdavis6890 wrote: Fri Jul 23, 2021 6:18 pm Question: Do we sell one of our rentals (and likely others as well shortly)?

My wife and I have 4 rental houses left out of 17 units (a 9-unit and 4 other singles) that we've been divesting out of over the last 5 years or so.

We're debating whether to sell these remaining four as well, which are basically the most stable and trouble-free of the bunch. They are not super profitable in an absolute sense. In total they are worth maybe $400k or so, and yield $2k/mo = ~6% cap rate, which does include management fees as well as a set-aside for anticipated, long-term expenses . There are no mortgages.

These do not represent a meaningful portion of our income today, though we would like to retire early in the next few years, at which point having an extra $2k/mo coming in would certainly be nice. And somehow rental income just feels different, more stable, or more real than stock income.

One of these rentals is coming up for lease renewal in November and my very-proactive management company is asking me to renew at the current rent of $1025, which is below the market rate of more like $1150-1200. Of course we could just ask to jack up the rent - but an extra hundred bucks a month just doesn't matter much to us right now. If we decide not to sell, I'll probably ask for a rent increase so we don't get too far behind the market.

We're considering selling them all soon, with this one coming up in November being the next to go. If we did sell them, we'd just put the money in with the rest of our pile, which mostly goes into Vanguard Total World and US Bonds. The $400k total value represents maybe 20% or so of our total portfolio outside the house we live in - and most of that portfolio is in retirement accounts.

We also occasionally get irritating stuff that we have to deal with, like a notice about the weeds being too high, for which the penalty is a $1000/day fine and/or 30 days in jail (really?!), or some 'business privilege tax' that we didn't know about, but which is now late.

Reasons to keep:
  • Stable income in retirement
    Inflation hedge / appreciation
    No real issues with any of these properties
    The current yield of 6% is higher than what we can expect from stocks and bonds
Reasons to sell:
  • Risk - Lawsuits, etc.
    Risk - Bad, delinquent tenants, major repairs
    Game mostly won, no need to keep playing
    Hassle reduction
Anyway, just looking for some words of wisdom here that can help break our mental log-jam. We've been talking about this for a couple of years and just don't have a clear feeling about either choice. We're each leaning in a different direction, but not strongly and both would support either decision. With the other properties it was a lot easier because in each case they really did feel like a burden and we felt great to be rid of them. But these are the last, best (least-worst?) of the lot, and honestly not much trouble.
I would exit with real estate being really high right now. At the minimum I would make sure to keep raising rents in line with similar stuff because when you do cash in that investor is going to look at that rent/cost ratio as the primary indicator on whether to buy it and a lease with the higher level rent speaks a lot better than claiming that it could be bumped up. Think like 10k in lost equity for every $100 you are not raising rent just to keep it in perspective with the 1% rule. Good luck with and you have done well at the table and there is nothing wrong with cashing out the chips on real estate.
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NewMoneyMustBeSmart
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Re: Sell Rentals?

Post by NewMoneyMustBeSmart »

mdavis6890 wrote: Fri Jul 23, 2021 6:18 pm Question: Do we sell one of our rentals (and likely others as well shortly)?
Do this:

Let X be the value of the sold properties net of sale.

Put X into https://www.portfoliovisualizer.com/ with your asset allocation.

Look at your annual dividends and yield.

Follow your nose....
-- | Few are those who see with their own eyes and feel with their own hearts - Einstein | *Everything I write here is an unreliable opinion*
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Sandtrap
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Re: Sell Rentals?

Post by Sandtrap »

I’ve benn in a similar situation.

Based on that as well as the information you’ve given.
Sell.

Unless the R/E income property is part of your estate planning. IE: Rental unit in trust for specific beneficiaries, etc.

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Topic Author
mdavis6890
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Re: Sell Rentals?

Post by mdavis6890 »

Such great advice - thanks everyone!

Seems like the overall consensus is "what are you waiting for - sell 'em!"
Tal- wrote: Fri Jul 23, 2021 8:52 pm
I'd consider keeping them and selling them in a few years after you don't have a W2. As you must know, taxes on the sale of a rental can be really really high due to both cap gains and deferred income. Our plan is to wait until our W2 income goes away, and then sell our rentals then when everything will be at a lower tax rate.
This is one point I haven't recently considered, but I'll check it out. On this one I think I'd end up with maybe $80k in capital gains and $10k in depreciation recapture, so I think that would be something like a $20-25k tax bill now. That's nothing to sneeze at. I'm not quite sure how to work this out based on selling after the W2 goes away. Thoughts on how I should model that out?
phxjcc
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Re: Sell Rentals

Post by phxjcc »

Ependytis wrote: Fri Jul 23, 2021 8:39 pm I thought I was killing it when I bought my home in 1999 for $295,000 and today it’s worth $900,000. However, when I look at the return on the S&P 500 over that same time, I would have $1,346,000. You could argue that the house is something that you both live in and enjoy the appreciation, true, but a rental is not.

I can’t imagine the rental market has done that well in comparison to the S&P 500. Also with the S&P 500 you have absolutely no chance of tenants calling you in the middle of night complaining that the toilets clogged, or risk of getting sued because little Johnny broke his arm, or violating some obscure city law. In summary, get rid of the rentals ASAP.
Unless you paid cash for that $295,000 house, this comparison is completely invalid.

You must look at "cash on cash" gains.

So, you put 20% down and paid what $2,000/month for the last 22 years.
Then you need to discount that cash flow by inflation, because that 2,000/month is really only $ 750 in real dollars.
Likewise, the S&P today of $1.346 mil is about 500,000 in 1999 dollars.

....and you would have needed to pay rent for 22 years, which would have been a sunk cost.

I am not prostheltizing (sp?) one way or another---but I see this a LOT on here and the the simple "IF I WOULD HAVE PUT IT INTO THE MARKET INSTEAD OF BOUGHT A HOUSE" argument is usually factually misrepresented.

There is a reason my "sell or keep" spreadsheet goes from column A to column AH.

NOW, FOR THE OP...I just did the WHATIF on my rental...if I would have taken the cash and put it into Wellesley (which is THE plan) I would have had 25% less total return.

Pick any conservative 30-40/70-60 fund and the answer was the same.

This is total return, including net tax consequences.

Yes, this IS based on a runaway RE market.
However, one could argue that the S&P is also in a runaway condition wrt P/E ratio.

The caveat is that if the "the toilet is backed up again" calls are getting too annoying, then sell.
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Watty
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Re: Sell Rentals?

Post by Watty »

mdavis6890 wrote: Sat Jul 24, 2021 11:11 am so I think that would be something like a $20-25k tax bill now.
Taxes are of course critical to know and factor into your plans but if you could save $10K by delaying the sale then that could quickely be offset if you have a large expense like needing a new roof if you keep it longer.
RevFran
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Re: Sell Rentals?

Post by RevFran »

So I will differ from the crowd here- I am 44, and own 5 rentals; the real estate mkt in my town is so nuts that I have thought about selling. But I like the diversification, and I do t feel thrilled putting more money than I already am (403n max at work, plus almost all side gig income) into the stock market right now. So I am not selling. Many of the pro-sell answers make sense - just noting that there is another perspective. You’ve unloaded most of your RE. Maybe hold on to at least 2 of these 4, or maybe all 4, for diversification.
cryingshame
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Re: Sell Rentals?

Post by cryingshame »

RevFran wrote: Sat Jul 24, 2021 6:33 pm So I will differ from the crowd here- I am 44, and own 5 rentals; the real estate mkt in my town is so nuts that I have thought about selling. But I like the diversification, and I do t feel thrilled putting more money than I already am (403n max at work, plus almost all side gig income) into the stock market right now. So I am not selling. Many of the pro-sell answers make sense - just noting that there is another perspective. You’ve unloaded most of your RE. Maybe hold on to at least 2 of these 4, or maybe all 4, for diversification.
I'm in this camp. If your happy with the management company this exposure to real estate could really help with sequence risk early in retirement.
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