Decision regarding selling real estate

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Topic Author
Cathy at the beach
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Joined: Thu Jun 08, 2023 3:31 pm

Decision regarding selling real estate

Post by Cathy at the beach »

I have a question, and would appreciate some unbiased advice.

To begin-

Emergency funds: Three to six months of expenses <-- yes, I have this

Debt: None. I own my home/car

Tax Filing Status: Married Filing Jointly

Tax Rate: Unknown. I am using a carry forward at this time, which mitigates a lot of the taxes

State of Residence: California

Age: 65


And on to the question...

I currently own a rental property, it is valued at $3- $3.4 million. It is my entire retirement nest egg. I am married, for both of us we will be at $2200 per month in SS. We havent claimed yet.

I am tired of being a landlord, and will want to sell at some point in the next 3-5 years.

If the house sold for $3.2 million, after using up the carry forward, and after commissions, I would net $2.6 million +/-.

What do I do then? The stock market seems weird and unstable. A bond fund sounds okay to me, but can you lose principal in a bond fund? If the yield is under 4%, that wouldn't be enough income. (Monthly expenses approximately $7500. CDs seem stable, but what happens when/if rates return to 0%? How does one find a good financial advisor?

I am married, however my husband isn't able to assist me with decisions.

I really appreciate any/all thoughts.
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arcticpineapplecorp.
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Re: Decision regarding selling real estate

Post by arcticpineapplecorp. »

Cathy at the beach wrote: Thu Jun 08, 2023 3:48 pm I currently own a rental property, it is valued at $3- $3.4 million. It is my entire retirement nest egg. I am married, for both of us we will be at $2200 per month in SS. We havent claimed yet.

I am tired of being a landlord, and will want to sell at some point in the next 3-5 years.

If the house sold for $3.2 million, after using up the carry forward, and after commissions, I would net $2.6 million +/-.

What do I do then? The stock market seems weird and unstable. A bond fund sounds okay to me, but can you lose principal in a bond fund? If the yield is under 4%, that wouldn't be enough income. (Monthly expenses approximately $7500. CDs seem stable, but what happens when/if rates return to 0%? How does one find a good financial advisor?
welcome to the group.

Assuming you're both earning $2200 a month and not jointly? If incorrect, I'll have to correct the numbers below.

monthly expenses are $7500
monthly income is $4400
monthly shortfall is $3100

$2.6 million to generate $3100 a month ($37,200 a year).

that's a 1.4% withdrawal rate (37,200 / 2,600,000 = 0.014)

whatever you put your money in will earn more than that unless you keep it at a brick and mortar bank (and I wouldn't do that because the FDIC limits are $500,000 for joint bank account).

Bonds are paying 4%, money market is paying 5%, CDs and online banks are paying 4-5%. That won't continue forever of course, but even total stock market dividend yield is 1.56%.

So I think you'll be ok wherever you put your money in that the amount of income to be received on the lump sum will equal or exceed the needed shortfall of income.

Can you lose principal? Sure, bond's values fell last year as interest rates rise. That's why they're paying more in interest now than last year. Stocks value can fall (they did last year). But even if your money is in a bank account paying 4% last year but inflation was 9% you're losing purchasing power on your money. So it's possible to lose money even if you don't literally see it (inflation is a hidden tax of sorts).

You had all your life savings in one asset, real estate. You lucked out. It could have gone a different way. This is why diversification is key. Because you can't know what's going to do well or poorly in advance. If you could, you'd know exactly where to put your money. So you spread it out between different assets, like stocks, bonds, real estate, cash or other fixed income. That way some things will do well even as others are not. Each asset has its day in the sun.

So you want to determine your need, ability and willingness to take risk first because that will then lead you to your asset allocation:

How much risk do you need to take: https://www.cbsnews.com/news/asset-allo ... -you-need/
How much risk do you have the ability to take: https://www.cbsnews.com/news/asset-allo ... -you-take/
How much risk do you have the willingness to take: https://www.cbsnews.com/news/asset-allo ... tolerance/
How to deal with conflicts between the need, ability and willingness to take risk: https://www.cbsnews.com/news/asset-allo ... ing-goals/

you should understand different allocations perform differently. The more risk, the more the expected return. The less risk, the less expected return:

https://investor.vanguard.com/investor- ... allocation

look at bad declines (50% below) and choose an allocation that allows you to still sleep well at night:

Image

finally, here are some links to posts about how to find a fiduciary fee only advisor.

what do you think?
Last edited by arcticpineapplecorp. on Thu Jun 08, 2023 4:57 pm, edited 1 time in total.
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adamthesmythe
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Re: Decision regarding selling real estate

Post by adamthesmythe »

You have some difficult decisions to make. I won't make them but I will point out the issues:

1. If you don't invest in stocks you will likely lose money because of inflation.

2. You are vulnerable to a well-dressed broker who will charge a yearly fee to manage your money, might put you in investments with high fees, and might churn your investments.

Watch out, don't make any sudden moves, and read the wiki on this site.
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arcticpineapplecorp.
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Re: Decision regarding selling real estate

Post by arcticpineapplecorp. »

adamthesmythe wrote: Thu Jun 08, 2023 4:56 pm Watch out, don't make any sudden moves, and read the wiki on this site.
good point, didn't think about it but read Managing a windfall which does specifically state:
While not being external sources of new wealth, other common sources of receiving large lump sums include the following:[2]

A real estate sale
The sale of a business
Widowhood and divorce

Sales of businesses and real estate involve the conversion of an illiquid asset into large sums of fungible cash.
It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events. Asking Portfolio Questions | Wiki
Topic Author
Cathy at the beach
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Re: Decision regarding selling real estate

Post by Cathy at the beach »

SS of $2200 is combined. During the earning years my husband made the decision to not take an income. Then he gambled away everything except the one house in my name. Then he had a TBI. So, it's kind of a @*!tshow.

I read the wiki(s), but I feel overwhelmed, and yes, fear a slick operator giving me self serving advice.
BogleTaxPro
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Re: Decision regarding selling real estate

Post by BogleTaxPro »

You might want to consider investing some of the proceeds in an annuity for a guaranteed stable income. See Stinky's excellent mega-thread for some of the pros and cons (etc.): Purchasing MYGAs (multi year guaranteed annuities) - mega thread viewtopic.php?t=334589
Flashes1
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Re: Decision regarding selling real estate

Post by Flashes1 »

I think you're in fine shape overall.

Given some of your fears, I'd put 50% in the Total Stock Market Index and 50% in bonds. Bonds: I'd bifurcate 50% in Total Bond Index and 50% via a Medium Term Bond Index. Carve out 2-3 years of expenses from the bond allocation and put in a High Yield Savings account that could be tapped without penalty.

Postpone SS until age 70.
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Wiggums
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Re: Decision regarding selling real estate

Post by Wiggums »

Sorry to hear that your husband has an injury. Your home value is your retirement portfolio plus SS. Right now you have all your eggs in one basket. That makes me a bit uncomfortable. I would sell the home once you identify a new place to live.

I would invest in (at least) 30% stock (Vanguard total stock market for S&P 500) to keep pace with inflation. For the bond portion, you can buy a combination of treasuries and a bond fund. A 40/60 or 50/50 portfolio would not be must different in terms of risk.

Good luck to you
"I started with nothing and I still have most of it left."
will86
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Re: Decision regarding selling real estate

Post by will86 »

Cathy at the beach wrote: Thu Jun 08, 2023 5:01 pm I read the wiki(s), but I feel overwhelmed, and yes, fear a slick operator giving me self serving advice.
right now you can get a 4%-5% on very liquid short term investments. CDs, Tbills. no need to be in a hurry. take some time to learn and ask questions here
if you meet an advisor you suspect may be too self serving, share you concerns here and before you commit to anything.

managing a simple self directed portfolio like mentioned above, is easier than what you have faced being a landlord (by far)
Joe Public
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Re: Decision regarding selling real estate

Post by Joe Public »

AOM and chill. :D
Topic Author
Cathy at the beach
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Re: Decision regarding selling real estate

Post by Cathy at the beach »

I really appreciate all the suggestions. Kindness seems to be in short supply these days, and yet, here you all are, helping out a nervous stranger.

I wanted to clarify that the rental house is an additional property from the house we live in. So at least I would not need to find another house if I sell and quit being a landlord.
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WoodSpinner
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Re: Decision regarding selling real estate

Post by WoodSpinner »

OP,

You might benefit from a Fee Only (Flat Fee or Hourly) consult with a Financial Advisor to help navigate the issues you are facing. I suggest avoiding any Asset Under Management (AUM) advisors, Insurance Sales People, Banks, Brokers etc. Focus on planning, Cashflow Needs, Retirement Goals, Estate Goals, Taxes etc. and then find investments to help support the plan (the investing is the easy part).

https://www.flatfeeadvisors.org/

https://www.napfa.org/

Best of luck,

WoodSpinner
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SuzBanyan
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Re: Decision regarding selling real estate

Post by SuzBanyan »

Cathy at the beach wrote: Thu Jun 08, 2023 7:42 pm I really appreciate all the suggestions. Kindness seems to be in short supply these days, and yet, here you all are, helping out a nervous stranger.

I wanted to clarify that the rental house is an additional property from the house we live in. So at least I would not need to find another house if I sell and quit being a landlord.
Have you verified the amount of taxes you will need to pay on the sale of the rental? You mentioned using your remaining loss carry forwards but I wasn’t sure if you were duly accounting for the likely gain if you have owned the property for years.

Sorry to hear about your husband’s injury, but I have to ask whether there is any risk that his future actions could cause you to lose the nest egg you will have after the sale. While I agree with others that diversifying from a single real estate asset makes sense, it may be easier for liquid assets to be depleted by your husband. Is this still a possibility? If so, there may be ways to tie up the liquid assets coming from the rental sale to make it difficult or impossible from him to waste them.

As others have said, you are likely to be fine financially because it’s seems you are very able to live well within your means.
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leeks
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Re: Decision regarding selling real estate

Post by leeks »

I would sell the rental property sooner rather than later so you can diversify your investments. Real estate values in 3-5 years may or may not be favorable.
Topic Author
Cathy at the beach
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Re: Decision regarding selling real estate

Post by Cathy at the beach »

SuzBanyan wrote: Thu Jun 08, 2023 8:38 pm
Cathy at the beach wrote: Thu Jun 08, 2023 7:42 pm I really appreciate all the suggestions. Kindness seems to be in short supply these days, and yet, here you all are, helping out a nervous stranger.

I wanted to clarify that the rental house is an additional property from the house we live in. So at least I would not need to find another house if I sell and quit being a landlord.
Have you verified the amount of taxes you will need to pay on the sale of the rental? You mentioned using your remaining loss carry forwards but I wasn’t sure if you were duly accounting for the likely gain if you have owned the property for years.

Sorry to hear about your husband’s injury, but I have to ask whether there is any risk that his future actions could cause you to lose the nest egg you will have after the sale. While I agree with others that diversifying from a single real estate asset makes sense, it may be easier for liquid assets to be depleted by your husband. Is this still a possibility? If so, there may be ways to tie up the liquid assets coming from the rental sale to make it difficult or impossible from him to waste them.

As others have said, you are likely to be fine financially because it’s seems you are very able to live well within your means.
The rental approximate sales price would be $3.2-3.4 million. Commisions would be $150,000. The carry forward is $1.2 million. The cost basis is $250,000. I am estimating 20% capital gains tax on the taxable amount to be $360,000. Net remaining after all expenses $2.6 million.

California is a community property state, so although the house is in my name, if he divorced me, he would take half.

He knows his brain isn't working correctly, but I have to remind him every few days that he has a situation. He has access to the checking account and a credit card, both with reasonable amounts in them. He is like a very young teen in his thinking, but when I suggest someone become his power of attorney he gets very agitated. So far he has been okay with me handling all the decisions (this has been going on for about ten years now).

I may be wrong, but I am thinking that since the house is in my name alone, that I could put the stocks/bonds/CDs in my name alone, and that would protect the assets as long as he didn't divorce me.
nonnie
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Re: Decision regarding selling real estate

Post by nonnie »

What is the source of funds that purchased this home? Is it inherited property, your own separate funds either prior to marriage or during? I need some clarification on why it is in your name only.

If these are all your separate funds and have not been commingled (Even if they have if you can provide a good paper trail showing it is all your funds you may be able to go forward). I believe you said your spouse chose not to work and so even if the property has been purchased during your marriage using only your funds, it might be a value to you to contact a lawyer to establish whether this is your own property or joint property.
Topic Author
Cathy at the beach
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Re: Decision regarding selling real estate

Post by Cathy at the beach »

nonnie wrote: Thu Jun 08, 2023 10:20 pm What is the source of funds that purchased this home? Is it inherited property, your own separate funds either prior to marriage or during? I need some clarification on why it is in your name only.

If these are all your separate funds and have not been commingled (Even if they have if you can provide a good paper trail showing it is all your funds you may be able to go forward). I believe you said your spouse chose not to work and so even if the property has been purchased during your marriage using only your funds, it might be a value to you to contact a lawyer to establish whether this is your own property or joint property.
It was in both ours names until I discovered he had put loans on all the properties we owned (mostly in his name, some were loans from 'friends'), drained the accounts, and gambled everything away. This was the only property I could save by selling other emcumbered properties (hence the carry forward), and using the proceeds to retain this house. At that point he quit claimed the property to me, He then (trigger warning) attempted to end his life, failed, but left himself oxygen deprived. And that's where we have been for ten years.

Sorry for the depressing details, it is difficult to explain how it ended up without touching on how we got here.
Valuethinker
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Re: Decision regarding selling real estate

Post by Valuethinker »

Cathy at the beach wrote: Thu Jun 08, 2023 11:19 pm
nonnie wrote: Thu Jun 08, 2023 10:20 pm What is the source of funds that purchased this home? Is it inherited property, your own separate funds either prior to marriage or during? I need some clarification on why it is in your name only.

If these are all your separate funds and have not been commingled (Even if they have if you can provide a good paper trail showing it is all your funds you may be able to go forward). I believe you said your spouse chose not to work and so even if the property has been purchased during your marriage using only your funds, it might be a value to you to contact a lawyer to establish whether this is your own property or joint property.
It was in both ours names until I discovered he had put loans on all the properties we owned (mostly in his name, some were loans from 'friends'), drained the accounts, and gambled everything away. This was the only property I could save by selling other emcumbered properties (hence the carry forward), and using the proceeds to retain this house. At that point he quit claimed the property to me, He then (trigger warning) attempted to end his life, failed, but left himself oxygen deprived. And that's where we have been for ten years.

Sorry for the depressing details, it is difficult to explain how it ended up without touching on how we got here.
My condolences for the death of the things that you thought you could once rely upon. It must have been horrible. Is horrible.

I will assume you have taken appropriate legal advice to protect yourself financially as best you can.

Overall on your proposed investment strategy I would comment that one really has to think in "real" ie inflation adjusted terms.

If one has a portfolio of $1m, around age 60, the sustainable withdrawal rate is around 3% ie $30k. But that amount would increase with CPI. The "4% rule" is based upon some historic performance of stock and bond markets that is not likely to reoccur. There is "sequence of return risk" ie in the case where stocks generate no real return (as they did 2000-2010) and yet one has to make withdrawals to sustain one's lifestyle, thus super-depleting capital.

Note that another way of increasing your inflation-linked retirement income is to delay Social Security for as long as possible - thus starting with a higher benefit which is itself CPI indexed. It's worth spending capital if you can do that.

I would suggest with that $1m portfolio, say, a breakdown of:

- 50% stocks
- 25% conventional US Treasury bonds (Intermediate Term US Treasury Bond fund) and/ or California Municipal bond fund (if that is attractive on an after tax basis). A "ladder" of CDs can be part of this (1-5 years maturity) as long as within FDIC limits per institution
- 25% US TIPs bonds. To the extent you can purchase ibonds, you can reduce the TIPS exposure each year (or TIPS & US Treasury bonds)

(you could reduce bonds and TIPs by 2.5% each, and hold that as cash until your ibonds reach the state of being cashable (5 years?)).

I am not US based but have some background in the financial services industry (CFA qualification).
SuzBanyan
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Re: Decision regarding selling real estate

Post by SuzBanyan »

Cathy at the beach wrote: Thu Jun 08, 2023 9:05 pm
SuzBanyan wrote: Thu Jun 08, 2023 8:38 pm
Cathy at the beach wrote: Thu Jun 08, 2023 7:42 pm I really appreciate all the suggestions. Kindness seems to be in short supply these days, and yet, here you all are, helping out a nervous stranger.

I wanted to clarify that the rental house is an additional property from the house we live in. So at least I would not need to find another house if I sell and quit being a landlord.
Have you verified the amount of taxes you will need to pay on the sale of the rental? You mentioned using your remaining loss carry forwards but I wasn’t sure if you were duly accounting for the likely gain if you have owned the property for years.

Sorry to hear about your husband’s injury, but I have to ask whether there is any risk that his future actions could cause you to lose the nest egg you will have after the sale. While I agree with others that diversifying from a single real estate asset makes sense, it may be easier for liquid assets to be depleted by your husband. Is this still a possibility? If so, there may be ways to tie up the liquid assets coming from the rental sale to make it difficult or impossible from him to waste them.

As others have said, you are likely to be fine financially because it’s seems you are very able to live well within your means.
The rental approximate sales price would be $3.2-3.4 million. Commisions would be $150,000. The carry forward is $1.2 million. The cost basis is $250,000. I am estimating 20% capital gains tax on the taxable amount to be $360,000. Net remaining after all expenses $2.6 million.

California …. [snip]
You have probably under estimated your tax. First, it’s not clear whether the cost basis you provided is after depreciation. If you did or should have taken depreciation, then the cost basis might be lower. Second, if you did take depreciation, then you are subject to recapture as ordinary income but at a rate as high as 25%. Third, CA has no capital gains rate, which means much of the gain will be taxed by the state at 13.8%. Also note that if you have an AGI in CA in excess of $1,000,000, even if it is just for one year due to the sale of a highly appreciated property, special rules apply that may require you to make larger estimated tax payments to avoid underpayment penalties. While the estimated tax rules do not increase the amount of tax due, they result in penalties if you fail to pay enough in a timely manner.

As you can tell, it is complicated. You can either work with your CPA or your tax software to get a better feeling for how much will be due so that you can plan accordingly.

Still, you will come out ahead after the sale and a sale will allow diversification.

If you haven’t already done so, it might be helpful for you to meet with an attorney to check to see if there is anything you can do to protect the assets from your husband’s future actions.
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