Portfolio review - rental properties

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Topic Author
z9852
Posts: 24
Joined: Sun Sep 17, 2017 5:32 pm

Portfolio review - rental properties

Post by z9852 »

I'm a new reader and still learning the Boglehead way. I'm hoping to get advice about my current portfolio / situation.

Here is my overview:

Age: 29 (wife 30).
Emergency funds / reserves: maintain ~$20K in cash
Tax filing status: married filing jointly
Marginal tax rate: 28% 25% federal, no state.
Debts: about $6K left on car loan (<2%). Student loans ~$24k (~$20k at 5.5%).
Mortgages: Three houses, two of which are rentals.
- Rental 1: mortgage @ $380K (3.5%), HELOC @ $115K (4.75% fixed, about $5K available). I have 30% equity based on estimated current value.
- Rental 2: mortgage @ $230K (3.6%). Nearly 30% equity.
- Home: mortgage @ $303K (4.125%). Recently purchased w/ 20% down.
401k: ~$30k, 80/20 stocks/bonds. Company contributes 3% of income. Haven't been making contributions.
HSA account: Company contributes ~$160/mo., and I contribute $100 per month. Balance is < $1K.
Insurance: Have umbrella policy covering properties and auto. Have term life insurance on myself.

Notes:

* The first rental currently has a good positive cash flow (even after saving a % for reserves). The second rental was just put on the market so is not bringing income just yet, though expecting to have a good cash flow from that one as well. We try to keep the properties well maintained. We use a property manager and have so far had an okay time as landlords (though experience some unexpected costs from time to time). The market in my area has been really crazy and home and rental values have gone way up since we purchased the rentals (bought the first one at about the bottom of the recession).

* Wife not working, but just finished nursing school and working on finding a job.

* I started early at my company when it was tiny, so have a lot of stocks (exercised options through the years). The company is now pretty large and still growing, so I'm anticipating a major windfall if ever the company is sold or goes public. Definitely not counting on this since, until the day it happens, the whole thing could fall through.



I'm hoping to get a sanity check on my situation. My thought is that I should be wary about being so exposed to the Real Estate market, and that I'm very low on emergency funds / reserves for this situation. My current plan is to save surplus cash for the next while to beef up emergency fund / rental reserves (goal is 6 months expenses), and to reallocate my 401k to mostly bonds (thinking this would help a little to reduce volatility assuming I'm overexposed to Real Estate). Once I've got a good reserve built up, I'd tackle the 5.5% student loan (and/or refinance?), and then start working on the 401k.

Am I in a risky enough situation where considering selling one of the rental properties would be wise, even if the rentals are currently bringing in positive cash flow?

Thank you very much!
Last edited by z9852 on Sat Oct 21, 2017 4:14 pm, edited 2 times in total.
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Sandtrap
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Re: Portfolio review - rental properties

Post by Sandtrap »

Yes. Your instincts are correct.
Things are precarious and could go either way.

Positive: tenants pay full rent, both units rented without issue, long term tenancy, minimal expenses, properties appreciate in high proportion to rental income.

Negative: one or both units are vacant, no positive cash flow, tenants in litigation, major expenses crop up, etc, etc,

Can you confidently maintain a "net" 6% CAP on both rentals?

What is the average annual property value appreciation for each/both properties?
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boglerdude
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Joined: Fri Jul 10, 2015 1:28 am

Re: Portfolio review - rental properties

Post by boglerdude »

Yeah, overexposed to real estate and overexposed to one RE market

The property manager is a drag on returns and even the best manager will do his best to not visit your properties because that time is costly

If you're going to put in sweat equity, that helps because it's like having another job

And visualize how you'll react if a tenant goes berserk and threatens you and your property.

The recent landlord thread:
viewtopic.php?f=2&t=226980
CurlyDave
Posts: 3182
Joined: Thu Jul 28, 2016 11:37 am

Re: Portfolio review - rental properties

Post by CurlyDave »

boglerdude wrote: Sun Oct 01, 2017 9:02 pm...If you're going to put in sweat equity, that helps because it's like having another job...
DW and I put a lot of sweat equity into rentals and it has paid off for us, big time.

Sweat equity can be as simple as terminating the property manager and doing it yourself, to as complex as doing major renovations. I have put on a few roofs in my day, but could have done almost as well by just being able to paint.

You are exposed to the risks of a concentrated investment in one geographic area. How much faith do you have in continued growth of that area? If you have faith, keep your real estate.
Answering a question is easy -- asking the right question is the hard part.
Loandapper
Posts: 226
Joined: Mon Jul 21, 2014 11:49 am

Re: Portfolio review - rental properties

Post by Loandapper »

Seems like you are already aware of this issue, but your cash reserves are very low, especially with your high level of risk.

Think of all the bad things that can happen: market drop, job loss, new roof, double vacancies, etc.

You could theoretically be out of cash very quickly with just one of those. Now what happens when two happen at the same time? You're in big trouble.
runner540
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Joined: Sun Feb 26, 2017 4:43 pm

Re: Portfolio review - rental properties

Post by runner540 »

I wouldn't be able to sleep at night with those stats, but I'm not you.

I didn't see your plans for when your wife gets a job. I would plow all of her paycheck into improving your balance sheet: building cash reserves, paying down car loan, student debt, and contributing again to both of your 401ks/roth. You guys are in the 28% tax bracket, so every $1000 you don't save in your 401k is costing you $280, and leaving you only $720 for mortgage/car/student loan payments and living expenses. (caveat - I don't understand much of how your rental properties change your tax bracket).

Here's my estimate of your net worth (backed into the numbers, correct me if I'm wrong):
Home equity: $75k
Rental 1 equity: $213k
Rental 2 equity: $98k
401k: $30k
cash reserves: $20k
Student loan and car loan: -$30k

total: $406k. Take off 5% of your home equity to account for selling costs: $386k

As the other posters have mentioned, it's highly leveraged and it's highly concentrated. How long could you last if you lost your job and you lost one or both of your renters?
Topic Author
z9852
Posts: 24
Joined: Sun Sep 17, 2017 5:32 pm

Re: Portfolio review - rental properties

Post by z9852 »

Thank you all for your responses! I'm a bit relieved to just confirm that this is a somewhat precarious situation I'm in.

Yesterday we received news that the tenant in rental #1 is moving out at the end of the month (long story, but we were considering selling last year and told tenants they could break the lease penalty free, then we hesitated on that decision and regretted it).

Now that we have the choice between signing another rental lease or selling, we think we'll just go ahead and sell. From my calculations, the CAP rate doesn't pencil out to much over ~2.3% optimistically (should've looked at this when we originally decided to rent it!). The two rentals are located in the Seattle area where home prices have shot up since ~2012. I don't have confidence that this trend will continue for too much longer, and I'd be happy enough to "lock in" the gains we've already seen if we can, and move towards a more balanced/simple portfolio. We used to live in the house, so will avoid capital gains tax.

The other property's CAP rate is coming out around 5%, and we also just heard that a tenant was found :D . It may be possible to kick up that CAP rate some day by converting it to a two-unit rental (it's nearly configured for that, just a few tweaks needed like soundproofing).

Once sold, I suppose I'll need to figure out what to do with the proceeds. I'm thinking I should stash it in savings for a while (Ally), but max out my 401k from income in the meantime? Now, to head over to the wiki for more investment reading :beer. Thanks again!
Topic Author
z9852
Posts: 24
Joined: Sun Sep 17, 2017 5:32 pm

Re: Portfolio review - rental properties

Post by z9852 »

Posting an update with a lot of recent changes -

We've decided to sell both of our rental properties (putting them both on the market in the next ~2 weeks instead of seeking new rental leases). We've warmed up to the idea of quitting the landlord biz and moving towards a more simplified / liquid portfolio, and de-risking our current situation. We're working on a plan for what to do with the sale proceeds, and are referencing the Bogleheads windfall guide. Our preliminary plan is to fund a 6 months EF, pay off a bit of high interest debt (student loan), and set aside a bit in a savings account for some big-ticket spending that we think we'll make over the next 2-3 years. After that, it looks like we'll still come out with a sizable amount of cash.

We've got a rough plan for what to do after the houses are sold (hoping for a sanity check), and then a couple of questions:

* Desired allocation: 80% stock / 20% bond
* Start diverting pre-tax income to max out my tax-advantaged accounts (HSA, 401k), and also max-out a new IRA. After doing a budget and tax estimate, we should still be able to maintain a comfortable budget. My wife has not yet landed a nursing position.
* Put the rest of the unallocated sale proceeds into a taxable investment account (leaning towards Vanguard, but no big preference).


Here are our questions:

* After selling the two rental properties, we'd be left with a single mortgage on our residence (~$303k @ 4.125%). Is there any cut-and-dry reason to pay down the mortgage with the extra sale proceeds rather than put into a taxable account?

* Incidentally, my employer is changing 401k providers from a local company (high-ish fees) to Fidelity this month. I've included the list of available funds below. I'm wondering what my best bet is for fund choices given the house sale situation. Assuming I will invest sale proceeds in a taxable account shortly, do I want to go heavy on bonds in the 401k now, or should I just stick to an 80/20 allocation and rebalance once I actually open and fund the taxable account? Not sure if there are fees or anything like that to worry about when rebalancing a 401k (or transferring between providers).

Thank you very much!


FID 500 INDEX PR (FUSVX) - Stock Investments Large Cap 0.035%
FID US BOND IDX PR (FSITX) - Bond Investments Income 0.045%
FID MID CAP IDX PR (FSCKX) - Stock Investments Mid-Cap 0.05%
FID SM CAP IDX PR (FSSVX) - Stock Investments Small Cap 0.05%
VANG GROWTH IDX ADM (VIGAX) - Stock Investments Large Cap 0.06%
VANG VALUE IDX ADM (VVIAX) - Stock Investments Large Cap 0.06%
VANG MDCPGR IDX ADM (VMGMX) - Stock Investments Mid-Cap 0.07%
VANG MDCPVAL IDX ADM (VMVAX) - Stock Investments Mid-Cap 0.07%
VANG SMCP GR IDX ADM (VSGAX) - Stock Investments Small Cap 0.07%
VANG SMCPVL IDX ADM (VSIAX) - Stock Investments Small Cap 0.07%
VANG DEV MKT IDX ADM (VTMGX) - Stock Investments International 0.07%
FID REAL EST IDX PR (FSRVX) - Stock Investments Specialty 0.09%
FID INFL PR IDX PR (FSIYX) - Bond Investments Income 0.09%
GABELLI TREASURY MM (GABXX) - Short-Term Investments 0.11%
VG TL INTL BD IDX AD (VTABX) - Bond Investments Income 0.12%
VANG EM STK IDX ADM (VEMAX) - Stock Investments International 0.14%
FID FDM IDX 2015 INV (FLIFX) - Blended Investment* N/A 0.21%
FID FDM IDX 2020 INV (FPIFX) - Blended Investment* N/A 0.21%
FID FDM IDX 2025 INV (FQIFX) - Blended Investment* N/A 0.21%
FID FDM IDX 2030 INV (FXIFX) - Blended Investment* N/A 0.21%
FID FDM IDX 2035 INV (FIHFX) - Blended Investment* N/A 0.21%
FID FDM IDX 2040 INV (FBIFX) - Blended Investment* N/A 0.21%
FID FDM IDX 2045 INV (FIOFX) - Blended Investment* N/A 0.21%
FID FDM IDX 2050 INV (FIPFX) - Blended Investment* N/A 0.21%
FID FDM IDX 2055 INV (FDEWX) - Blended Investment* N/A 0.21%
FID FDM IDX 2060 INV (FDKLX) - Blended Investment* N/A 0.21%
FID FDM IDX 2005 INV (FJIFX) - Blended Investment* N/A 0.22%
FID FDM IDX 2010 INV (FKIFX) - Blended Investment* N/A 0.22%
FID FDM IDX INC INV (FIKFX) - Blended Investment* N/A 0.23%
CALV US LG CP CRI I (CISIX) - Stock Investments Large Cap 0.37%
DFA INTL SUS CORE 1 (DFSPX) - Stock Investments N/A 0.38%
WA CORE PLUS BOND I (WACPX) - Bond Investments Income 0.52%
DFA INTL SMALL CO I (DFISX) - Stock Investments International 0.53%
DH LARGE CAP Y (DHLYX) - Stock Investments Large Cap 0.58%
PARNASSUS CORE EQ IS (PRILX) - Stock Investments Large Cap 0.66%
PRMCP ODYSSEY GROWTH (POGRX) - Stock Investments Large Cap 0.66%
MFS INTL VALUE R6 (MINJX) - Stock Investments International 0.66%
DH MID CAP I (DHPIX) - Stock Investments Mid-Cap 0.79%
PARNASSUS MID CAP IS (PFPMX) - Stock Investments N/A 0.8%
J H SMALL CAP VAL N (JDSNX) - Stock Investments Small Cap 0.89%
SEAFARER OS GR&IN IS (SIGIX) - Stock Investments International 0.92%
OAKMARK FUND INV (OAKMX) - Stock Investments Large Cap 0.93%
CONESTOGA SM CAP IS (CCALX) - Stock Investments Small Cap 1.1%
Topic Author
z9852
Posts: 24
Joined: Sun Sep 17, 2017 5:32 pm

Re: Portfolio review - rental properties

Post by z9852 »

Hello all - updating my post with the latest and some fund questions.

We've sold our two rental properties over the last couple of months. We were very happy to get quite a bit more than we were hoping for, and are glad to have gotten out of the rental biz.

I'm hoping to confirm that our plans for the proceeds sound okay.

* Stash away enough for a 12 month emergency fund in an Ally no-penalty CD (something like $60k).
* Loans: paid off student loans, and will keep low-interest car loan.
* We've maxed out 2017 tax-deferred accounts: my Fidelity 401k, new Roth IRAs at Fidelity for both me and wife, and my HSA at HSA Bank.
* I plan to front-load 2018 tax-deferred contributions (replacing income with rental sale proceeds).
* Allocate some proceeds for sorely needed home improvements (we bought a fixer).
* Continue contributing after-tax income and increasing our savings rate if we can.

After that, we'll have something in the $170k ballpark to invest after cap gain taxes. We're leaning toward opening a Vanguard taxable account and putting it there for the long term. I'm a bit nervous about doing a lump sum investment of this size (especially since I've never done it before), but from all I've read, it sounds like if we're confident in our allocation, there's no better time than now!

Here is what I'm thinking for fund allocation to get to 80/20 stocks/bonds (with ~16% international) based on anticipated balances up to February '18:

* 401k / $75k (Fidelity - see fund list above)
- 70% - FID US BOND IDX PR (FSITX) - 0.045%
- 30% - FID 500 INDEX PR (FUSVX) - 0.035%
* HSA / $12k (TD Ameritrade)
- 42% - Cash account treated like bonds/fixed (to avoid service fee)
- 58% - SPDR Portfolio Total Stock Market ETF (SPTM) - 0.03%
* Roth IRAs / $22k (Fidelity)
- 100% - Fidelity Total Market Index Fund (FSTVX)
* Vanguard taxable $180k
- 74% - Vanguard Total Stock Market Index Admiral Shared (VTSAX)
- 26% - Vanguard Total International Stock Index Admiral Shares (VTIAX)

One question is that I anticipate over the years that I'll contribute much more to the 401k than to the taxable account, so I'm not sure if I should mix in some small / mid cap stocks in there so as not to overweight the S&P 500 fund?

Thanks Bogleheads!
runner540
Posts: 1763
Joined: Sun Feb 26, 2017 4:43 pm

Re: Portfolio review - rental properties

Post by runner540 »

Bumping to help you get more responses.

Have you read the wiki on paying off debt vs investing? I personally wouldn't pay 4%+ interest to invest in taxable but other folks will. Nowhere else to get a risk free 4% return these days.

For your 401k, if you are committed to rebalancing you can make your own 80/20 blend. If not, just pick the target date fund that has that blend and call it a day. What is your desired international allocation?

Congrats on selling your properties. Your balance sheet is now much more resilient!
Olemiss540
Posts: 2135
Joined: Fri Aug 18, 2017 8:46 pm

Re: Portfolio review - rental properties

Post by Olemiss540 »

There is really no need for a 12mo emergency fund when you are soon to have 2 incomes and a sizeable taxable account. I would go to a 6mo ER fund, payoff the student loans AND the car loan just to make immediate cash flow improvements, continue to MAX all tax advantaged space moving forward EVERY YEAR including your SO's, and then invest the rest into a taxable account in all low cost broadly diversified equity mutual funds.

Offset your heavy equity tilt in your taxable funds with additional bonds in your 401k to maintain your overall AA. Only remove money from the taxable account in order to top off your yearly tax advantaged accounts if necessary and then continue saving 30% per year of your net income through a combination of increasing investment account contributions and chunking money towards that mortgage to get it paid down.

Then become FI in your early to mid 50's and do whatever the he'll you want.
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.
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Sandtrap
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Re: Portfolio review - rental properties

Post by Sandtrap »

Very nice!
Congratulations on exiting the Rental Business.
Your plan looks great and well thought out. And, you've made great progress from your original post.
Here's some additional reviews on basics.
Deploying to "non taxable space" then taxable" is per Bogle guidelines.
Funding Priority [url] https://www.bogl ... vestments
Review these guidelines and tweak accordingly.
Tax Efficient Fund Placement
https://www.bogleheads.org/wiki/Tax-eff ... _placement
Suggest you review your IPS or construct one if have not already. In that you will ascertain the best allocation that works for your financial position and risk tolerance. . . and "sleep factor".

As for the funds, you will find the general Boglehead consensus is to simplify the number of funds and locations, streamline, reduce expenses ER, avoid overlap. And while doing that, treat the entirety of one's portfolio comprehensively, not in sections or bits. As you are doing this, reduce expenses, pay down debts with highest interest rates first.

Check your overall positions and whether you are on target for your financial goals with these links:
PORFOLIO VISUALIZERS, PROJECTIONS, AND ANALYSIS
https://www.portfoliovisualizer.com
(you can enter the tickers and map all of your funds to get a comprehensive view)
Firecalc. Retirement. How long will your money last?
https://www.firecalc.com

As for your emergency fund. Only you can ascertain whether 6 mos or 12 mos works for you. It depends on your immediate needs, and lifestyle and personal comfort zone, and risk level.

I hope this is helpful to you.
j :D
Wiki Bogleheads Wiki: Everything You Need to Know
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