Too many houses?

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Topic Author
TomBranson
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Too many houses?

Post by TomBranson »

I own four houses:

* House 1 (main residence)
- Value: 27% of all real estate holdings.
- Mortgage: 65% of value @ 4.25%.
- Appreciation: 11.11% CAGR over 4 years

* House 2 (residential rental)
- Value: 13% of all real estate holdings.
- Mortgage: 52% of value @ 3.75%.
- Appreciation: 3.74% CAGR over 11 years.
- Cap Rate: 2.79%

* House 3 (commercial rental)
- Value: 22% of all real estate holdings.
- Mortgage: None.
- Appreciation: 6.42% CAGR over 18 years.
- Cap Rate: 3.44%

* House 4 (vacation home)
- Value: 38% of all real estate holdings.
- Mortgage: 92% of value @ 3.625%.
- Appreciation: 3.37% CAGR over 1 year.
- Cap Rate: -2.48%

Their total value represents 50% of my net worth, or 11% after deducting the mortgages. Houses 1-3 are all in the same city. House 4 is in another state. The two rentals are cash flow positive with very stable tenants. The vacation home is rented a handful of weeks a year when the opportunity arises, but we never intended to put in the time or effort to make money off of it hence the negative cap rate.

My question is this: should I sell something? If so, why and what?

From an asset allocation perspective I feel overweight real estate. I also feel like 3 of the 4 properties being in a single city is perhaps overly risky. The strong recovery in housing prices in my area, the ease with which any of these could be sold ("sellers market"), and the liquidity that would become available if I sold have also peaked my curiosity in selling something. I feel like I've been the beneficiary of market timing (bought early during recoveries), low interest rates, and generally excellent appreciation (even surviving 2007/2008 quite well). I'm not a RE market genius and don't pretend that I can keep up a steady streak of wins, so I don't think I'm looking to get any deeper into RE investing. I've considered selling a couple to pay off the remaining to get my essential expenses lower, though I am able to max 401k, Roths, etc as is and have a decent emergency fund (4 months expenses). What else should I be considering in making this decision?

I welcome any thoughts you all have of my financial situation regarding the RE and what your recommendations might be with regards to selling or not.

Thank you!!
Tom
technovelist
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Re: Too many houses?

Post by technovelist »

I would say you are seriously over-concentrated in real estate. If I were in your position, I would lighten up .
By coincidence, I have a friend in a position somewhat like yours and he is working on reducing his holdings at present.
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KyleAAA
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Re: Too many houses?

Post by KyleAAA »

I think you're fine. Having 11% of your net worth in real estate isn't all that much. Just invest all that extra cache flow in stocks and bonds if you're worried about it.
technovelist
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Re: Too many houses?

Post by technovelist »

KyleAAA wrote:I think you're fine. Having 11% of your net worth in real estate isn't all that much. Just invest all that extra cache flow in stocks and bonds if you're worried about it.
Yes, but it isn't 11%, it's 50%. His real estate exposure is the gross value of his properties, unless he has non-recourse mortgages, which seems very unlikely especially with investment properties.
In theory, theory and practice are identical. In practice, they often differ.
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rob
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Re: Too many houses?

Post by rob »

You seem to be having an issue just because your asking the question, so assuming you want to lighten up..... to answer I would have to know what carry of rentals and what if any leases are in place.

Based on numbers present, I would sell the vacation house as it's a bit chunk of the value and presumably not rented (or at least not full time). It would depend on what leases are locked in for the res/comm properties..... You might find it more tenable to get rid of one of these - especially if not locked into long term lease - and keep the vacation home.
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celia
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Re: Too many houses?

Post by celia »

Since you feel heavily invested in real estate, I would sell the vacation home. It is the riskiest, being the largest holding, largest mortgage, and negative cash flow. If the economy goes down, people will probably cut back on travel and thus it may not be rented as often as it is now.

The commercial properties sound good as they have long time tenants and a positive cash flow. You can also check up on them easily as they are near you.
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123
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Re: Too many houses?

Post by 123 »

If you want to harvest some real estate capital gains consider doing a 1035 exchange on your residential rental for another property which you would consider to be a suitable residence for yourself down the road. After renting it for awhile convert it to your own primary residence. You then sell the first primary residence, taking advantage of the $250,000 gain exclusion on sale of personal residence (used as personal residence 2 of 5 previous years). Two years later you sell your then residence using the $250,000 exclusion again. You relocate to the vacation home and in two years you'd be able to use the $250,000 exclusion again. You've had at least 4 years to decide where you'd like to live the rest of your life, move there next.
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TomBranson
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Re: Too many houses?

Post by TomBranson »

technovelist wrote:Yes, but it isn't 11%, it's 50%. His real estate exposure is the gross value of his properties, unless he has non-recourse mortgages, which seems very unlikely especially with investment properties.
The residential rental (house 2) is an investors mortgage, the others are regular mortgages, I'm not sure if they would be non-recourse or not. Regardless I'm personally considering the full value of the houses when thinking about asset allocation. Maybe there are some holes in that believe, but for simplicities sake I consider myself 50% RE at the moment.

I appreciate your candidate thoughts about just how overweight that is. Even just formulating my original post was helpful in me realizing that, and your confirmation further validates that concern.
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TomBranson
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Re: Too many houses?

Post by TomBranson »

rob wrote:You seem to be having an issue just because your asking the question, so assuming you want to lighten up..... to answer I would have to know what carry of rentals and what if any leases are in place.
Thanks for the feedback, I am realizing that I really do want to lighten up the RE allocation. Someone asked me why I have so many houses and I said "I've just kind of collected them." :happy So, the allocation wasn't really all that intentional to begin with, just moving over time and feeling like it wasn't the right time to sell and getting lucky/blessed with good tenants along the way.
rob wrote:Based on numbers present, I would sell the vacation house as it's a bit chunk of the value and presumably not rented (or at least not full time). It would depend on what leases are locked in for the res/comm properties..... You might find it more tenable to get rid of one of these - especially if not locked into long term lease - and keep the vacation home.
The residential rental (house 2) has a 3 year lease in place that ends Q1 next year. The current tenant has been in the property for 4 years, likelihood of renewal (for them) is high but not certain. The commercial rental (house 3) also has a 3 year lease in place that ends Q3 next year. The current tenant has been in the property for 12 years and is extremely likely to renew. Can you be more specific on what carry numbers you'd like to see on the rentals? I would be interested in getting a 2nd opinion on how we're doing on those leases.

You are perceptive in that getting rid of the vacation home is the least tenable option :o - though I understand would likely be the most prudent from a purely financial perspective. One option I've been considering: we purchased the vacation home with a mostly completed 2nd level. We have a quote for $50K to finish it out. This would enable us to double the rental rate (renting by the week usually, literally just a handful of weeks per year at present). If we sold house 2 (residential rental) we could easily pay for that interior work on the vacation home and use the time and energy saved to focus a bit more on marketing the vacation property. I think the combination of doubling the living space and slightly increased marketing could get us very close to a 0% cap rate. Still a poor investment, but at least not a cash flow drag, and if we did this scenario we'd still have a chunk of cash left over which I'd likely use to increase our EF a bit more.
retiredjg
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Re: Too many houses?

Post by retiredjg »

See if the occupants of either or both rentals are interested in lease with option to buy. It can be a win-win.

Consider being more aggressive about rentals on the vacation home to make it positive or neutral cash flow.
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TomBranson
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Re: Too many houses?

Post by TomBranson »

123 wrote:If you want to harvest some real estate capital gains consider doing a 1035 exchange on your residential rental for another property which you would consider to be a suitable residence for yourself down the road. After renting it for awhile convert it to your own primary residence. You then sell the first primary residence, taking advantage of the $250,000 gain exclusion on sale of personal residence (used as personal residence 2 of 5 previous years). Two years later you sell your then residence using the $250,000 exclusion again. You relocate to the vacation home and in two years you'd be able to use the $250,000 exclusion again. You've had at least 4 years to decide where you'd like to live the rest of your life, move there next.
Thank you! I was not aware of 103[1] exchanges. This is very interesting indeed. We've toyed with the idea of downsizing our primary residence, and this 1031 idea would fit nicely into that as well. I think I'd like to hold on to the primary residence for 2 more years, as there is a public transit rail station being constructed a short distance away that is likely to spike appreciation when it opens ~2 years from now - assuming of course the economy and RE market remain at least as they are today. So I think I now have two scenarios to choose from:

Scenario 1:
Q1 next year - sell House 2 (residential rental), invest the after tax proceeds in House 4 (vacation home) to increase rental rate there and add to EF to increase comfort level.
+2 yrs - sell House 1 (primary residence), use the proceeds to either pay down House 4 (vacation home) mortgage and move there or to buy a smaller primary residence.

This would get me down to 3 houses and free up some cash soon. I'd pay taxes on the House 2 sale, but would avoid the transaction costs of the 1031 exchange (realtor fees, etc).

Scenario 2:
Q1 next year - sell House 2 (residential rental), 1031 exchange for House 5 (new house), rent House 5 (new house) for 2 years.
+ 2 yrs - sell House 1 (primary residence) tax free (or at least 250K exclusion), move into House 5 (new house).
(optional) + 2 yrs - sell House 5 (new house) tax free and use the proceeds to pay down House 4 (vacation home) mortgage and move there.

This would leave me heavily exposed to RE for 2 more years, but I'd at least have a clear plan to reduce my holdings, and to do so tax free. I'd avoid taxes but incur transaction costs with House 5.


Thanks everyone who's commented so far, I think I'm starting to solidify my own thoughts on this and to get some viable options on the table!
Jack FFR1846
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Re: Too many houses?

Post by Jack FFR1846 »

Can you work with a local broker to your vacation home to rent it out more weeks during the year?

Personally, I'd sell it just because of the upkeep that any home needs. A friend has a vacation home and after every weekend he spends there, where he planned to hike or mountain bike, he instead has stories of hours of plumbing work or raking or removing snow in the winter. To me, it sounds like instead of a vacation home, he needs to work as a handy man and get paid for his time.
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DVMResident
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Re: Too many houses?

Post by DVMResident »

TomBranson wrote:Houses 1-3 are all in the same city.
I'm not alarmed by the RE weighting; but the concentration is concerning.

What is the economic driver in your city?
Is heavily dependent on a single industry? Like a military base or manufacturing. Or is it a dynamic, robust, and diverse large city serving multiple sectors?
Is this region subject to natural disasters?

I would be uncomfortable holding so much RE in concentrated part of the world.

---

Separate thought on House 4:
I wouldn't use leverage, even at low interest, to fund a vacation. House 4 is obviously a luxury, is costing money, and difficult to manage. Sell now OR go for the home exclusion mentioned above (easier if you're close to retirement).
inbox788
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Re: Too many houses?

Post by inbox788 »

Jack FFR1846 wrote:To me, it sounds like instead of a vacation home, he needs to work as a handy man and get paid for his time.
Some people call that a hobby.
JGoneRiding
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Re: Too many houses?

Post by JGoneRiding »

I personally don't think you have to much since both real rentals are doing well with good tenants. I calculate my exposure as the equity I have sense in theory as I pay down the mortgage and increase equity I am also building wealth in other areas. And if I sold the houses I would only get the equity. But if you are tired of it all by all means sale and invest elsewhere it takes a lot of work but at the same time you have good tenants and that is the hardest part
trueblueky
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Re: Too many houses?

Post by trueblueky »

retiredjg wrote:See if the occupants of either or both rentals are interested in lease with option to buy. It can be a win-win.
+1
cherijoh
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Re: Too many houses?

Post by cherijoh »

Have you set aside some money outside of your 4-month emergency fund for rental-related expenses? If this emergency fund is supposed to cover both personal emergencies and unexpected expenses related to your rental property, I think 4 months is inadequate. If your residential tenant decides not to renew their lease you should anticipate the need to spend some money to get it tenant-ready (at least having the interior repainted) and some period of time without rent. I'm not familiar with commercial real estate, but there could also be gaps while finding a new tenant. You also need to consider whether you would be able to sell either property with a tenant in place - on the residential property that would limit you to other investors and exclude someone who wanted to live there.
retiredjg
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Re: Too many houses?

Post by retiredjg »

I'm not a real estate person. It would be too much trouble for me. However, I don't really feel like you have too much.

First of all, I would not even consider the first one as real estate. It is a place to live, not an investment. So you really have 3 investments.

The other three show some diversification. One residential rental, one commercial rental, one vacation home. And there is some diversification in location (although if those 3 properties are on the coast, you might have a problem).

One is paid for so that is all profit (after insurance and maintenance). One is not paid for, but still has positive returns and is a small portion of your real estate holdings anyway.

The only real estate "problem" you have is the vacation home. It is a large portion of your real estate holdings and it drains money. If you use it and if it suits your needs, I don't see this as a problem at all. In fact, your "loss" might be covered by using this home for vacation instead of doing other more expensive things.

If the vacation home really is a problem, maybe you could just rent it out more. But you are not using it, clearly you need to sell it as the annual loss is not balanced by any sort of gain.

You say "From an asset allocation perspective I feel overweight real estate." Since you don't intend to buy more and since you have an emergency fund and are maxing out 401k, Roths, etc....that overweight is getting smaller each year. Again, I don't see a problem - from an outsider's point of view.

On the other hand, if your gut says to do something, you probably should. If it is your head that is telling you do do something, maybe comments in this thread will give you a different perspective.
Spencer
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Re: Too many houses?

Post by Spencer »

TomBranson wrote: * House 2 (residential rental)
- Value: 13% of all real estate holdings.
- Mortgage: 52% of value @ 3.75%.
- Appreciation: 3.74% CAGR over 11 years.
- Cap Rate: 2.79%

* House 3 (commercial rental)
- Value: 22% of all real estate holdings.
- Mortgage: None.
- Appreciation: 6.42% CAGR over 18 years.
- Cap Rate: 3.44%
I'll comment on #2&3 since these are investment assets. I would view the others separately as a primary and second residence.

First off, can you expand on the financials of these assets? Cost basis, annual NOI, and estimated current value would be helpful. I'm highly suspect of the cap rates listed compared to your appreciation figures. I assume you are calculating the cap rates off estimated current value? If you purchased #3 18 years ago, and it has appreciated 6% compounded, and is only making 3.44%, something is extremely wrong. Additionally, more info will help to analyze your tax consequences from a sale or 1031 exchange.
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Re: Too many houses?

Post by WHL »

I wouldn't sell any of them. You seem to be doing well, making positive cash flow off of the two rentals, and enjoying the vacation house when possible.

You don't give much of a picture of your overall financial situation, so as long as everything else is doing alright, I'd keep on trucking.
SDBoggled
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Re: Too many houses?

Post by SDBoggled »

Hi,

If you are calculating CAP rate on the current appreciated valuations (and allowing reserves for long term maintenance), then unless you want to sell because you find the management onerous, I wouldn't sell unless I could beat the returns in another "similar-risk" (for you to judge) investment.

You seem to have decent (CAP + appreciation) returns over quite a long sample time... what is the harm in continuing to let the tenants pay off the mortgages???

The vacation home seems to be the most recent and most expensive purchase and a lifestyle choice, rather than an investment decision. As others have suggested, perhaps with a bit of effort, it could also be a decent investment, but insufficient info for me to make any comment.

IMHO such decisions often come down to investment strategy fit with personal priorities. I recently sold a single family home and in the midst of replacing it with a duplex and a triplex. I will get more cashflow (hopefully similar appreciation) but 4 more tenants. I did consider just buying index funds, but believe I can leverage my efforts to end up with greater overall return - this certainly would not suit the majority of investors :-)
Valuethinker
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Re: Too many houses?

Post by Valuethinker »

Spencer wrote:
TomBranson wrote: * House 2 (residential rental)
- Value: 13% of all real estate holdings.
- Mortgage: 52% of value @ 3.75%.
- Appreciation: 3.74% CAGR over 11 years.
- Cap Rate: 2.79%

* House 3 (commercial rental)
- Value: 22% of all real estate holdings.
- Mortgage: None.
- Appreciation: 6.42% CAGR over 18 years.
- Cap Rate: 3.44%
I'll comment on #2&3 since these are investment assets. I would view the others separately as a primary and second residence.

First off, can you expand on the financials of these assets? Cost basis, annual NOI, and estimated current value would be helpful. I'm highly suspect of the cap rates listed compared to your appreciation figures. I assume you are calculating the cap rates off estimated current value? If you purchased #3 18 years ago, and it has appreciated 6% compounded, and is only making 3.44%, something is extremely wrong.
Actually I was thinking it was about right. 18 years ago he probably bought it at an 8-10% cap rate. Price has risen much faster than rental income (in line with bond investments for example, where yields have more than halved over that time period). So cap rate has fallen?

The current cap rates look low. Conversely, the commercial property looks almost riskless. I say almost because a downturn in that area or city (Detroit!) can finish one off. But no mortgage. Say in 10 years time the value is not likely to be lower, the rents are likely to be a bit higher.

In the case of House 2 the cap rate appears quite low. But, then, the mortgage is half paid off, and again the value is unlikely to fall over the next 11 years say. If the rent covers the mortgage then this is an asset, in some sense, 'for free' (ignoring opportunity cost).

One would have to look closely at what the investment alternatives are. A portfolio of US stocks might pay c. 3% yield, with growth, but would have much higher volatility. Tax issues of course have to be considered.
WhyNotUs
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Re: Too many houses?

Post by WhyNotUs »

Seems like your challenge is that you want to reduce leverage but are trying to keep the property that makes the least sense (vacation home).
Your home seems reasonable, House 2 has a good rental history, good mortgage rate, good L/V and positive cash flow, House 3 is a commercial rental with a very long term tenant and is producing good income as it is paid for.
All of those seem sound.

Then comes the clunker- House 4. Value seems inconsistent with your primary residence, too heavily leveraged, and negative cash flow. It is the drain on your system, your leverage risk, non-local, and your only poor performer. Unfortunately, it seems like that is the one that you are trying to protect from sale. You may have a good reason for that and it is your life but it is the only one calls out for sale to me. As a former vacation home owner, I can tell you that life is sweet post sale.
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RenoJay
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Re: Too many houses?

Post by RenoJay »

I own a bunch of houses, and it can definitely feel like "too much." The big discovery I made a few years ago was hard-money lending where I'd loan people money for them to buy a house. They deal with the headaches while providing me a 9%-10% totally passive return. In my opinion it's been a great alternative to having too much in equities and no one has missed or been late on a single payment since they realize they can lose their home by doing so.
Topic Author
TomBranson
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Re: Too many houses?

Post by TomBranson »

Hello everyone,

First of all, thank you for all of your insights and frank comments on my question and RE situation. I wanted to answer some of the specific questions and also provide an update on where I'm at:
DVMResident wrote:
TomBranson wrote:Houses 1-3 are all in the same city.
I'm not alarmed by the RE weighting; but the concentration is concerning.

What is the economic driver in your city? Is heavily dependent on a single industry? Like a military base or manufacturing. Or is it a dynamic, robust, and diverse large city serving multiple sectors? Is this region subject to natural disasters?
The city is fairly large (population ~3 million), has a diverse economy, a long term track record of growth, and is not normally subject to natural disasters. There is obviously still concentrated risk though, which is part of what contributed to the unease that started this thread.
retiredjg wrote:See if the occupants of either or both rentals are interested in lease with option to buy. It can be a win-win.
Excellent idea. I'm currently discussing with the residential tenants to see if this is something they'd be interested in.
cherijoh wrote:Have you set aside some money outside of your 4-month emergency fund for rental-related expenses? If this emergency fund is supposed to cover both personal emergencies and unexpected expenses related to your rental property, I think 4 months is inadequate.
I do not have money outside of the 4 month emergency fund specifically for the rentals. This is something I'm building now by setting aside 1% of the current value of all of the homes over the course of 2015 and annually thereafter until I get a more comfortable reserve fund for the rentals (targeting 3 to 6 months of gross rental revenue, in addition to emergency fund).
WHL wrote:I wouldn't sell any of them. You seem to be doing well, making positive cash flow off of the two rentals, and enjoying the vacation house when possible.
SDBoggled wrote:You seem to have decent (CAP + appreciation) returns over quite a long sample time... what is the harm in continuing to let the tenants pay off the mortgages???
This is exactly the conclusion I've come to. I think I just got a little spooked, but after this thread and thinking it over I'm a lot more comfortable with what I'm doing. Yes there is some concentrated risk here, but it's not nearly approaching recklessness. We are doing well on the rentals relative to other places we could put the money (with the exception of house #4 which is a costly luxury), so we'll keep them and continue to accept that bountiful situation. There is some room for optimization though, so we've decided to:

1. Build a reserve fund specifically for the rentals (as noted above) to help better prepare for and manage the risks.
2. Complete an already partially renovated basement in house #4 at a cost of a about 10% of current value. This will double the heated square footage and bedroom count and allow us to rent to new classes of tenants (ie, weddings) and charge significantly (~50%) more for the weekly rentals. This relatively modest one time investment, in addition to some new marketing efforts, should get us very close to break even.
3. Add a parking lot to house #3 (commercial property) at a cost of about 5% of current value, increasing monthly rental income by ~25% (lease terms already agreed to by tenant).
4. With our easy tenant, we got a little lazy with keeping up on market rates on house #2 (residential rental). Based on the current market rates it looks like we will be able to renew that lease later this year for about 25% more than their prior contract, further adding to the positive cashflow from this property.

In summary, after the feedback from this thread, and a lot of pondering on my part, I'm no longer spooked by the RE weighting. The fundamentals are generally pretty healthy. We're making some modest additional investments that will yield some pretty significant long term benefits and the new aggregate CAP rate makes holding on to all of the properties even more appealing.

Thanks again to everyone that's commented thus far, I welcome any feedback on our decision and the additional plans I've outlined above.
kaudrey
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Re: Too many houses?

Post by kaudrey »

As someone who owns a primary residence, a vacation home, and a rental condo, I can relate.

I think the people who say "sell the vacation home", don't really get the purpose of the home - to USE it, not make money. We go to our cabin in the mountains on as many weekends as possible, and we don't rent it out. Of course it is a large negative cash flow, but it gives us pleasure and we can afford it and we give up other things to be able to keep it.

Our condo is cash flow neutral, but we rent it to DH's cousin, so we have a very stable tenant (he'd probably live there forever if we don't sell it). I'd actually love to sell it, but it is still underwater, so we will hold on for a few more years and see what happens.

The risk, of course, is that you lose both tenants at the same time and can't re-rent, throwing the positive cash flows out of whack. Or the market tanks and you can't sell later if you need to. But if your jobs are stable and you can afford to cover costs if needed for a while, I just don't think I'd stress too much about it.

Your plan sounds fine.
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gunn_show
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Re: Too many houses?

Post by gunn_show »

JGoneRiding wrote:I personally don't think you have to much since both real rentals are doing well with good tenants. I calculate my exposure as the equity I have sense in theory as I pay down the mortgage and increase equity I am also building wealth in other areas. And if I sold the houses I would only get the equity. But if you are tired of it all by all means sale and invest elsewhere it takes a lot of work but at the same time you have good tenants and that is the hardest part
+1
My parents did this for decades, owned 4 homes, same city, rented out the other 3 cash-flow positive, eventually brother and I each moved into one of them separately, and it has worked out well for my family. A lot of it depends on where you live - in SoCal homes only go up and if you get good renters, or at least a good property manager (if you don't love landlording), then it can definitely work out. My folks both worked 30+ year pension jobs so perhaps it was an "easier" risk for them to take over-weighting in RE, but never the less despite good and bad tenants (who doesn't love bullet holes) it has always worked out. We put tons of sweat equity into the homes, I spent more days as a kid painting fences and earthquake retro-fitting than I did surfing at the beach, but, I got a pretty good deal on a dirt cheap mortgage home when I graduated college. Each of the homes is worth many multiples of what they originally paid for them 30 years ago. We still have 4 in the family. So it really is personal preference and tolerance for RE and tenants and landlording. If you live in a good city with little worry about rental problems, why sell?

FWIW I just did a 1031 swap from one of the original homes we had in the family trust, into a larger fixer upper in a better part of town. So I got into twice the house for half the cost and no capital gains or taxes of any sort. I say this also because I was actually looking for a ski condo vacation home at the time, when a RE friend told me about the fixer upper, was too good a deal to pass up. But I will go back to the ski condo probably next off season and look again. Like Kaudrey said, I want to buy it to use it, and possibly rent out. If it makes money, great, if not, I am factoring that in ahead of time anyway (and it will be cheap enough to not lose much). Only sell that home if you are not using it and really dragging down losses. Sometimes pleasure trumps numbers, but that is a tough sell to many on this old board.
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gasdoc
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Re: Too many houses?

Post by gasdoc »

I am more concerned about the amount of total debt/leverage in the four homes than I am in the percent of your assets. It seems that real estate is somewhat of a side business for you, as opposed to a passive investment where I would be worried about asset allocation with your other passive investments. My concern would be that you could enter a real estate downswing at the same time as a drop in the stock market whereby you would be forced to liquidate other investments at low prices to bail out the real estate. If you were to just pay off more of the mortgages from your other investments, assuming they are held in taxable accounts, you would have considerably less risk with the amount of real estate that you own. Now if your other investments are mostly held in non-liquid retirement accounts... you should be certain to keep a healthy emergency fund! By the way, I consider the total cost of an asset to represent my market risk as opposed to only that portion which represented by equity (the 50% rather than the 11%).
desiderium
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Re: Too many houses?

Post by desiderium »

I think lumping the vacation house into the analysis may be mixing apples and oranges. If you are enjoying it, then you have a very nice arrangement for paying part of your costs, and some good ideas about increasing other people's contribution to your vacation enjoyment. If you are not getting much personal enjoyment, then it IS just an investment and not a great one.

If you view your RE holdings as your business, then the weighting is not such a concern. However, by all means, be a better businessperson, upgrade properties, raise rents according to market etc. If you view the properties more as a passive investment, then they are similar to your other equity investments and you are too concentrated in this sector.
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4nursebee
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Re: Too many houses?

Post by 4nursebee »

I'd talk to your accountant to understand tax implications of whatever you do.
HORRIBLE cap rates, not an investment I would get into. Make sure you understand cap rates.
18% cap rate here.
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dolphinsaremammals
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Re: Too many houses?

Post by dolphinsaremammals »

If I were rolling in money, one thing I'd do is buy a second home. Immediately that removes (most of) the worry about disasters, having to be out of the primary home during renovations, what happens if terrible neighbors move next door, and so on. This is obviously not a financial consideration, I'm just saying.
TRC
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Re: Too many houses?

Post by TRC »

TomBranson wrote:I own four houses...
My question is this: should I sell something? If so, why and what?
Since this is mainly an index based investing forum, you're likely going to get biased answers that say you should sell and be more in the stock market.

I'm in a similar boat, thought we don't own as many houses. Our primary residence is owned free & clean and we own a vacation rental that's about 60% paid off. Our home equity represents about 37% of our total net worth. Personally this is a good balance for us, though I have no desire to acquire more properties.

As a comparison, my wife has a relative who started buying single family houses back in his 20s. He rehabbed each one, then rented them out. Right now i think he has about 13 houses that are all owned free & clean and providing him with a steady stream of income.
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Re: Too many houses?

Post by Carefreeap »

TomBranson wrote:
123 wrote:If you want to harvest some real estate capital gains consider doing a 1035 exchange on your residential rental for another property which you would consider to be a suitable residence for yourself down the road. After renting it for awhile convert it to your own primary residence. You then sell the first primary residence, taking advantage of the $250,000 gain exclusion on sale of personal residence (used as personal residence 2 of 5 previous years). Two years later you sell your then residence using the $250,000 exclusion again. You relocate to the vacation home and in two years you'd be able to use the $250,000 exclusion again. You've had at least 4 years to decide where you'd like to live the rest of your life, move there next.
Thank you! I was not aware of 103[1] exchanges. This is very interesting indeed. We've toyed with the idea of downsizing our primary residence, and this 1031 idea would fit nicely into that as well. I think I'd like to hold on to the primary residence for 2 more years, as there is a public transit rail station being constructed a short distance away that is likely to spike appreciation when it opens ~2 years from now - assuming of course the economy and RE market remain at least as they are today. So I think I now have two scenarios to choose from:

Scenario 1:
Q1 next year - sell House 2 (residential rental), invest the after tax proceeds in House 4 (vacation home) to increase rental rate there and add to EF to increase comfort level.
+2 yrs - sell House 1 (primary residence), use the proceeds to either pay down House 4 (vacation home) mortgage and move there or to buy a smaller primary residence.

This would get me down to 3 houses and free up some cash soon. I'd pay taxes on the House 2 sale, but would avoid the transaction costs of the 1031 exchange (realtor fees, etc).

Scenario 2:
Q1 next year - sell House 2 (residential rental), 1031 exchange for House 5 (new house), rent House 5 (new house) for 2 years.
+ 2 yrs - sell House 1 (primary residence) tax free (or at least 250K exclusion), move into House 5 (new house).
(optional) + 2 yrs - sell House 5 (new house) tax free and use the proceeds to pay down House 4 (vacation home) mortgage and move there.

This would leave me heavily exposed to RE for 2 more years, but I'd at least have a clear plan to reduce my holdings, and to do so tax free. I'd avoid taxes but incur transaction costs with House 5.


Thanks everyone who's commented so far, I think I'm starting to solidify my own thoughts on this and to get some viable options on the table!
Be aware that the rules on 1031 exchanges have changed and moving into a rental and converting it to a principal residence is not as lucrative as it once was. Effective 1/1/09 you will need to bifurcate the gains based on the time the house was in rental service as of 1/1/2009 over the years of ownership. And make sure you calculate the amount of tax. At one point we realized that it would actually cost us more to move into our rental house than the actual amount of tax!

Remember sometimes it's cheaper and easier to just pay the tax than to get involved with some of these tax avoidance schemes. :wink:
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TomBranson
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Re: Too many houses?

Post by TomBranson »

kaudrey wrote:As someone who owns a primary residence, a vacation home, and a rental condo, I can relate.

I think the people who say "sell the vacation home", don't really get the purpose of the home - to USE it, not make money.
Thanks for your thoughts kaudrey. For me the main thing is that you're aware and intentional about the use. If I was trying to delude myself thinking that the vacation house was an amazing investment, when it's really a costly luxury, that's one thing. But I understand it's a costly luxury, but one that we do use pretty regularly (~2 months/year + a good number of weekends in between). If we're actually able to get it to cash flow neutral this year, I will be very happy! :D I think intentionality played a part in my original unease about our real estate holdings as well. We never intended to own 4 houses, but now that I've thought it through and gotten some good feedback, I'm ok with it and can be more intentional about how we manage it going forward.

The intangible benefits of having your own vacation home are pretty nice also. I didn't really realize how nice until we actually bought it. We can decide on a Friday afternoon to head up to the house for that weekend. If we had a week planned at the house and something happens and that falls through, we just don't go, it's as simple as that. When we get there, it has our preferred brands of XYZ, it has that picture on the wall that's meaningful to us. Really getting to know the area in which you're vacationing makes it a whole new experience, more comfortable, less stressful. It's also been a great way to give gifts to friends and family by offering for them to use the house free of charge.
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TomBranson
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Re: Too many houses?

Post by TomBranson »

bkinder wrote:I am more concerned about the amount of total debt/leverage in the four homes than I am in the percent of your assets. It seems that real estate is somewhat of a side business for you, as opposed to a passive investment where I would be worried about asset allocation with your other passive investments.
Yes, I definitely consider it a side business, but it's not a large part of my income, so I don't focus on it all that much. In aggregate the leverage is about 59%. That doesn't strike me as all that bad, why is that of concern? Or is it more the cost to service that debt relative to my income (ie, being able to avoid selling in a down market + loss of income)? That's one of the reasons we're building up a real estate-specific emergency fund (as you also recommend later in your post).
bkinder wrote:By the way, I consider the total cost of an asset to represent my market risk as opposed to only that portion which represented by equity (the 50% rather than the 11%).
This is how I think about it as well. Though I think looking at that total exposure within the context of how much is leveraged is also beneficial.
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TomBranson
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Re: Too many houses?

Post by TomBranson »

4nursebee wrote:HORRIBLE cap rates, not an investment I would get into. Make sure you understand cap rates.
18% cap rate here.
Is that 18% calculated based on current market value or original cost? Mine were calculated using current market value, which is why I also provided an appreciation figure. Combining the two I think these (except for the vacation home) all represent good returns:

House 1: 11.11% (annual appreciation only)
House 2: 6.53% (appreciation + cap rate)
House 3: 9.86%
House 4: 0.89%

Congrats on the 18% though, that's very good indeed. :happy
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gasdoc
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Re: Too many houses?

Post by gasdoc »

TomBranson wrote:
bkinder wrote:I am more concerned about the amount of total debt/leverage in the four homes than I am in the percent of your assets. It seems that real estate is somewhat of a side business for you, as opposed to a passive investment where I would be worried about asset allocation with your other passive investments.
Yes, I definitely consider it a side business, but it's not a large part of my income, so I don't focus on it all that much. In aggregate the leverage is about 59%. That doesn't strike me as all that bad, why is that of concern? Or is it more the cost to service that debt relative to my income (ie, being able to avoid selling in a down market + loss of income)? That's one of the reasons we're building up a real estate-specific emergency fund (as you also recommend later in your post).
bkinder wrote:By the way, I consider the total cost of an asset to represent my market risk as opposed to only that portion which represented by equity (the 50% rather than the 11%).
This is how I think about it as well. Though I think looking at that total exposure within the context of how much is leveraged is also beneficial.
It sounds like we are more on the same page than not. Personally, I like to have my assets fully paid for- not leveraged at all- but that may be my conservative nature. I like to know if the sh__ really hit the fan (extended job loss, loss of spouse, whatever), I would only have to pay for food and shelter going forward with no debt service to worry about. :happy My main point was that I didn't think you were too heavily weighted in real estate.
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obgyn65
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Re: Too many houses?

Post by obgyn65 »

To the OP : yes, far too many houses. Time to reduce RE investments, IMO.
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