Cashing out RE appreciation or keeping the rental cash flow?

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redrocker
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Cashing out RE appreciation or keeping the rental cash flow?

Post by redrocker » Thu Sep 26, 2019 6:42 pm

I'm seriously considering selling my largest rental property (a large triplex) to cash on on the appreciation, reduce my real estate exposure, and reduce my personal stress/anxiety levels.

My thinking has shifted gradually regarding the long term plans for this house. I bought it in 2010 and for years felt strongly I would likely never sell it unless someone offered me a ridiculous amount for it. My confidence in this plan only grew as the house rapidly appreciated the next 5 years.

Lately though, there are several factors which have combined to make me seriously consider selling. Some of those factors include:
1) the optimism for the future of this city and specific neighborhood has cooled in general;
2) related to 1), the opportunity for additional appreciation in property value seems to have diminished significantly;
3) my personal circumstances have led me to decide that I will likely not use any of the units in this property as my residence in the future;
4) the property is in a historic district that is overseen by a commission with an unpredictable and authoritarian bent to it.
5) Looking to reduce the feeling of too many irons in the fire (6 rental units currently) and enable more time for travel or possibly picking up a new trade
6) I have 3 other rental units aside from this property so when it comes to have projects to occupy my time, I would still have that satisfied (I've had difficulty reaching a sustainable level of work to maintain the list of action items)

The house has approximately doubled in value, and while rents have also improved, it's a bit difficult to stomach that investing my profit from a potential sale could generate as much income as the total rent currently does (and without the headaches this particular property divvies out throughout each year).

I'm estimating I could sell the property in the $600k range. I have a realtor I trust who thinks I'd get about $610-620k for it based on similar properties in the area. I've got about 20yrs left on a 30yr mortgage with remaining principal of $225k and an interest rate of 4.2%.

The property currently nets $17k/yr after depreciation ($22,500/yr before depreciation). I do not track my hours spent maintaining it but they aren't hugely significant. It's just when something hits its often urgent and often a headache either in terms of cost, physical access, or getting the city to approve work due to the historic nature. Just two examples: 1) recently there was blockage in the sewer on the city side, the city refused to do anything (I learned later they were posturing for a bribe), and I spent $600 getting it jetted. 2) I drove by to find the city had affixed a large, red, accusatory poster on my facade citing me for "neglect" of the property because they didn't like a gap in the porch boards. Which requires me to go hat-in-hand to ask what I have to do to rectify the situation and be left alone.

So I'm trying to evaluate the wisdom in cashing out the rather large amount of appreciation versus plugging along with property that makes good rent with a good rate on the mortgage.

If I assume I'd be putting $300-350k in the market at an assumed 6% return, I'm making essentially the same I am now, with no tenant responsibilities, no bureaucratic nonsense from the city, no natural disaster threats (not insignificant on the Gulf Coast), and basically no effort on my part. Yes, I understand the volatility of the stock market but I think I will be able to manage greater comfort with that acknowledged volatility than a hurricane or man-made disaster.

I know how the perspective of others not directly exposed to a certain situation can be clearer than the perspective of one down in the trenches so I'm posting here to see the thoughts of others and any challenges to my own thinking anyone would care to issue.

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Re: Cashing out RE appreciation or keeping the rental cash flow?

Post by bloom2708 » Fri Sep 27, 2019 9:14 am

Reason #5 would be enough for me.

All the other reasons are "icing on the cake" to sell for me.

Work work is enough work for me. It sounds like you have been successful in your rental business. Selling out slowly seems like a good plan. So both your work-work and rental-work can be behind you at some point.
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AerialWombat
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Re: Cashing out RE appreciation or keeping the rental cash flow?

Post by AerialWombat » Fri Sep 27, 2019 9:26 am

Sounds to me like you’re just trying to justify something you’ve already decided to do. There is nothing wrong with closing out a position that no longer suits you. I love my rentals and have no desire to sell, but in 10 years I could see changing my tune. Do what’s best for you, which sounds like selling.
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Noobvestor
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Re: Cashing out RE appreciation or keeping the rental cash flow?

Post by Noobvestor » Fri Sep 27, 2019 9:26 am

Similar returns to the stock market, but massive concentration risk in just one building. To me, that's all you need to know. To take on the additional risk associated with the brick-and-mortar investment I would demand much higher returns. Sell it and diversify. /2 cents
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

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Re: Cashing out RE appreciation or keeping the rental cash flow?

Post by Carefreeap » Fri Sep 27, 2019 9:51 am

We sold two of our rentals in So. CA for a lot of the same reasons you listed. No Historical District but an HOA for one of the units. I loved the location and originally thought it would become my "Little Old Lady" home if anything happened to my husband but the tenant hassles, the neighbors and the constant repairs were a drain on my happiness. I agree with one of the prior posters that the risk just isn't worth the hassle at some point. Take your stack of money, pay your cap gains taxes and enjoy your profit! :beer

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redrocker
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Re: Cashing out RE appreciation or keeping the rental cash flow?

Post by redrocker » Fri Sep 27, 2019 10:42 am

AerialWombat wrote:
Fri Sep 27, 2019 9:26 am
Sounds to me like you’re just trying to justify something you’ve already decided to do.
That's just it, I haven't committed to a decision yet. I've been occasionally prone to making emotional decisions in the past and I've found the counsel of others helpful in avoiding mistakes. That said, in retrospect I wish I'd sold in early 2016 when the local RE market was peaking. I was sufficiently distracted by other things in life at that point to not grasp that opportunity when it was there.

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redrocker
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Re: Cashing out RE appreciation or keeping the rental cash flow?

Post by redrocker » Fri Sep 27, 2019 10:44 am

Carefreeap wrote:
Fri Sep 27, 2019 9:51 am
Take your stack of money, pay your cap gains taxes and enjoy your profit! :beer
Your situation does sound similar. As for cap gains, I've claimed a homestead exemption on this particular property and lived in one of its units since purchase so my understanding is that I'm exempt from the first 500k of cap gains. Someone feel free to correct me if I'm wrong but for me that adds to the financial incentive to sell.

oldmotos
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Re: Cashing out RE appreciation or keeping the rental cash flow?

Post by oldmotos » Fri Sep 27, 2019 11:33 am

Sell - the rent is way too low for the value of the property.

fareastwarriors
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Re: Cashing out RE appreciation or keeping the rental cash flow?

Post by fareastwarriors » Fri Sep 27, 2019 12:10 pm

Bogleheads forum -> sell rental, invest in 3-fund portfolio, and live easy.

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Watty
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Re: Cashing out RE appreciation or keeping the rental cash flow?

Post by Watty » Fri Sep 27, 2019 2:48 pm

Be sure to do dummy tax return so that you know just what the impact of selling would be.

Also consider doing a 1031 exchange for a property that would be easier to manage.

One reason that I do not own any individual rental property is that I do not want to still be dealing with it when I am 80 years old. Even with a property management company you will still need to manage the manager. My wife would likely also have problems with dealing with individual rentals if something happened to me. There are a lot of good reasons to reduce the number of real estate holding you have.

HeelaMonster
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Re: Cashing out RE appreciation or keeping the rental cash flow?

Post by HeelaMonster » Fri Sep 27, 2019 3:09 pm

Watty wrote:
Fri Sep 27, 2019 2:48 pm
...
Also consider doing a 1031 exchange for a property that would be easier to manage.
...
I am in the same situation as OP (not as many properties, but identical reasoning).... so considering a similar sale. Question....

Does a 1031 exchange require the services of an attorney (or other) to act as middleperson and certify the equivalence of new property, or does the IRS recognize/accept a "self-directed" exchange?

Topic Author
redrocker
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Re: Cashing out RE appreciation or keeping the rental cash flow?

Post by redrocker » Fri Sep 27, 2019 4:47 pm

Watty wrote:
Fri Sep 27, 2019 2:48 pm
Also consider doing a 1031 exchange for a property that would be easier to manage.
I need to do a little digging to confirm but I don't believe a 1031 is applicable when I'm selling my primary residence. However, that might be a complicated answer since 2/3s of the property has been used as rental.

Carefreeap
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Re: Cashing out RE appreciation or keeping the rental cash flow?

Post by Carefreeap » Sun Sep 29, 2019 6:49 pm

redrocker wrote:
Fri Sep 27, 2019 10:44 am
Carefreeap wrote:
Fri Sep 27, 2019 9:51 am
Take your stack of money, pay your cap gains taxes and enjoy your profit! :beer
Your situation does sound similar. As for cap gains, I've claimed a homestead exemption on this particular property and lived in one of its units since purchase so my understanding is that I'm exempt from the first 500k of cap gains. Someone feel free to correct me if I'm wrong but for me that adds to the financial incentive to sell.
I'd check with a tax professional since 2/3 was used as a rental property. I have a feeling you're only get a proportion of the exemption and only if you're married.

I mitigated my tax hit by selling the unit with the $300k gain via an installment sale spread out over three years. But I knew the buyers and their financial situation and it worked well. Got my third (and final) installment earlier this year.

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Sandtrap
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Re: Cashing out RE appreciation or keeping the rental cash flow?

Post by Sandtrap » Sun Sep 29, 2019 7:00 pm

0) I'm seriously considering selling my largest rental property (a large triplex) to cash on on the appreciation, reduce my real estate exposure, and reduce my personal stress/anxiety levels.
. . . . . .
Lately though, there are several factors which have combined to make me seriously consider selling. Some of those factors include:
1) the optimism for the future of this city and specific neighborhood has cooled in general;
2) related to 1), the opportunity for additional appreciation in property value seems to have diminished significantly;
3) my personal circumstances have led me to decide that I will likely not use any of the units in this property as my residence in the future;
4) the property is in a historic district that is overseen by a commission with an unpredictable and authoritarian bent to it.
5) Looking to reduce the feeling of too many irons in the fire (6 rental units currently) and enable more time for travel or possibly picking up a new trade
6) I have 3 other rental units aside from this property so when it comes to have projects to occupy my time, I would still have that satisfied (I've had difficulty reaching a sustainable level of work to maintain the list of action items)
0-5 are more than enough reasons.
Sell.
This has something to do with positive gains, and everything to do with a business and lifestyle change.
j :happy
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renue74
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Re: Cashing out RE appreciation or keeping the rental cash flow?

Post by renue74 » Sun Sep 29, 2019 7:08 pm

I own 10 rental properties. My "master" plan is to sell them in 10 years and transition out of rentals...but things change.

I actually had a seller financed note on an office condo I sold. Last year, the owner sold the office and my installment sale came to an end and I had to realize capital gains on the office condo. My accountant just sent me the numbers last week and I was sad, mad, and not a good person to talk to for about a day. I hate paying taxes.

But, your life has changed and you need to sell and move on. I don't think anybody fully regrets financial decisions like this. Sure, you may look at it in 10 years and say..."I could had sold that for $750K" but I don't think you will lose sleep over that.

MarkNYC
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Re: Cashing out RE appreciation or keeping the rental cash flow?

Post by MarkNYC » Sun Sep 29, 2019 8:54 pm

Carefreeap wrote:
Sun Sep 29, 2019 6:49 pm
redrocker wrote:
Fri Sep 27, 2019 10:44 am
Carefreeap wrote:
Fri Sep 27, 2019 9:51 am
Take your stack of money, pay your cap gains taxes and enjoy your profit! :beer
Your situation does sound similar. As for cap gains, I've claimed a homestead exemption on this particular property and lived in one of its units since purchase so my understanding is that I'm exempt from the first 500k of cap gains. Someone feel free to correct me if I'm wrong but for me that adds to the financial incentive to sell.
I'd check with a tax professional since 2/3 was used as a rental property. I have a feeling you're only get a proportion of the exemption and only if you're married.
Yes, only a portion of the gain will be eligible for the principal residence exclusion. Both sales proceeds and basis must be allocated between the residence and the rental units. So after reducing the basis of the rental units by allowable depreciation, more than 2/3 of the total gain will be allocated to the rental units and taxable, and less than 1/3 of the total gain will be allocable to the principal residence and eligible for the exclusion.

Topic Author
redrocker
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Re: Cashing out RE appreciation or keeping the rental cash flow?

Post by redrocker » Sun Sep 29, 2019 9:13 pm

MarkNYC wrote:
Sun Sep 29, 2019 8:54 pm
Carefreeap wrote:
Sun Sep 29, 2019 6:49 pm
I'd check with a tax professional since 2/3 was used as a rental property. I have a feeling you're only get a proportion of the exemption and only if you're married.
Yes, only a portion of the gain will be eligible for the principal residence exclusion. Both sales proceeds and basis must be allocated between the residence and the rental units. So after reducing the basis of the rental units by allowable depreciation, more than 2/3 of the total gain will be allocated to the rental units and taxable, and less than 1/3 of the total gain will be allocable to the principal residence and eligible for the exclusion.
Thank you both. I'll definitely consult a real estate tax expert here. Personal/rental ratio at the property has been claimed at 40/60 based on sqft but doesn't look like that will impact the overall calculation much.

gr7070
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Re: Cashing out RE appreciation or keeping the rental cash flow?

Post by gr7070 » Sun Sep 29, 2019 10:00 pm

redrocker wrote:
Thu Sep 26, 2019 6:42 pm

The property currently nets $17k/yr after depreciation ($22,500/yr before depreciation).
...
If I assume I'd be putting $300-350k in the market at an assumed 6% return, I'm making essentially the same I am now
How are you losing money on the depreciation? You should be making money off the depreciation. The depreciation should increase your net.

With that said, are you sure you're even looking at net properly? Are you including everything? Property accrual (historically that's typically 4% alone nationwide, $24k > 17k)? Paying down mortgage principal? Income taxes reduced?

Also be sure to compare rental net to investment net. You need to pay taxes on that 6% return.

If it's a quality rental you should be making far more than 6%.

You need to include risk in your comparison. What city/state is it in? Some states (like Texas) with steady growth I'd feel much better about than the stock market currently.

It doesn't appear you're converting the bananas to apples prior to comparing them.

Also, understand this forum appears to have a bias against rental property. So this is not necessarily the place to go to get "keep the rental" responses.

You can also solve a number of your issues by hiring a property manager. Sure it'll cost, say, 10% of rents collected, but, again, if it's a viable rental property it should be able to accommodate that fee in the ledger.

If it ever was a viable rental I would not be looking to unload it. Especially if you're still in the accumulation period. Even if not, again, just have someone (manager) to take the headache away and keep the preponderance of the profits.

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redrocker
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Re: Cashing out RE appreciation or keeping the rental cash flow?

Post by redrocker » Mon Sep 30, 2019 2:13 pm

gr7070 wrote:
Sun Sep 29, 2019 10:00 pm
How are you losing money on the depreciation? You should be making money off the depreciation. The depreciation should increase your net.


I understand that I'm not "losing money on depreciation," those two different numbers from my Schedule E were roughly Line 21 and Line 21 with Line 18 added back in. I also understand that depreciation isn't free money. I pay it back at the sale, so it feels like an overstatement to say I should be" making money" off of it.
gr7070 wrote:
Sun Sep 29, 2019 10:00 pm
With that said, are you sure you're even looking at net properly? Are you including everything? Property accrual (historically that's typically 4% alone nationwide, $24k > 17k)? Paying down mortgage principal? Income taxes reduced?


Accrual? Are you referring to appreciation? I've somewhat addressed that and do not expect the property to appreciate significantly in the next few years, if ever. Also, if you are referring to a "typical" 4% appreciation rate, I think that's overly optimistic. There were good arguments against such a rosy view in this thread:
viewtopic.php?f=2&t=269901
gr7070 wrote:
Sun Sep 29, 2019 10:00 pm
Also be sure to compare rental net to investment net. You need to pay taxes on that 6% return.

Yes, but the numbers I'm citing from my Schedule E are also pre-tax. I realize I wasn't clear on that in the OP.

gr7070 wrote:
Sun Sep 29, 2019 10:00 pm
If it's a quality rental you should be making far more than 6%.

On my original investment? Absolutely. Off the top of my head I'm making close to 50% annually on my initial investment. My primary question is, due to the large (~+100%) appreciation in value of this property, wouldn't I be better off selling and putting the profits into the market if - using conservative assumptions about market performance - those proceeds make roughly the same amount annually (in dollars, not % ROI) as the house currently does in rent, without the added risk of vacancies, a bad tenant, a devastating natural disaster, etc?
gr7070 wrote:
Sun Sep 29, 2019 10:00 pm
You need to include risk in your comparison. What city/state is it in? Some states (like Texas) with steady growth I'd feel much better about than the stock market currently.

I wanted to (at least initially) avoid disclosing my location because I know there are some opinions about it. But I'm in New Orleans, LA. HIGH risk in light of record flood season, crime, and a tendency of recent city administrations to sell us out to tourists and out of town investors.
gr7070 wrote:
Sun Sep 29, 2019 10:00 pm
You can also solve a number of your issues by hiring a property manager. Sure it'll cost, say, 10% of rents collected, but, again, if it's a viable rental property it should be able to accommodate that fee in the ledger.

I wish I could agree with this. But I think you're underestimating the cost. And the effort. In this town you absolutely have to manage the manager. I have actually had multiple people try to hire me as their property manager and when I ask what it pays, I laugh. I see what my partner's (who rents) building has to deal with: they have turned over 3 different managers in 18 months. I think the headache would be worse with a manager.

gr7070
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Re: Cashing out RE appreciation or keeping the rental cash flow?

Post by gr7070 » Mon Sep 30, 2019 3:45 pm

redrocker wrote:
Mon Sep 30, 2019 2:13 pm
gr7070 wrote:
Sun Sep 29, 2019 10:00 pm
How are you losing money on the depreciation? You should be making money off the depreciation. The depreciation should increase your net.


I understand that I'm not "losing money on depreciation," those two different numbers from my Schedule E were roughly Line 21 and Line 21 with Line 18 added back in. I also understand that depreciation isn't free money. I pay it back at the sale, so it feels like an overstatement to say I should be" making money" off of it.
Unless you're stuffing your mattress with it you're making money off of the deferment. If you're not including that in your assessment and comparison of your rental than you're just ignoring one of the benefits of rental property. Up to you, but it's a real, tangible benefit regardless.

What one can't do is just subtract it from the net. There's absolutely zero basis in fact for that. It's absolutely a benefit; cannot subtract it.
redrocker wrote:
Mon Sep 30, 2019 2:13 pm
gr7070 wrote:
Sun Sep 29, 2019 10:00 pm
With that said, are you sure you're even looking at net properly? Are you including everything? Property accrual (historically that's typically 4% alone nationwide, $24k > 17k)? Paying down mortgage principal? Income taxes reduced?


Accrual? Are you referring to appreciation? I've somewhat addressed that and do not expect the property to appreciate significantly in the next few years, if ever. Also, if you are referring to a "typical" 4% appreciation rate, I think that's overly optimistic. There were good arguments against such a rosy view in this thread:
viewtopic.php?f=2&t=269901
Have you not noticed the historic run up in the stock market of "late"? One cannot assume the stock market is going up and just discount real estate appreciation completely and call it a reasonable comparison.

You are wholly ignoring one massive potential benefit (appreciation) and actually subtracting another benefit (depreciation). Why even bother with an "analysis"?
My primary question is, due to the large (~+100%) appreciation in value of this property, wouldn't I be better off selling and putting the profits into the market if - using conservative assumptions about market performance - those proceeds make roughly the same amount annually (in dollars, not % ROI) as the house currently does in rent without the added risk of vacancies, a bad tenant, a devastating natural disaster, etc?
And my answer to that is a definitive no. You need to look at the entire picture. The entire return. You are definitely not looking at any kind of true net for your rental property. Looking at it the way you are trying to rental property would never make sense.

And you mention real estate risks while ignoring the risks of the stock, bond markets.
redrocker wrote:
Mon Sep 30, 2019 2:13 pm
gr7070 wrote:
Sun Sep 29, 2019 10:00 pm
You can also solve a number of your issues by hiring a property manager. Sure it'll cost, say, 10% of rents collected, but, again, if it's a viable rental property it should be able to accommodate that fee in the ledger.

I wish I could agree with this. But I think you're underestimating the cost. And the effort. In this town you absolutely have to manage the manager. I have actually had multiple people try to hire me as their property manager and when I ask what it pays, I laugh. I see what my partner's (who rents) building has to deal with: they have turned over 3 different managers in 18 months. I think the headache would be worse with a manager.
Maybe in your situation. The last major repair my manager sent to me was the exact opposite. I went into the property to assess myself and couldn't believe they had put off the item so long. Note, it wasn't causing damage, the issue was just incredibly run down. I, as the owner, would have approved the repair/improvement far sooner than the manager did.

So, my manager apparently does a great job stewarding my money.

I think if you want to make a decision based on the proper facts at hand you need to significantly change how you do so. If not, by your approach it's an easy sell.

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hand
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Re: Cashing out RE appreciation or keeping the rental cash flow?

Post by hand » Mon Sep 30, 2019 3:52 pm

Exit strategy for a handfull of rentals is tough; best returns come from good timing and active involvement in preperation and marketing. This is not a holding you want to try to liquidate under duress (poor market conditions, poor health, other pressing responsibilities).

It sounds like you've already benefited from the concentated position in local real estate and are feeling stretched thin - liquidate now and lock in a good return.

dmk395
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Re: Cashing out RE appreciation or keeping the rental cash flow?

Post by dmk395 » Tue Oct 01, 2019 7:17 am

I'd sell immediately. Your cash flow is not on par with value. $300k in a cd would get you $500 per month with ZERO stress.

DVMResident
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Re: Cashing out RE appreciation or keeping the rental cash flow?

Post by DVMResident » Tue Oct 01, 2019 9:09 am

+1 sell vote.

I was in a very similar scenario. I bought a 2-unit that was doubled in value in 5 years. I liked the rental, but the market appreciation equity made it no longer worth the concentrated investment (my rule net of cash-on-purchase/sale >3x e/p of AA to purchase, <2x = sell). So I sold.

This property has been good to you, but it’s time for it go (or whenever next selling/tax season is best with your circumstances).

gr7070
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Re: Cashing out RE appreciation or keeping the rental cash flow?

Post by gr7070 » Wed Oct 02, 2019 11:57 am

DVMResident wrote:
Tue Oct 01, 2019 9:09 am
I was in a very similar scenario. I bought a 2-unit that was doubled in value in 5 years. I liked the rental, but the market appreciation equity made it no longer worth the concentrated investment (my rule net of cash-on-purchase/sale >3x e/p of AA to purchase, <2x = sell). So I sold.
DVM Resident,
I'm curious if you use this formula for use in selling a rental to buy other rental(s) or would you move that real estate equity to equities and bonds?

DVMResident
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Re: Cashing out RE appreciation or keeping the rental cash flow?

Post by DVMResident » Wed Oct 02, 2019 12:40 pm

gr7070 wrote:
Wed Oct 02, 2019 11:57 am
DVMResident wrote:
Tue Oct 01, 2019 9:09 am
I was in a very similar scenario. I bought a 2-unit that was doubled in value in 5 years. I liked the rental, but the market appreciation equity made it no longer worth the concentrated investment (my rule net of cash-on-purchase/sale >3x e/p of AA to purchase, <2x = sell). So I sold.
DVM Resident,
I'm curious if you use this formula for use in selling a rental to buy other rental(s) or would you move that real estate equity to equities and bonds?
Great question. I’m agnostic to the investment vehicle and don’t have a preference for RE vs equity/bonds. The answer also needs to be considered in the context of what you can buy: e.g. local RE markets, are your tax advantaged accounts maxed, etc. In other words, it’s personal.

What I did with these proceeds is put them in my taxable account at my current AA. I had considered cash-out refi (couldn’t make it work) and buying another RE. I wanted to leverage up to a quad-plex but my local market was, and still is, overpriced relative to the rent (even with a 1031 exchange). I couldn’t make the math attractive enough to pull the trigger.

HeelaMonster
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Re: Cashing out RE appreciation or keeping the rental cash flow?

Post by HeelaMonster » Wed Oct 02, 2019 12:47 pm

gr7070 wrote:
Mon Sep 30, 2019 3:45 pm
redrocker wrote:
Mon Sep 30, 2019 2:13 pm
gr7070 wrote:
Sun Sep 29, 2019 10:00 pm
How are you losing money on the depreciation? You should be making money off the depreciation. The depreciation should increase your net.

I understand that I'm not "losing money on depreciation," those two different numbers from my Schedule E were roughly Line 21 and Line 21 with Line 18 added back in. I also understand that depreciation isn't free money. I pay it back at the sale, so it feels like an overstatement to say I should be" making money" off of it.
Unless you're stuffing your mattress with it you're making money off of the deferment. If you're not including that in your assessment and comparison of your rental than you're just ignoring one of the benefits of rental property. Up to you, but it's a real, tangible benefit regardless.

What one can't do is just subtract it from the net. There's absolutely zero basis in fact for that. It's absolutely a benefit; cannot subtract it.
I don't want to derail the thread, but would greatly appreciate if someone could speak further to DEPRECIATION. I own a couple small rentals, so should have a better understanding... but I have yet to sell one, and have never been comfortable that I have a complete grasp on depreciation. In particular, long term versus short term benefits. It obviously helps in the near term, by reducing rental income at taxtime. BUT... then it gets recaptured at some point in the future, when the property is sold, reducing the cost basis so you pay more taxes on the sale. Does that recapture not effectively "zero out" the benefit.... in other words, you get something upfront, but pay it back later? :confused

Thanks for humoring me, on something I should be able to grasp on my own!

gr7070
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Re: Cashing out RE appreciation or keeping the rental cash flow?

Post by gr7070 » Wed Oct 02, 2019 12:57 pm

HeelaMonster wrote:
Wed Oct 02, 2019 12:47 pm
gr7070 wrote:
Mon Sep 30, 2019 3:45 pm
redrocker wrote:
Mon Sep 30, 2019 2:13 pm
gr7070 wrote:
Sun Sep 29, 2019 10:00 pm
How are you losing money on the depreciation? You should be making money off the depreciation. The depreciation should increase your net.

I understand that I'm not "losing money on depreciation," those two different numbers from my Schedule E were roughly Line 21 and Line 21 with Line 18 added back in. I also understand that depreciation isn't free money. I pay it back at the sale, so it feels like an overstatement to say I should be" making money" off of it.
Unless you're stuffing your mattress with it you're making money off of the deferment. If you're not including that in your assessment and comparison of your rental than you're just ignoring one of the benefits of rental property. Up to you, but it's a real, tangible benefit regardless.

What one can't do is just subtract it from the net. There's absolutely zero basis in fact for that. It's absolutely a benefit; cannot subtract it.
I don't want to derail the thread, but would greatly appreciate if someone could speak further to DEPRECIATION. I own a couple small rentals, so should have a better understanding... but I have yet to sell one, and have never been comfortable that I have a complete grasp on depreciation. In particular, long term versus short term benefits. It obviously helps in the near term, by reducing rental income at taxtime. BUT... then it gets recaptured at some point in the future, when the property is sold, reducing the cost basis. Does that recapture not effectively "zero out" the benefit.... in other words, you get something upfront, but pay it back later? :confused

Thanks for humoring me, on something I should be able to grasp on my own!
You've got it correct. Although, you don't specifically note that that reduced tax bill puts more money in your pocket today that then, presumably, gets invested, or in essence allows one to invest that much more. That's a nice positive.

It's the exact benefit - deferred taxes that one reaps the invested growth from - that makes a 401k such a huge positive. That is considered enormously beneficial in the case of a retirement account.

One should not ignore this positive.

gr7070
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Re: Cashing out RE appreciation or keeping the rental cash flow?

Post by gr7070 » Wed Oct 02, 2019 1:07 pm

Depreciation essentially gives you one fourth (income tax bracket) of one twenty-seventh (depreciation) of the (depreciable amount) property to invest every year.

I'll take an interest-free loan of $2500 annually from the government and invest that to repay at a time of my choosing!

At 7% that's $40,000 after ten years, $120k after 20 years, and $275k after 30 years. Less the 25k/50k/75k reduced basis (free principal) at time of sale. $200,000 free money after 30 years!

HeelaMonster
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Re: Cashing out RE appreciation or keeping the rental cash flow?

Post by HeelaMonster » Wed Oct 02, 2019 2:29 pm

gr7070 wrote:
Wed Oct 02, 2019 12:57 pm
You've got it correct. Although, you don't specifically note that that reduced tax bill puts more money in your pocket today that then, presumably, gets invested, or in essence allows one to invest that much more. That's a nice positive.

It's the exact benefit - deferred taxes that one reaps the invested growth from - that makes a 401k such a huge positive. That is considered enormously beneficial in the case of a retirement account.

One should not ignore this positive.
Thanks for the reply!

Topic Author
redrocker
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Re: Cashing out RE appreciation or keeping the rental cash flow?

Post by redrocker » Mon Dec 02, 2019 3:40 pm

Wanted to update this thread as I heard an interesting idea (that I'm not sure is valid for what I would want to achieve).

I read about the tactic of getting the house appraised prior to converting from partial residential to 100% rental, thus essentially locking in the appreciation and presumably leaving oneself a way to access those capital gains taxfree. However, this sounds a bit too good to be true and wanted to ask if anyone here had heard of such a strategy?

If I hadn't mentioned it explicitly before, one unit in this multi-family (approx 40% of the sqftage) has served as my primary residence since purchase. I have a tenant moving into my former residence this month and I don't intend to live in the house for the time being. This has been one of the big motivations to sell within the next year or two, so that ~40% of the appreciation (estimated to be in total about $300k) wouldn't be taxed as capital gains.

I'm estimating the personal portion of capital gains to be in the $95-105k range, FWIW.

If such a tactic were to work, I think it would be helpful to relieve the pressure from an accelerated schedule for selling so I could focus on the other intangibles that factor into the decision.

Thegame14
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Re: Cashing out RE appreciation or keeping the rental cash flow?

Post by Thegame14 » Mon Dec 02, 2019 3:50 pm

I don't know all the rules, but you should work with a RE, and do a like kind transfer to another property, and from what someone told me is that it doesn't have to be another rental, he claims the rules are "very loose" for like kind transfers and you can but a retirement house and using the like kind transfer not pay any taxes on the appreciation.

Topic Author
redrocker
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Re: Cashing out RE appreciation or keeping the rental cash flow?

Post by redrocker » Mon Dec 02, 2019 3:52 pm

Thegame14 wrote:
Mon Dec 02, 2019 3:50 pm
I don't know all the rules, but you should work with a RE, and do a like kind transfer to another property, and from what someone told me is that it doesn't have to be another rental, he claims the rules are "very loose" for like kind transfers and you can but a retirement house and using the like kind transfer not pay any taxes on the appreciation.
I'm curious about that because from what I've read, 1031 exchange is only applicable for rental property to rental property.

Cycle
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Re: Cashing out RE appreciation or keeping the rental cash flow?

Post by Cycle » Mon Dec 02, 2019 3:58 pm

I have a duplex and no longer live on site. I'm now considering selling. Anytime I need to go there to do something, it's an hour in travel time.

It's generally a headache, and I would have gotten better returns had I invested in REITs.

I put a lot of sweat equity into the property and am considering cashing out, just shifting that to my AA.

I have 30k in cash flow (no mortgage). It's worth maybe $380k.
Never look back unless you are planning to go that way

2 bits
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Re: Cashing out RE appreciation or keeping the rental cash flow?

Post by 2 bits » Tue Dec 03, 2019 4:13 pm

Catching up, missed the thread in October.
Sounds like lots of reasons to sell.
But then again, I am biased. Not necessarily in a Boglehead way but in a life style way. Fifteen or 20 years ago during the accumulation phase I was taken aback by a roofing contractor that seemed so pleased / relieved to have sold his 9 rentals. Now, at this point we are close behind having sold all but our last duplex. Maybe we could have done better by holding on to the other properties that were sold in the last 3-4 years. However the strong stock market and the improved life / time factor have made it nice to have sold and moved on to other projects.
Up thread somebody suggested that you know your local market better than we do. That negates some / many of the reasons to keep the triplex.
Sounds as though you are doing some good due diligence (1031 details et. al.) but just keep making progress toward selling and see how that makes you feel.
I sometimes think that I am living the life of which my immigrant ancestors dreamed.

MarkNYC
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Re: Cashing out RE appreciation or keeping the rental cash flow?

Post by MarkNYC » Tue Dec 03, 2019 6:07 pm

redrocker wrote:
Mon Dec 02, 2019 3:40 pm
Wanted to update this thread as I heard an interesting idea (that I'm not sure is valid for what I would want to achieve).

I read about the tactic of getting the house appraised prior to converting from partial residential to 100% rental, thus essentially locking in the appreciation and presumably leaving oneself a way to access those capital gains taxfree. However, this sounds a bit too good to be true and wanted to ask if anyone here had heard of such a strategy?
Obtaining a property appraisal will not "lock in appreciation" nor will it provide "a way to access those capital gains tax-free." And I would be interested to hear the logic behind this tactic and what provision in the tax law supposedly supports it.

WJW
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Re: Cashing out RE appreciation or keeping the rental cash flow?

Post by WJW » Tue Dec 03, 2019 6:45 pm

Cycle wrote:
Mon Dec 02, 2019 3:58 pm
I have a duplex and no longer live on site. I'm now considering selling. Anytime I need to go there to do something, it's an hour in travel time.

It's generally a headache, and I would have gotten better returns had I invested in REITs.

I put a lot of sweat equity into the property and am considering cashing out, just shifting that to my AA.

I have 30k in cash flow (no mortgage). It's worth maybe $380k.
30k in net income?? If so, seems like a good rate of return to me...

Cycle
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Re: Cashing out RE appreciation or keeping the rental cash flow?

Post by Cycle » Tue Dec 03, 2019 9:14 pm

WJW wrote:
Tue Dec 03, 2019 6:45 pm
Cycle wrote:
Mon Dec 02, 2019 3:58 pm
I have a duplex and no longer live on site. I'm now considering selling. Anytime I need to go there to do something, it's an hour in travel time.

It's generally a headache, and I would have gotten better returns had I invested in REITs.

I put a lot of sweat equity into the property and am considering cashing out, just shifting that to my AA.

I have 30k in cash flow (no mortgage). It's worth maybe $380k.
30k in net income?? If so, seems like a good rate of return to me...
Yeah, but I don't have a mortgage, so thats 380k of illiquidity.

On days my tennants make demands of me, I want to sell. A few weeks later, I think... This is totally passive. Then they make additional demands of me, and I want to sell again.

In the long run I can generally expect like 7% from equities. I don't think running a small business is worth the extra 1% steady income. Also, real estate does have some risk.
Never look back unless you are planning to go that way

WJW
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Re: Cashing out RE appreciation or keeping the rental cash flow?

Post by WJW » Wed Dec 04, 2019 8:27 am

Cycle wrote:
Tue Dec 03, 2019 9:14 pm
WJW wrote:
Tue Dec 03, 2019 6:45 pm
Cycle wrote:
Mon Dec 02, 2019 3:58 pm
I have a duplex and no longer live on site. I'm now considering selling. Anytime I need to go there to do something, it's an hour in travel time.

It's generally a headache, and I would have gotten better returns had I invested in REITs.

I put a lot of sweat equity into the property and am considering cashing out, just shifting that to my AA.

I have 30k in cash flow (no mortgage). It's worth maybe $380k.
30k in net income?? If so, seems like a good rate of return to me...
Yeah, but I don't have a mortgage, so thats 380k of illiquidity.

On days my tennants make demands of me, I want to sell. A few weeks later, I think... This is totally passive. Then they make additional demands of me, and I want to sell again.

In the long run I can generally expect like 7% from equities. I don't think running a small business is worth the extra 1% steady income. Also, real estate does have some risk.
What kinds of demands are your tenants making that aren't worth $30k a year? Based on cash flow alone if you were invested in equities you would assume maybe a 3 or 4% safe withdrawal rate and that's on whatever cash you have left after transaction costs and capital gains taxes....Have you thought about refinancing to free up some of the equity?

Topic Author
redrocker
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Re: Cashing out RE appreciation or keeping the rental cash flow?

Post by redrocker » Wed Dec 04, 2019 9:31 am

Cycle wrote:
Tue Dec 03, 2019 9:14 pm
Yeah, but I don't have a mortgage, so thats 380k of illiquidity.

On days my tennants make demands of me, I want to sell. A few weeks later, I think... This is totally passive. Then they make additional demands of me, and I want to sell again.

In the long run I can generally expect like 7% from equities. I don't think running a small business is worth the extra 1% steady income. Also, real estate does have some risk.
Your income/equity are similar to mine so I get it.

As for the response asking whether tenant demands are worth the $30k/yr, I'll add that in just the last two weeks, I have spent just a hair over $10k in HVAC replacement and foundation repair. That's just the financial side. The foundation "repair" wasn't urgent or even possibly necessary. Some historic inspector was driving by and decided I needed to put some money into the facade. I am also fighting the city over a zoning issue that they have created for me (they are claiming I converted a single to a multi-family even though it's been multifamily since at least the 80s), fighting the utility company to turn on power when they claim they can't find my address. All of this is just the last 30 days or so of headache.

WJW
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Re: Cashing out RE appreciation or keeping the rental cash flow?

Post by WJW » Wed Dec 04, 2019 10:41 am

redrocker wrote:
Wed Dec 04, 2019 9:31 am
As for the response asking whether tenant demands are worth the $30k/yr, I'll add that in just the last two weeks, I have spent just a hair over $10k in HVAC replacement and foundation repair. That's just the financial side. The foundation "repair" wasn't urgent or even possibly necessary. Some historic inspector was driving by and decided I needed to put some money into the facade. I am also fighting the city over a zoning issue that they have created for me (they are claiming I converted a single to a multi-family even though it's been multifamily since at least the 80s), fighting the utility company to turn on power when they claim they can't find my address. All of this is just the last 30 days or so of headache.
Repairs/maintenance should be accounted for in your projected net income calculation. All properties require maintenance and capital expenditures. As far as the zoning issue; this is not typical in a legal multifamily property. Utility company is an unusual issue that you should be able to resolve quickly but again not typical.

I would invest in a $380k property that generates $30k annually in net income, even if it requires some part-time work on my part.

Cycle
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Re: Cashing out RE appreciation or keeping the rental cash flow?

Post by Cycle » Thu Dec 05, 2019 2:05 pm

redrocker wrote:
Wed Dec 04, 2019 9:31 am
As for the response asking whether tenant demands are worth the $30k/yr, ...
I was just asked to notify the 2nd floor tenant that they need to keep the bedroom noises down, but in a way that the 1st floor tenants wouldn't know they complained.

I told them unless the violation constitutes calling the police, like after hours shouting, it's best to not involve the landlord.
Never look back unless you are planning to go that way

Topic Author
redrocker
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Re: Cashing out RE appreciation or keeping the rental cash flow?

Post by redrocker » Thu Dec 05, 2019 5:39 pm

Cycle wrote:
Thu Dec 05, 2019 2:05 pm
redrocker wrote:
Wed Dec 04, 2019 9:31 am
As for the response asking whether tenant demands are worth the $30k/yr, ...
I was just asked to notify the 2nd floor tenant that they need to keep the bedroom noises down, but in a way that the 1st floor tenants wouldn't know they complained.

I told them unless the violation constitutes calling the police, like after hours shouting, it's best to not involve the landlord.
I guess a key subset of the original inquiry I was making was what rate of return should I use to evaluate keeping VS selling? Is 6%/yr on equities conservative? Because of that $380k of equity is in the market, the question of what your tenant demands are worth changes to $30k-$22.8k = $7.2k/yr.

And in my case, I'm making less than that per year between three separate units, so...

gr7070
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Re: Cashing out RE appreciation or keeping the rental cash flow?

Post by gr7070 » Thu Dec 05, 2019 5:43 pm

redrocker wrote:
Thu Dec 05, 2019 5:39 pm
Cycle wrote:
Thu Dec 05, 2019 2:05 pm
redrocker wrote:
Wed Dec 04, 2019 9:31 am
As for the response asking whether tenant demands are worth the $30k/yr, ...
I was just asked to notify the 2nd floor tenant that they need to keep the bedroom noises down, but in a way that the 1st floor tenants wouldn't know they complained.

I told them unless the violation constitutes calling the police, like after hours shouting, it's best to not involve the landlord.
I guess a key subset of the original inquiry I was making was what rate of return should I use to evaluate keeping VS selling? Is 6%/yr on equities conservative? Because of that $380k of equity is in the market, the question of what your tenant demands are worth changes to $30k-$22.8k = $7.2k/yr.

And in my case, I'm making less than that per year between three separate units, so...
I'd calculate a more realistic rate of return than one based on cash flow. Include price appreciation and also the benefit of depreciation, while also accounting for all expenses.

WJW
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Re: Cashing out RE appreciation or keeping the rental cash flow?

Post by WJW » Thu Dec 05, 2019 9:30 pm

gr7070 wrote:
Thu Dec 05, 2019 5:43 pm
redrocker wrote:
Thu Dec 05, 2019 5:39 pm
Cycle wrote:
Thu Dec 05, 2019 2:05 pm
redrocker wrote:
Wed Dec 04, 2019 9:31 am
As for the response asking whether tenant demands are worth the $30k/yr, ...
I was just asked to notify the 2nd floor tenant that they need to keep the bedroom noises down, but in a way that the 1st floor tenants wouldn't know they complained.

I told them unless the violation constitutes calling the police, like after hours shouting, it's best to not involve the landlord.
I guess a key subset of the original inquiry I was making was what rate of return should I use to evaluate keeping VS selling? Is 6%/yr on equities conservative? Because of that $380k of equity is in the market, the question of what your tenant demands are worth changes to $30k-$22.8k = $7.2k/yr.

And in my case, I'm making less than that per year between three separate units, so...
I'd calculate a more realistic rate of return than one based on cash flow. Include price appreciation and also the benefit of depreciation, while also accounting for all expenses.
And don't forget to include selling costs and capital gains taxes on the sell side of your argument.

Cycle
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Location: Minneapolis

Re: Cashing out RE appreciation or keeping the rental cash flow?

Post by Cycle » Fri Dec 06, 2019 11:06 pm

redrocker wrote:
Thu Dec 05, 2019 5:39 pm
Cycle wrote:
Thu Dec 05, 2019 2:05 pm
redrocker wrote:
Wed Dec 04, 2019 9:31 am
As for the response asking whether tenant demands are worth the $30k/yr, ...
I was just asked to notify the 2nd floor tenant that they need to keep the bedroom noises down, but in a way that the 1st floor tenants wouldn't know they complained.

I told them unless the violation constitutes calling the police, like after hours shouting, it's best to not involve the landlord.
I guess a key subset of the original inquiry I was making was what rate of return should I use to evaluate keeping VS selling? Is 6%/yr on equities conservative? Because of that $380k of equity is in the market, the question of what your tenant demands are worth changes to $30k-$22.8k = $7.2k/yr.

And in my case, I'm making less than that per year between three separate units, so...
I have no idea what % to assume.

I kinda got into rehabbing and landlording to scratch the entrepreneurial itch outside of my 9-5 megacorp job.

But now I feel like " been there done that, got the t-shirt."

Also I'm a new parent, so I'm not exactly swimming in free time and don't really need the extra few k the landlording might yield over an index fund in the next 5-10 years.

The main thing holding me back is emotional, as I put a ton of time into rehabbing the property. Sunk emotional cost.
Never look back unless you are planning to go that way

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