$1.1 million rental portfolio, but tired of being a landlord

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Sandtrap
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Re: $1.1 million rental portfolio, but tired of being a landlord

Post by Sandtrap » Tue Apr 16, 2019 8:23 am

renue74 wrote:
Mon Apr 15, 2019 10:21 pm
I own 9 rental properties + 1 full time airbnb property and net about $100K/year in rental income. I self manage....except for 2 recent buys I just bought.

I've always self managed...for 7 years. I don't mind dealing with the riff-raff. My plan is to do it for 10 more years and sell off then.

I actually just bought a 3 property deal from an investor who went into a 1031 exchange. I'm pretty sure you have to have one transaction if you want to exchange into the total amount.

My suggestions

1.) Look at your most difficult properties. You know the ones, that sorta kinda suck and has never really had decent tenants......and hand those off to a property manager. Just do it for a trial. It'll cost you 10%, but you won't get the calls.

2.) How to find a good property manager? Look at local real estate agents who also have rental property. See who they use for property managers. Ask around.

I have landlord friends who have cycled out. After 20 years, they hated it. They tried to sell me package deals, but they wanted retail prices for properties that obviously had deferred maintenance and low paying rents. They eventually sold their properties off...I think it took about 2 years for each one to sell about 20 properties each.

If you do decide to sell....sell over a few years to reduce your tax burden.

But, I would suggest the property manager route first. But, you need to make sure it's profitable. There's no reason to have a rental property that doesn't cash flow well.

Plan the work, work the plan.
+1
Excellent suggestions.
In addition to a step by step "exit plan" for the OP (fed up landlord).

The 1031 can be split up to a variety of properties as long as the total is equal or exceeded.

It took me at least 8 years to step back from 100's units, self managed, over 30 years. As you say, there has to be a long term plan to exit from this while minimizing loses, maximizing gains.
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knpstr
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Re: $1.1 million rental portfolio, but tired of being a landlord

Post by knpstr » Tue Apr 16, 2019 10:07 am

BanquetBeer wrote:
Tue Apr 16, 2019 8:07 am
knpstr wrote:
Mon Apr 15, 2019 9:23 pm
Work 40 hours a week for $45,000/yr --- or work 7.5 hours per week for $45,000/yr... hmmm which is better?

Not to mention, if their property appreciates at 2.5%/yr that is another $27,500+/yr so ~$72,500+/yr for 7.5 hours of work a week when you include that.
I feel like there is some misunderstanding here.

Rental: $1.1mil investment + 10h/wk = $45k (+ $27k appreciation)

If you invest in stocks you would get ~900*9%=81k on average with almost no work but those returns are not reliable.

If you use 3.5% SWR that’s 32k with no work vs 45k with 500h/yr work (because both assets appreciate, although stocks do tend to appreciate at a higher rate)

So if they worked full time for $45k they would still have +32k from stocks and earn $77k/yr.

One could find part time or temp work to get (45-32=13k) per year or one could work full time to save up 13/0.035=$370k more (assuming you use this SWR based on an age appropriate evaluation)

That could be 7 years earning about 50k or 5.5 years earning about 75k

Would you rather front load work/savings or spread it out is out? That’s a personal choice.
If living off full-time work: at $900K and 9% it will take about ~4.25 years to have enough if you let it grow. No need for 5.5-7 years you quoted.

It may be rather difficult to find $50-75k work from not working or part-time work the last 10 years. One would need about a ~$65K job to net $45K to live off after tax in the meantime. May or may not be realistically available to jump right into. Probably would want to pick up the highest paying job AND keep all properties. Continue to live off the rental income, invest 100% of net pay into index funds, let the property continue to appreciate.

If real estate is making him/her miserable then obviously this is worth it (to dump it all). But a ~7.5/hr work week is pretty good, sometimes the grass just appears greener.

As a side note, It is odd to me he/she is only netting $45k on $130K gross rental income with no debt payments and no property management expense. He/she should be closer to $65,000/yr when not having to account for those two expenses.
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius

BanquetBeer
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Re: $1.1 million rental portfolio, but tired of being a landlord

Post by BanquetBeer » Tue Apr 16, 2019 10:22 am

knpstr wrote:
Tue Apr 16, 2019 10:07 am
If living off full-time work: at $900K and 9% it will take about ~4.25 years to have enough if you let it grow. No need for 5.5-7 years you quoted.
9% ignores inflation, I would use 6% real typically in my calculations. Some may argue lower but I find that matches up more with firecalc averages.
knpstr wrote:
Tue Apr 16, 2019 10:07 am
It may be rather difficult to find $50-75k work from not working or part-time work the last 10 years. One would need about a ~$65K job to net $45K to live off after tax in the meantime. May or may not be realistically available to jump right into.
$65k job + $22.5k (2.5% dividend) for a single filer, maxing our 401k and using standard deduction would cost about $6500 in taxes.

OP could earn 47-48k and still make 45k after tax take-home due to LTCG rates. (Spend dividends and invest earnings in 401k, could Roth convert later)

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4nursebee
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Re: $1.1 million rental portfolio, but tired of being a landlord

Post by 4nursebee » Tue Apr 16, 2019 10:37 am

1. How the H does the net of 50K come from 130K income unless there is already a highly paid property manager already?

2. I hate posts that are posted on behalf of other "investors".

3. If you were local, I would buy them all and be a better manager!

4. If the 50K really does come from 130K, LOUSY return for the risk.
4nursebee

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FelixTheCat
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Re: $1.1 million rental portfolio, but tired of being a landlord

Post by FelixTheCat » Tue Apr 16, 2019 12:41 pm

teelainen wrote:
Mon Apr 15, 2019 2:00 pm
FelixTheCat wrote:
Mon Apr 15, 2019 1:00 pm
teelainen wrote:
Mon Apr 15, 2019 12:55 pm
- This investor is tired of being a landlord, tired of dealing with tenants, toilets, rent collecting, filling vacancies, and all the tenant drama.
I would hire a property manager.
No, the investor doesn't want to "manage" the property manager. It takes a lot of time and skill to make sure the property manager is doing their job. Also, it is very hard to find a good property manager. Lastly, property managers are not cheap (even the bad ones).
I have about 15 years as a landlord. A good property manager is about as much effort as a Boglehead portfolio.
Felix is a wonderful, wonderful cat.

protagonist
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Re: $1.1 million rental portfolio, but tired of being a landlord

Post by protagonist » Tue Apr 16, 2019 1:07 pm

teelainen wrote:
Mon Apr 15, 2019 12:55 pm


Questions:
1. Is $40k-$50k net profit + $18k in depreciation per year a good "return" on $1.1 million worth of assets? Or can this investor make the same amount of money (with less work) buying municipal bonds?
Question for you: Is your time worth nothing? How about your aggravation? You , curiously, did not factor those into your calculations. Maintenance, repairs, difficult tenants, advertising, tax complications, lawyers, potential time not rented, expense and work buying and selling, travel, etc. etc. etc.....
I'm no advocate of municipal bonds, but they have one large thing going for them. You buy them and then ignore them.

tampaite
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Re: $1.1 million rental portfolio, but tired of being a landlord

Post by tampaite » Tue Apr 16, 2019 1:44 pm

Deleting my messages on this forum
Last edited by tampaite on Mon Jun 03, 2019 7:37 am, edited 1 time in total.

mariezzz
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Re: $1.1 million rental portfolio, but tired of being a landlord

Post by mariezzz » Tue Apr 16, 2019 1:59 pm

There doesn't have to be capital gains on a property if you move into them one at a time, live there long enough so the capital gains are offset, and then sell that property. Don't know your living situation or whether you're willing to do this, but it is an option. You could rent out (part of) where you're currently living or put personal items away and do an air bnb, being selective about who you let rent & keeping price high enough that it does some of the selecting).

If you did this for a few years, you could gradually sell a few properties (and over time, that would gradually eliminate some of the headaches of being a landlord) and eliminate some/all of the capital gains on the properties as they sell.

Then, you would be close to retiring ($40K is less than 4% of 1.1 million), depending on your risk aversiveness & willingness to be cut expenses. Or could find some other part time job for a bit of income.

gougou
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Re: $1.1 million rental portfolio, but tired of being a landlord

Post by gougou » Tue Apr 16, 2019 2:02 pm

45K NOI from a $1.1M portfolio is pretty terrible unless the properties are located in highly desirable locations. The cap rate is only 4% which is comparable to what you could get from a duplex in San Francisco if you self-manage. It also compares terribly to VNQ (Vanguard Real Estate ETF) which is completely passive and pays 3+% yield.

To minimize taxes the investor could try to 1031 exchange his portfolio into some larger properties with higher cap rate and in-place management. Aim for at least 6% cap rate for average locations and 4% cap rate for hot locations with strong long-term appreciation.

BanquetBeer
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Re: $1.1 million rental portfolio, but tired of being a landlord

Post by BanquetBeer » Tue Apr 16, 2019 2:11 pm

mariezzz wrote:
Tue Apr 16, 2019 1:59 pm
There doesn't have to be capital gains on a property if you move into them one at a time, live there long enough so the capital gains are offset, and then sell that property. Don't know your living situation or whether you're willing to do this, but it is an option. You could rent out (part of) where you're currently living or put personal items away and do an air bnb, being selective about who you let rent & keeping price high enough that it does some of the selecting).

If you did this for a few years, you could gradually sell a few properties (and over time, that would gradually eliminate some of the headaches of being a landlord) and eliminate some/all of the capital gains on the properties as they sell.

Then, you would be close to retiring ($40K is less than 4% of 1.1 million), depending on your risk aversiveness & willingness to be cut expenses. Or could find some other part time job for a bit of income.
I believe capital gains are avoided but depreciation recapture is still required at 25% rate.

mariezzz
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Re: $1.1 million rental portfolio, but tired of being a landlord

Post by mariezzz » Tue Apr 16, 2019 2:16 pm

BanquetBeer wrote:
Tue Apr 16, 2019 2:11 pm
mariezzz wrote:
Tue Apr 16, 2019 1:59 pm
There doesn't have to be capital gains on a property if you move into them one at a time, live there long enough so the capital gains are offset, and then sell that property. Don't know your living situation or whether you're willing to do this, but it is an option. You could rent out (part of) where you're currently living or put personal items away and do an air bnb, being selective about who you let rent & keeping price high enough that it does some of the selecting).

If you did this for a few years, you could gradually sell a few properties (and over time, that would gradually eliminate some of the headaches of being a landlord) and eliminate some/all of the capital gains on the properties as they sell.

Then, you would be close to retiring ($40K is less than 4% of 1.1 million), depending on your risk aversiveness & willingness to be cut expenses. Or could find some other part time job for a bit of income.
I believe capital gains are avoided but depreciation recapture is still required at 25% rate.
Kitces has discussion of converting a previous rental to primary residence: https://www.kitces.com/blog/limits-to-c ... exclusion/
OP needs to be aware of possible tax ramification but may still save a lot in taxes.

Adding to what I said above: as people move out, find good tenants (with strong references) who are going to respect the property & take care of it. I'd sacrifice some in rental income for that.

Gibby45
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Re: $1.1 million rental portfolio, but tired of being a landlord

Post by Gibby45 » Tue Apr 16, 2019 2:28 pm

Your only choices to avoid being a landlord are to sell the properties or delegate the aspects of being a landlord you do not like. I'm not sure what your location is, but look into websites like Roofstock and Bigger Pockets to see if any investors would be interested in a portfolio sale. A few investors can join forces to take the properties off your hands. Looking at the numbers you might need to lower the price but you will save 2.5% per property in realtor fees going that route. You could also take a flyer with the Zillow make me move option.

If you go the Air BNB route, you will need to make sure it is allowed in your area and that income is generally considered earned business income and not passive rental income (YMMV). That business model is much more hands on than the long term rental business model.

Streptococcus
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Re: $1.1 million rental portfolio, but tired of being a landlord

Post by Streptococcus » Tue Apr 16, 2019 7:50 pm

teelainen wrote:
Mon Apr 15, 2019 12:55 pm
Scenario:
- Individual investor owns 10 single-family rental properties. The total market value of all the properties is about $1.1 million.
- The properties are all paid off, free and clear, with no mortgages. They were all purchased about 10 years ago for a cost basis of about $500k.
- This investor is tired of being a landlord, tired of dealing with tenants, toilets, rent collecting, filling vacancies, and all the tenant drama.
- This investor spends about 5-10 hours per week on average dealing with repairs, rents, filling vacancies as needed, taxes, paperwork, etc.
- The real estate market in this city is expected to grow at about 2%-3% per year.

Numbers:
- Annual gross revenue is $130,000.
- Net profit is about $40k-$50k per year (it varies each year depending on how many repairs are needed).
- Each year, this investor gets to write off about $18k in depreciation (the IRS allows residential real estate to be depreciated over 27.5 years).
- So, in addition to the net profit of $40k-$50k per year, the $18k in depreciation expense is a nice tax saving bonus as well.

Other Notes:
- The investor depends on this $40k-$50k per year to pay for living expenses, because the investor currently doesn't have a full-time job.
- Keep in mind that if the investor sells all the properties, there will be capital gains taxes on about $600k of the sale.
- So, the investor may only have about $900k in cash after everything is sold and all the taxes are paid.

Questions:
1. Is $40k-$50k net profit + $18k in depreciation per year a good "return" on $1.1 million worth of assets? Or can this investor make the same amount of money (with less work) buying municipal bonds?
2. Besides municipal bonds, is there anything else this investor can buy to safely get $40k-$50k per year?
3. The investor has considered doing a 1031 exchange in order to trade the 10 properties for something else (and defer the taxes), but it is hard to find a buyer who is willing to buy all 10 properties at once and still pay full market value for all of them.
4. Any other tips or advice for this investor?

Remember that the investor will only have about $900k in cash after everything is sold and all the taxes are paid. Thanks.
I'm fellow real estate investor and like you I only buy single family homes.
My 2 cents:
Do not sell your properties. Hire a property manager and give up 10-12% of your 40 - 50K per year.

I do not self manage. I'm a physician. Not only am I not handy, I started real estate because I was looking for an investment, not a job. I never deal with my properties. I know investors who own tens of homes in different cities and they don't self manage.

It appears to me that real estate for you is a job and you are burned out. Make it an investment. Hire property management.

If you sell your homes, I don't think you will end up with 900k in cash. Your tax hit will be way more significant.

First you will pay taxes on all the depreciation amount you have taken all these years, possibly 25%.

Plus you will pay taxes on the capital gains, possibly 15%

Plus you may not find another similar source of income that is fairly stable and you can increase by 3% each year to match inflation.

My personal strategy is to never ever sell my houses and pass them tax free to my kids upon death. We're talking about hundreds of thousand of tax saving. if I do sell, I will 1031 exchange them.

My advice to you: 1031 exchange all the houses that are a headache. This is a common strategy among RE investors. Get rid of the houses that are less profitable or need too much work, 1031 exchange them, hire a PM. Avoid paying taxes on your cap gains.

DonIce
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Re: $1.1 million rental portfolio, but tired of being a landlord

Post by DonIce » Tue Apr 16, 2019 8:10 pm

Streptococcus wrote:
Tue Apr 16, 2019 7:50 pm
My 2 cents:
Do not sell your properties. Hire a property manager and give up 10-12% of your 40 - 50K per year.
Is it really possible to get a decent property manager that will manage 10 properties for you for only $4k - $5k per year?

renue74
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Re: $1.1 million rental portfolio, but tired of being a landlord

Post by renue74 » Tue Apr 16, 2019 8:24 pm

DonIce wrote:
Tue Apr 16, 2019 8:10 pm
Streptococcus wrote:
Tue Apr 16, 2019 7:50 pm
My 2 cents:
Do not sell your properties. Hire a property manager and give up 10-12% of your 40 - 50K per year.
Is it really possible to get a decent property manager that will manage 10 properties for you for only $4k - $5k per year?
Property managers make most of their money from rental rehabs. The 10% management fee is just icing on the cake.

It's like when the HVAC guy charges you $79 for a "air conditioner" startup cleaning in the spring. He's just looking for something to add-on.

They throw the 10 rentals into their portfolio and keep on working.

Streptococcus
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Re: $1.1 million rental portfolio, but tired of being a landlord

Post by Streptococcus » Tue Apr 16, 2019 8:55 pm

DonIce wrote:
Tue Apr 16, 2019 8:10 pm
Streptococcus wrote:
Tue Apr 16, 2019 7:50 pm
My 2 cents:
Do not sell your properties. Hire a property manager and give up 10-12% of your 40 - 50K per year.
Is it really possible to get a decent property manager that will manage 10 properties for you for only $4k - $5k per year?
My PM company charges 10% and thats it. They market the houses, show them, deal with the tenants, manage the repairs, and if needed, they sell the rental. Great PM companies are also real estate agents and real estate investors. That means they understand the rental market.
My PM charges only 10%. Nothing else. They dont even charge me a fee for putting a tenant in the house. If I need repair, they outsource it at a discount. I can use my own plumber, contractor, etc. (I have them) but the one they outsource are good and competitive.

The 10% I give them is the best 10% I spend in my life. And one thing that OP is not considering: the beauty of receiving a check each month, passively. The more the properties, the bigger the check. It is beautiful :sharebeer

Now you wonder how they make money? My PM company manages 227 units. If you calculate about $120 per units per month, it is a ~ $30,000 per month operation. Plus they make money as RE agents plus they make money as RE investors.

averagedude
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Re: $1.1 million rental portfolio, but tired of being a landlord

Post by averagedude » Tue Apr 16, 2019 9:10 pm

As an average wage earner, i would suggest you selling all of your real estate holding and invest in a three fund portfolio. Passive income from the stock and bond markets beats real estate. No getting phone calls in the middle of the night to fix things, no showing property to potential buyers, not having to deal with tenants who think you are the one percenters who are taking advantage of them, and not having your sleep interrupted because of you having a geographical concentrated investment. The only problem with this advice is how do you pay the tax man. This is beyond my scope of expertise. I'm sure this is the main concern of your question and it is legitimate.

DonIce
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Re: $1.1 million rental portfolio, but tired of being a landlord

Post by DonIce » Tue Apr 16, 2019 9:36 pm

Streptococcus wrote:
Tue Apr 16, 2019 8:55 pm
DonIce wrote:
Tue Apr 16, 2019 8:10 pm
Streptococcus wrote:
Tue Apr 16, 2019 7:50 pm
My 2 cents:
Do not sell your properties. Hire a property manager and give up 10-12% of your 40 - 50K per year.
Is it really possible to get a decent property manager that will manage 10 properties for you for only $4k - $5k per year?
My PM company charges 10% and thats it. They market the houses, show them, deal with the tenants, manage the repairs, and if needed, they sell the rental. Great PM companies are also real estate agents and real estate investors. That means they understand the rental market.
My PM charges only 10%. Nothing else. They dont even charge me a fee for putting a tenant in the house. If I need repair, they outsource it at a discount. I can use my own plumber, contractor, etc. (I have them) but the one they outsource are good and competitive.

The 10% I give them is the best 10% I spend in my life. And one thing that OP is not considering: the beauty of receiving a check each month, passively. The more the properties, the bigger the check. It is beautiful :sharebeer

Now you wonder how they make money? My PM company manages 227 units. If you calculate about $120 per units per month, it is a ~ $30,000 per month operation. Plus they make money as RE agents plus they make money as RE investors.
But that's 10% of the rent right? Not 10% of free cash flow.

Streptococcus
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Re: $1.1 million rental portfolio, but tired of being a landlord

Post by Streptococcus » Tue Apr 16, 2019 10:12 pm

DonIce wrote:
Tue Apr 16, 2019 9:36 pm
Streptococcus wrote:
Tue Apr 16, 2019 8:55 pm
DonIce wrote:
Tue Apr 16, 2019 8:10 pm
Streptococcus wrote:
Tue Apr 16, 2019 7:50 pm
My 2 cents:
Do not sell your properties. Hire a property manager and give up 10-12% of your 40 - 50K per year.
Is it really possible to get a decent property manager that will manage 10 properties for you for only $4k - $5k per year?
My PM company charges 10% and thats it. They market the houses, show them, deal with the tenants, manage the repairs, and if needed, they sell the rental. Great PM companies are also real estate agents and real estate investors. That means they understand the rental market.
My PM charges only 10%. Nothing else. They dont even charge me a fee for putting a tenant in the house. If I need repair, they outsource it at a discount. I can use my own plumber, contractor, etc. (I have them) but the one they outsource are good and competitive.

The 10% I give them is the best 10% I spend in my life. And one thing that OP is not considering: the beauty of receiving a check each month, passively. The more the properties, the bigger the check. It is beautiful :sharebeer

Now you wonder how they make money? My PM company manages 227 units. If you calculate about $120 per units per month, it is a ~ $30,000 per month operation. Plus they make money as RE agents plus they make money as RE investors.
But that's 10% of the rent right? Not 10% of free cash flow.
Correct!

WhyNotUs
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Re: $1.1 million rental portfolio, but tired of being a landlord

Post by WhyNotUs » Tue Apr 16, 2019 10:22 pm

Calculating Cap Rate is on purchase cost rather than market value.
I own the next hot stock- VTSAX

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teelainen
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Re: $1.1 million rental portfolio, but tired of being a landlord

Post by teelainen » Tue Apr 16, 2019 10:24 pm

Leemiller wrote:
Mon Apr 15, 2019 1:43 pm
You might want to get some 1031 advice. I don’t believe you need someone to buy all ten from you, I thought you could escrow funds for 6 months or so pending finding a replacement property. Also, not sure if you’re including maintanence costs by reserving funds annual. Two new roofs would put a huge dent in your returns.
You don't need the same person to buy all 10 properties from you, but it's easier that way. The investor has 45 days to identify potential replacement properties and 180 days to acquire the replacement property. The exchange must be completed in 180 days, not 45 days plus 180 days.

If you are selling the 10 properties to different people at different times, you must find all the buyers within 45 days and find your replacement property within that same time as well.

DonIce
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Re: $1.1 million rental portfolio, but tired of being a landlord

Post by DonIce » Tue Apr 16, 2019 11:51 pm

Streptococcus wrote:
Tue Apr 16, 2019 10:12 pm
Correct!
So in the case of the OP, I think he said $130k total rents, corresponding to $40k free cash flow. So 10% of the $130k, not 10% of the $40k. That's what I was asking about, since it sounded like you were saying you would have it managed for 10% of the 40k.

msk
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Re: $1.1 million rental portfolio, but tired of being a landlord

Post by msk » Wed Apr 17, 2019 3:14 am

Been there, done that. I had 30 apartments/single-family dwellings for 30 years. No matter how much you delegate, there comes a point when you are simply fed up. After many years waiting for the RE market to pick up, I sold, with the market still moribund. As luck would have it, the market shot up the following year, so the buyers, 2 friends, were happy to see their rents going up by 50%. I lump summed the proceeds into a single stock pick (looked ridiculously good to me...) and my exRE capital went up a factor 3x. Everyone happy. Fed up with RE? Just sell! Pro for RE: nice monthly cash coming in. Pro for stocks: better growth but trivial cash income. Pro for bonds? Can't think of any. Stocks are more volatile than RE, but time always comes in as a savior. Remember always: inflation matters! I am now 100% in stocks worldwide by market weight. 55% US 45% ex US. I am much more comfortable with that split than, say, 55% US stocks and 45% US bonds, but each to his own.

mchampse
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Re: $1.1 million rental portfolio, but tired of being a landlord

Post by mchampse » Wed Apr 17, 2019 3:23 am

I wouldn’t recommend municipal bonds for you. You don’t pay taxes on them, but they have lower yields. It works if you are in the top tax bracket, but if it’s your only source of income and your total income is $40-$50k, you will likely come out ahead buying taxable bonds (treasuries or corporate) and paying the tax.

Streptococcus
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Re: $1.1 million rental portfolio, but tired of being a landlord

Post by Streptococcus » Wed Apr 17, 2019 7:22 am

DonIce wrote:
Tue Apr 16, 2019 11:51 pm
Streptococcus wrote:
Tue Apr 16, 2019 10:12 pm
Correct!
So in the case of the OP, I think he said $130k total rents, corresponding to $40k free cash flow. So 10% of the $130k, not 10% of the $40k. That's what I was asking about, since it sounded like you were saying you would have it managed for 10% of the 40k.
You are correct. It is 10% of 130K.
I will also add that if his NOI is 130K and his cash flow is 40K, which is ~31%, without even paying a PM he is probably spending too much in expenses.

In RE, it is said that in the very long run you will spend about 50% of your income in expenses, not including mortgage. That is if you are a successful RE investor. Did I understand that the OP has all of his properties paid off, so no mortgage, no PM yet he spends ~ 70% in expenses. He either has too many expenses or I’m missing something.

This tells me one thing: The OP probably has a few properties that are either not income producing or income eating (expenses) and time eating. Identify those properties, 1031 exchange them or if you’re burned out, just sell them. Keep the winners and have them professionally managed.

But in my opinion, if you generate 130K with no mortgage, you should have at least 65k cash flow. And that is PM included.

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djpeteski
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Re: $1.1 million rental portfolio, but tired of being a landlord

Post by djpeteski » Wed Apr 17, 2019 7:36 am

Have you considered selling off one or two of your least favorite properties and reevaluating? This would spread out the tax hit over time, diversify, and still keep an income.

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Re: $1.1 million rental portfolio, but tired of being a landlord

Post by spectec » Wed Apr 17, 2019 7:55 am

If he's tired of managing rental properties, what's the point of even considering a 1031 exchange? Sort of defeats the purpose doesn't it? Given the numbers you put up, I think the 1031 exchange is questionable anyhow after transaction costs and associated risks.
Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it. - Will Rogers

riverguy
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Re: $1.1 million rental portfolio, but tired of being a landlord

Post by riverguy » Wed Apr 17, 2019 10:49 am

Streptococcus wrote:
Tue Apr 16, 2019 7:50 pm
teelainen wrote:
Mon Apr 15, 2019 12:55 pm
Scenario:
- Individual investor owns 10 single-family rental properties. The total market value of all the properties is about $1.1 million.
- The properties are all paid off, free and clear, with no mortgages. They were all purchased about 10 years ago for a cost basis of about $500k.
- This investor is tired of being a landlord, tired of dealing with tenants, toilets, rent collecting, filling vacancies, and all the tenant drama.
- This investor spends about 5-10 hours per week on average dealing with repairs, rents, filling vacancies as needed, taxes, paperwork, etc.
- The real estate market in this city is expected to grow at about 2%-3% per year.

Numbers:
- Annual gross revenue is $130,000.
- Net profit is about $40k-$50k per year (it varies each year depending on how many repairs are needed).
- Each year, this investor gets to write off about $18k in depreciation (the IRS allows residential real estate to be depreciated over 27.5 years).
- So, in addition to the net profit of $40k-$50k per year, the $18k in depreciation expense is a nice tax saving bonus as well.

Other Notes:
- The investor depends on this $40k-$50k per year to pay for living expenses, because the investor currently doesn't have a full-time job.
- Keep in mind that if the investor sells all the properties, there will be capital gains taxes on about $600k of the sale.
- So, the investor may only have about $900k in cash after everything is sold and all the taxes are paid.

Questions:
1. Is $40k-$50k net profit + $18k in depreciation per year a good "return" on $1.1 million worth of assets? Or can this investor make the same amount of money (with less work) buying municipal bonds?
2. Besides municipal bonds, is there anything else this investor can buy to safely get $40k-$50k per year?
3. The investor has considered doing a 1031 exchange in order to trade the 10 properties for something else (and defer the taxes), but it is hard to find a buyer who is willing to buy all 10 properties at once and still pay full market value for all of them.
4. Any other tips or advice for this investor?

Remember that the investor will only have about $900k in cash after everything is sold and all the taxes are paid. Thanks.
I'm fellow real estate investor and like you I only buy single family homes.
My 2 cents:
Do not sell your properties. Hire a property manager and give up 10-12% of your 40 - 50K per year.

I do not self manage. I'm a physician. Not only am I not handy, I started real estate because I was looking for an investment, not a job. I never deal with my properties. I know investors who own tens of homes in different cities and they don't self manage.

It appears to me that real estate for you is a job and you are burned out. Make it an investment. Hire property management.

If you sell your homes, I don't think you will end up with 900k in cash. Your tax hit will be way more significant.

First you will pay taxes on all the depreciation amount you have taken all these years, possibly 25%.

Plus you will pay taxes on the capital gains, possibly 15%

Plus you may not find another similar source of income that is fairly stable and you can increase by 3% each year to match inflation.

My personal strategy is to never ever sell my houses and pass them tax free to my kids upon death. We're talking about hundreds of thousand of tax saving. if I do sell, I will 1031 exchange them.

My advice to you: 1031 exchange all the houses that are a headache. This is a common strategy among RE investors. Get rid of the houses that are less profitable or need too much work, 1031 exchange them, hire a PM. Avoid paying taxes on your cap gains.
Why would you suggest taking a 4-5% cap rate and reducing it another ~$10k to 3-4%? Awful idea. :oops:
teelainen wrote:
Tue Apr 16, 2019 10:24 pm
Leemiller wrote:
Mon Apr 15, 2019 1:43 pm
You might want to get some 1031 advice. I don’t believe you need someone to buy all ten from you, I thought you could escrow funds for 6 months or so pending finding a replacement property. Also, not sure if you’re including maintanence costs by reserving funds annual. Two new roofs would put a huge dent in your returns.
You don't need the same person to buy all 10 properties from you, but it's easier that way. The investor has 45 days to identify potential replacement properties and 180 days to acquire the replacement property. The exchange must be completed in 180 days, not 45 days plus 180 days.

If you are selling the 10 properties to different people at different times, you must find all the buyers within 45 days and find your replacement property within that same time as well.
So do them each in separate exchanges? You can do that you know.
spectec wrote:
Wed Apr 17, 2019 7:55 am
If he's tired of managing rental properties, what's the point of even considering a 1031 exchange? Sort of defeats the purpose doesn't it? Given the numbers you put up, I think the 1031 exchange is questionable anyhow after transaction costs and associated risks.
There's more real property out there to buy other than rental properties....

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teelainen
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Re: $1.1 million rental portfolio, but tired of being a landlord

Post by teelainen » Thu Apr 18, 2019 12:03 am

DVMResident wrote:
Mon Apr 15, 2019 1:53 pm
In addition to the $40-50k cash-flow, appreciation should bring another $22-33k of illquidate gains plus increases in rent. Based on the 4% rule (which may or may not be appropriate for your age), the RE is outperforming a typical $900 60/40 AA. On the other hand, you have a part-time job managing the units and your assets might be concentrated in one city. So you demand a solid premium.
Yes, it is true that the appreciation of the real estate portfolio should bring in another $22-33k of illiquid gains. But the problem is that the property taxes keep increasing with the value of the real estate portfolio. It is hard to do proportional rent increases because wages are really stagnant for the renters.

spectec
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Re: $1.1 million rental portfolio, but tired of being a landlord

Post by spectec » Thu Apr 18, 2019 8:16 am

spectec wrote:
Wed Apr 17, 2019 7:55 am
If he's tired of managing rental properties, what's the point of even considering a 1031 exchange? Sort of defeats the purpose doesn't it? Given the numbers you put up, I think the 1031 exchange is questionable anyhow after transaction costs and associated risks.
---> There's more real property out there to buy other than rental properties.... <-----


I have often seen proposed 1031 exchanges which are ill-conceived because the taxpayer loses sight of practicality in the pursuit of avoiding a moderately marginal tax bill. And the greatest risk arrives after the deal is done - IRS disagrees with some technicality and blows the tax deferral on the entire deal. This is after the accommodaters, lawyers, and brokers have all been paid their fees and the replacement property is in place. At that point do you throw good money after bad by fighting the IRS with little prospect of winning?
Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it. - Will Rogers

DVMResident
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Re: $1.1 million rental portfolio, but tired of being a landlord

Post by DVMResident » Thu Apr 18, 2019 8:42 am

teelainen wrote:
Thu Apr 18, 2019 12:03 am
DVMResident wrote:
Mon Apr 15, 2019 1:53 pm
In addition to the $40-50k cash-flow, appreciation should bring another $22-33k of illquidate gains plus increases in rent. Based on the 4% rule (which may or may not be appropriate for your age), the RE is outperforming a typical $900 60/40 AA. On the other hand, you have a part-time job managing the units and your assets might be concentrated in one city. So you demand a solid premium.
Yes, it is true that the appreciation of the real estate portfolio should bring in another $22-33k of illiquid gains. But the problem is that the property taxes keep increasing with the value of the real estate portfolio. It is hard to do proportional rent increases because wages are really stagnant for the renters.
This is extremely location dependent both for the taxes and for the wages. Secondarily, the taxes are deductible.

But overall, if this true with decreasing profits each year and all 10 units are in the same town, it’s even a stronger argument for diversification.

riverguy
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Re: $1.1 million rental portfolio, but tired of being a landlord

Post by riverguy » Thu Apr 18, 2019 8:55 am

spectec wrote:
Thu Apr 18, 2019 8:16 am
spectec wrote:
Wed Apr 17, 2019 7:55 am
If he's tired of managing rental properties, what's the point of even considering a 1031 exchange? Sort of defeats the purpose doesn't it? Given the numbers you put up, I think the 1031 exchange is questionable anyhow after transaction costs and associated risks.
---> There's more real property out there to buy other than rental properties.... <-----


I have often seen proposed 1031 exchanges which are ill-conceived because the taxpayer loses sight of practicality in the pursuit of avoiding a moderately marginal tax bill. And the greatest risk arrives after the deal is done - IRS disagrees with some technicality and blows the tax deferral on the entire deal. This is after the accommodaters, lawyers, and brokers have all been paid their fees and the replacement property is in place. At that point do you throw good money after bad by fighting the IRS with little prospect of winning?
What are you talking about??

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teelainen
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Re: $1.1 million rental portfolio, but tired of being a landlord

Post by teelainen » Thu Apr 18, 2019 9:18 pm

goodenyou wrote:
Mon Apr 15, 2019 2:20 pm
I just sold commercial property for the same reason. I am enjoying the liquidity. I think building wealth with real estate can involve liquidity cycles.
Can you describe your liquidity cycles? How long are they? Do you buy real estate when the real estate market is down? Do you sell when the market is up?

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Re: $1.1 million rental portfolio, but tired of being a landlord

Post by goodenyou » Fri Apr 19, 2019 7:51 am

teelainen wrote:
Thu Apr 18, 2019 9:18 pm
goodenyou wrote:
Mon Apr 15, 2019 2:20 pm
I just sold commercial property for the same reason. I am enjoying the liquidity. I think building wealth with real estate can involve liquidity cycles.
Can you describe your liquidity cycles? How long are they? Do you buy real estate when the real estate market is down? Do you sell when the market is up?
My liquidity cycle is governed by my energy level to manage tenets, maintain property and deal with partners. As I accumulated wealth, my tolerance for aggravation went down and my desire for simplicity went up. I also realized that there is a lending cycle with interest rate fluctuations and I didn’t want to ride out the possibility of higher interest rates and a decreased interest in real estate investment as I got older. I am a very small player in real estate. I have a very busy day job, I’m a father and a husband and I like to play golf. I don’t want more time managing properties.
"Ignorance more frequently begets confidence than does knowledge" | Do you know how to make a rain dance work? Dance until it rains.

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Re: $1.1 million rental portfolio, but tired of being a landlord

Post by renue74 » Fri Apr 19, 2019 8:01 am

goodenyou wrote:
Fri Apr 19, 2019 7:51 am
teelainen wrote:
Thu Apr 18, 2019 9:18 pm
goodenyou wrote:
Mon Apr 15, 2019 2:20 pm
I just sold commercial property for the same reason. I am enjoying the liquidity. I think building wealth with real estate can involve liquidity cycles.
Can you describe your liquidity cycles? How long are they? Do you buy real estate when the real estate market is down? Do you sell when the market is up?
My liquidity cycle is governed by my energy level to manage tenets, maintain property and deal with partners. As I accumulated wealth, my tolerance for aggravation went down and my desire for simplicity went up. I also realized that there is a lending cycle with interest rate fluctuations and I didn’t want to ride out the possibility of higher interest rates and a decreased interest in real estate investment as I got older. I am a very small player in real estate.
I can sorta concur with this. When I first started buying rental property, I had a partner and we owned 2 properties together. It was a good partnership and both of us contributed $ and time in the rehabs. We were both very handy.

This was maybe 6 or 7 years ago. Then he decided to fully retire with his wife and move to Sarasota. We had owned the rentals for maybe 2 years and we both agreed to just sell them and split the profit. They had appreciated a lot. ($35K duplex....we sold for $85K, I cant recall the other.) The partnership split was friendly and I still occasionally talk to him.

I held cash for a while looking for the next deal. You're always looking for the next deal and it was nice to feel like selling off the properties were a "win." I can understand why flippers do what they do, but that's not what I like. I much rather have steady monthly income and not pay short term capital gains on flips.

Is is a smart move to move in and out of rentals? I'm not sure....but I look at it as..."I just sold this house and made 5 years of rental income...without the headache of tenants."

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Re: $1.1 million rental portfolio, but tired of being a landlord

Post by togb » Fri Apr 19, 2019 6:22 pm

This really is a first world problem, and I bet there are a lot of people who think working a few hours a week for that income would be a good deal.
But if you really don't want to do it, either pay someone else to do it for you, or sell them. You will pay taxes on the gains, and the recaptured depreciation. You won't net as much as you think.

If they were nicer properties, you could move into one for two years-- making it a primary residence for two years would avoid the taxes. But from the $$ you shared, I'm not sure you want to live in them? (or you live where houses are much more reasonable than my neighborhood).

CurlyDave
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Re: $1.1 million rental portfolio, but tired of being a landlord

Post by CurlyDave » Fri Apr 19, 2019 11:23 pm

Saving$ wrote:
Mon Apr 15, 2019 8:42 pm
trustquestioner wrote:
Mon Apr 15, 2019 2:23 pm
1031 into a well located triple net lease.
This has the advantage of avoiding the cap gains tax and the 25% recapture tax, as well as the PITA residential tenants.
The downside is all the eggs are then in one basket, and you may get a PITA commercial tenant.
There is a much, much larger risk in a triple net lease. A business associate and I once very seriously considered a triple net lease. We ultimately declined and I am thankful we did.

The building was a K-Mart and for a few years it would have done well, but then they closed that location.

This about that for a minute -- you are now personally on the hook for the mortgage on a K-Mart building. Plus the taxes, insurance and upkeep. There is zero income and the number of potential new tenants is vanishingly small. I see very few financial paths that do not include bankruptcy.

Sure, if your net worth is approaching $ 1Billion this would be a setback, not a disaster. But for the rest of us, it is an unrecoverable error.

dmk395
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Re: $1.1 million rental portfolio, but tired of being a landlord

Post by dmk395 » Sun Apr 21, 2019 6:54 am

I know the feeling. Dealing with tenants can be very DIFFICULT and stressful. A few thing I've done recently that have helped.

Hire more stuff out. Get a good contractor, and not fix most things myself.

Hired a real estate agent to handle filling empty units. This has been awesome because I realized I was renting units too low, and they go through professional screening services.

When a unit opens up instead of just making sure things are ok, replace things that you routinely have issues with. Toilets were probably my #1 call. Replace them, and get new ones if they are more than 5 years old.

It's hard to handle the last minute calls of course. Like the "my door won't lock" because of a screw missing or something...
-I handle this stuff best beforehand on a turnover. Going through EVERY part of the unit, really helps and replacing anything that even looks like it will break! You'll spend a bit more money, but the headaches will be less

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