Selling Rental Properties. What to do with proceeds? 3 different scenarios

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Topic Author
Archer4995
Posts: 22
Joined: Sat Nov 29, 2014 1:07 pm

Selling Rental Properties. What to do with proceeds? 3 different scenarios

Post by Archer4995 » Sun Sep 15, 2019 5:43 pm

Hello Bogleheads!

I have posted in the past about my 3 rental properties and what to do with them. I have made the decision to sell them at this point for a variety of reasons, but I need advice on what to do with the proceeds. I'm currently looking at 3 different scenarios and I would love your wisdom on the best course of action as it relates to my entire portfolio. Below is a quick snapshot into our total portfolio with the 3 proposed scenarios to follow:


Emergency Funds: Yes, 3 months

Debt: 421,000, 10/1 ARM @4.25% (primary residence)
101,000, 30 yr @4.5% (rental property)
122,000, 15yr @3.25% (rental property)

Tax Filing Status: Married Filing Jointly

Tax Rate: 33% Federal, 0 State

State of Residence: Texas

Age: Husband and wife both 38, children 9, 7, 5

Current Retirement Assets:
3 Fund portfolio spread Across the following 4 accounts:
-Traditional IRA (husband)
-Traditional IRA (Wife)
-401k (husband)
-Taxable account
Total Value of the above 4 accounts: $1,739,065
-My company also gives ASOP as part of compensation that is considered pre tax retirement money - current balance $102,000
Total value of all 5 retirement accounts: $1,841,065

Contributions:
-19,000 401k
-8,550 company match
-34,200 company ASOP
-50,000 taxable
Total Yearly contributions:
$111,750
*Have 529's set up for children with a total balance of $100,000. .. contributing $900/mo

Rental Property Sale Scenarios:
1. Do a 1031 exchange into a Delaware Statutory Trust investment. This would allow me to use most of the rental property equity, about $550,000, without having to pay capital gains or depreciation recapture. I like the idea of this because if I stay in real estate im only interested in being completely passive at this point. Obviously there are downsides of a DST including the illiquidity of the investment amongst other things.

2. Sell the properties straight up, pay the deprecation recapture and capital gains, and throw the proceeds into my taxable investment account. This would probably be around $440,000.

3. Sell the properties straight up, pay the depreciation recapture and capital gains, and use the $440,000 to pay off my primary residence and be completely debt free. I'm attracted to this idea but im hesitant to lock up that much of my net worth in my primary residence (home is worth $700,000)

Any feedback or questions would be highly appreciated. Thank you in advance...

kevdude
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Re: Selling Rental Properties. What to do with proceeds? 3 different scenarios

Post by kevdude » Sun Sep 15, 2019 7:44 pm

We will be doing your 2nd option. We have rental properties (a combination of small apartment buildings and individual condos) that total about $5MM ($4MM after debt, but prior to selling cost and taxes). This also represents the vast majority of our investments. I'm currently 56, wife is 55 and the rental properties are our sole source of income. We will begin selling this year and probably sell off over the next 4-5 years, but are in no real hurry to do so. We do have a $280M mortgage on our residence which we have no intention of paying off as it is at 3.75%.

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Duckie
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Re: Selling Rental Properties. What to do with proceeds? 3 different scenarios

Post by Duckie » Sun Sep 15, 2019 8:35 pm

Archer4995 wrote:Rental Property Sale Scenarios:
1. Do a 1031 exchange into a Delaware Statutory Trust investment. This would allow me to use most of the rental property equity, about $550,000, without having to pay capital gains or depreciation recapture. I like the idea of this because if I stay in real estate im only interested in being completely passive at this point. Obviously there are downsides of a DST including the illiquidity of the investment amongst other things.

2. Sell the properties straight up, pay the deprecation recapture and capital gains, and throw the proceeds into my taxable investment account. This would probably be around $440,000.

3. Sell the properties straight up, pay the depreciation recapture and capital gains, and use the $440,000 to pay off my primary residence and be completely debt free. I'm attracted to this idea but im hesitant to lock up that much of my net worth in my primary residence (home is worth $700,000)

Any feedback or questions would be highly appreciated.
You might consider a mix of #2 and #3. Use some of the proceeds to pay down your mortgage and invest the remainder. It doesn't have to be all or nothing.

ralph124cf
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Re: Selling Rental Properties. What to do with proceeds? 3 different scenarios

Post by ralph124cf » Sun Sep 15, 2019 10:00 pm

Given the current tax law, you get almost no tax help from the mortgage interest. Pay off your primary residence.

It feels very satisfying to have no mortgage, even when it might not be the optimum financial decision.

Ralph

Topic Author
Archer4995
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Joined: Sat Nov 29, 2014 1:07 pm

Re: Selling Rental Properties. What to do with proceeds? 3 different scenarios

Post by Archer4995 » Mon Sep 16, 2019 8:55 am

Thank you for the replies so far.

Anyone have any experience with the DST route?

Kennedy
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Re: Selling Rental Properties. What to do with proceeds? 3 different scenarios

Post by Kennedy » Mon Sep 16, 2019 10:06 am

Archer4995 wrote:
Mon Sep 16, 2019 8:55 am
Thank you for the replies so far.

Anyone have any experience with the DST route?
Never heard of a DST. Tell us more, please.

Topic Author
Archer4995
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Joined: Sat Nov 29, 2014 1:07 pm

Re: Selling Rental Properties. What to do with proceeds? 3 different scenarios

Post by Archer4995 » Mon Sep 16, 2019 11:17 am

My basic understanding of a DST is that it is a way for passive real estate investors to do a 1031 exchange. Essentially you are buying into a trust that owns, say a collection of commercial real estate etc. but you are allowed to use a 1031 exchange to do it. Some of the limitations I’ve heard are thats it’s a passive investment, so you have zero control over decisions that are made, there’s also not a way to raise new funds if/when big ticket expenses occur, and also it’s relatively illiquid.

I just kind of know a 30,000 foot overview that’s why I was hoping someone could chime in that has more knowledge or has done one of these.

medic
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Joined: Thu Jul 18, 2019 11:30 am

Re: Selling Rental Properties. What to do with proceeds? 3 different scenarios

Post by medic » Mon Sep 16, 2019 12:08 pm

Qualified Opportunity Zone?

hale2
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Re: Selling Rental Properties. What to do with proceeds? 3 different scenarios

Post by hale2 » Mon Sep 16, 2019 12:10 pm

I've been selling a property a year to take advantage of the hot market. I seriously considered DSTs. There are several well established, reputable companies. However, I decided against them due to the high fees. I understand the management fees, but some of the ones I looked into had purchase fees of around 7%. The ones I looked into are illiquid for 5-7 years. I was fine with this, but then I would have to purchased a new DST property when the current property is sold, meaning more fees. I just decided to pay the taxes and use the proceeds to pay off other investment properties, my personal residence, and increase my taxable account.

HeelaMonster
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Re: Selling Rental Properties. What to do with proceeds? 3 different scenarios

Post by HeelaMonster » Mon Sep 16, 2019 12:36 pm

Archer4995 wrote:
Mon Sep 16, 2019 11:17 am
My basic understanding of a DST is that it is a way for passive real estate investors to do a 1031 exchange. Essentially you are buying into a trust that owns, say a collection of commercial real estate etc. but you are allowed to use a 1031 exchange to do it. Some of the limitations I’ve heard are thats it’s a passive investment, so you have zero control over decisions that are made, there’s also not a way to raise new funds if/when big ticket expenses occur, and also it’s relatively illiquid.

I just kind of know a 30,000 foot overview that’s why I was hoping someone could chime in that has more knowledge or has done one of these.
I don't know anything about DST, so can't help much (or rather, any)... but do have a related question. My own reading on 1031 exchange (again, limited knowledge) suggested that rules have been tightened from what they used to be, and that they now require much more of a "like-for-like" exchange than was previously allowed. With that in mind, do you already know that an exchange of buildings for trust will qualify, under current rules?

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billthecat
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Re: Selling Rental Properties. What to do with proceeds? 3 different scenarios

Post by billthecat » Mon Sep 16, 2019 12:50 pm

ralph124cf wrote:
Sun Sep 15, 2019 10:00 pm
Given the current tax law, you get almost no tax help from the mortgage interest. Pay off your primary residence.

It feels very satisfying to have no mortgage, even when it might not be the optimum financial decision.

Ralph
I deduct 10k for SALT plus another 12k or so for home mortgage, so it seems to pay off still despite tax law changes.

However, comparing the after tax yield vs the after tax mortgage rate, it seems like it might be better to payoff the mortgage.
We cannot direct the winds but we can adjust our sails.

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billthecat
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Re: Selling Rental Properties. What to do with proceeds? 3 different scenarios

Post by billthecat » Mon Sep 16, 2019 12:51 pm

I have been doing option 2. Almost done.
We cannot direct the winds but we can adjust our sails.

Bobby206
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Re: Selling Rental Properties. What to do with proceeds? 3 different scenarios

Post by Bobby206 » Mon Sep 16, 2019 1:08 pm

medic wrote:
Mon Sep 16, 2019 12:08 pm
Qualified Opportunity Zone?
QOZ are full of requirements for setting them up and are really only for the appreciation - in this case $100k or so - so not practical to set up a QOZ here. However, the OP could throw $100k into a QOZ fund and then the rest of the money would be tax free. Not a horrible idea. Probably as good as utilizing a DST.

I have been considering similar options and have some concern about the track record of DSTs which are basically just limited partnerships with even more restrictions and lots of fees.

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Johnsson
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Re: Selling Rental Properties. What to do with proceeds? 3 different scenarios

Post by Johnsson » Mon Sep 16, 2019 1:33 pm

We are in also doing this.

1st of three sold and funds in your option #2... our taxable funds.

Two more to go.

Thegame14
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Re: Selling Rental Properties. What to do with proceeds? 3 different scenarios

Post by Thegame14 » Mon Sep 16, 2019 1:39 pm

ralph124cf wrote:
Sun Sep 15, 2019 10:00 pm
Given the current tax law, you get almost no tax help from the mortgage interest. Pay off your primary residence.

It feels very satisfying to have no mortgage, even when it might not be the optimum financial decision.

Ralph
+1

Topic Author
Archer4995
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Joined: Sat Nov 29, 2014 1:07 pm

Re: Selling Rental Properties. What to do with proceeds? 3 different scenarios

Post by Archer4995 » Mon Sep 16, 2019 2:52 pm

For the pay off your mortgage and be completely debt-free crowd, what is your threshold on your house value as it relates to your entire net worth? I know that’s not really actionable, but I guess the idea of having roughly 25% of my net worth tied up in primary residence equity is a little uncomfortable.

kevdude
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Joined: Sat Aug 12, 2017 7:17 pm

Re: Selling Rental Properties. What to do with proceeds? 3 different scenarios

Post by kevdude » Mon Sep 16, 2019 5:20 pm

Archer4995 wrote:
Mon Sep 16, 2019 8:55 am
Thank you for the replies so far.

Anyone have any experience with the DST route?
In my previous life I financed commercial real estate, including for very sophisticated customers, i.e. incredibly wealthy individuals and very successful commercial real estate companies. I had a few customers that set up property syndications, including DST's. I didn't become intimately familiar with the product, but from discussions with my customers and reading some of the prospectuses, it became pretty clear that the sponsor is the one who wins here. They fee everything to death, so in the end, the returns they would project seemed incredibly difficult to achieve. I, myself, would never invest into a syndication for this reason. I also know of many syndication firms that went belly up during the financial crisis because they were very poorly capitalized.

You mentioned you are only familiar with these from a 30,000' level. If I was investing hundreds of thousands of dollars with someone I would become intimately familiar with them, including having a very reputable attorney that is familiar with this type of product/investment go over everything, from the prospectus to all legal documents you can get your hands on. And then I would go still go with option #2.

dmk395
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Re: Selling Rental Properties. What to do with proceeds? 3 different scenarios

Post by dmk395 » Tue Sep 17, 2019 7:14 am

With the looks of how your doing overall, I don't think you can really go wrong either way. You've won the game.

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