Trying to retire. What to do with my rental property?

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Topic Author
mom72
Posts: 4
Joined: Sun Jun 28, 2020 5:14 pm

Trying to retire. What to do with my rental property?

Post by mom72 » Mon Jun 29, 2020 10:15 pm

Goal: Retire and maximize value of rental property
Backstory: I’m working part time & want to quit (or scale back earnings to $1,000/mo). Money will be tight in retirement. Prepare by pumping up monthly income and/or eliminating mortgage on primary home.

Age: 72

Annual Income (Pretax)
Social Security $36,000
Pension $13,932
Rental property income $13,000
Freelance $26,000
Investment income: 2020 RMD $5,000
Total: $93,932
Tax Rate: 24% Federal, 0% State
Tax Filing: Single

Annual Expenses
$72,000 (no extravagances)
ideally: add $10,000 for travel & classes

Assets
16/YO rental property $425,000 (comps)
26/YO primary residence $600,000 est
Vanguard Advisors IRA (50% stocks /50% bonds) 6/8/20 $143,775.20

Liabilities
Primary residence mortgage balance $136,000 @4.5% (payment $1,237/mo) maturity: 8/1/43


Rental Property Decision Info (questions at bottom)
Purchased: December 2004 $258,500.
Comparable sales (identical floor plans):
Mar. 31, 2020 $447,500
Oct 2019 $425,000

Potential Gross Income $1,800 x 12 = $21,600
Vacancy rate (8%) $1,728
Effective Gross Income $19,872
Taxes est $4,500
Insurance $562
Gardener $600
Maintenance, replacements & repairs $900 (additionally, I'm currently looking at $4,000-$5,000 in repairs)
Net Operating Income $13,310/year

Estimated prospective sale
Capital gains (estimated, due from a 1031 exchange): $58k
Selling costs (8% x 425k) $34,000
Net from sale @$425k: $333,000
Retire home mortgage $136,000 @4.5% (payment $1,159/mo)
Estimated net proceeds after mortgage payoff: $197,000

Rental property alternatives
Option #1
Move to the rental property (a small SF home in 10-unit HOA development); sell after 2 years
Pros
  • Avoid $58,000 est capital gains tax (1031 exchange in 2004) after 2 years
  • Break even & maybe profit from renting primary home
  • No mortgage payments
Cons/costs
  • Lose crucial social context of close neighborhood & enjoyment of beach home
  • Contentious social atmosphere @rental development
  • $12,000-$17,000 repair costs prior to renting primary home (furnace, kitchen, 2
  • appliances, floors)
  • Immediate repairs to rental: $5K-$6K
Option #2
Sell rental property now
Pros
  • Vacant. Tenant leaving 6.30.20
  • Listings scarce locally, extremely hot market
  • Emotional: No more tenant interactions, property upkeep & contentious rental HOA
  • Exterior newly painted; interior now receiving new carpet & bathroom floor ($5K-$6K)
  • Enable home mortgage pay-off
  • Escape any looming RE downturn
Cons/costs
  • Additional costs on horizon to update kitchen, new roof
  • Potentially lose additional appreciation from rapidly increasing RE prices
  • No better investment options currently
Option #3
Engage new tenant and rent property with 6-month lease (shortest term allowed by HOA)
Pros
  • Increase rent from $1,800 to $2,200/mo
  • Lease expired. Tenant leaving 6.30.20
  • Rental may be best investment option currently
Cons/costs
  • Continued exposure to management headaches & costs & ugly HOA atmosphere
  • Exposure to real estate market in unstable economy with short horizon before divesting

Questions:
  • Should I sell or hold this property?
  • If so, what is the best use of the (potentially $130k) proceeds?
Thanks in advance for your thoughts.
Last edited by mom72 on Tue Jun 30, 2020 11:28 am, edited 1 time in total.

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geerhardusvos
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Re: Trying to retire. What to do with my rental property?

Post by geerhardusvos » Tue Jun 30, 2020 9:36 am

mom72 wrote:
Mon Jun 29, 2020 10:15 pm
Questions:
  • Should I sell or hold this property?
  • If so, what is the best use of the (potentially $130k) proceeds?
Thanks in advance for your thoughts.
Given that you’ve used words like headache and instability, I would recommend selling the rental property. You have to factor in the money that you will need to put into it to sell the house, like maybe a new roof. Sounds like you have it really nice at your current house, and not wanting might to leave that behind to move into your rental. Sometimes these are tough decisions, but I think you will feel very relieved if you sell the rental and have it out of your life and move that money into a truly passive income index fund portfolio. I would put the proceeds in VTSAX considering your other income streams. Best wishes!
VTSAX and chill

Carefreeap
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Re: Trying to retire. What to do with my rental property?

Post by Carefreeap » Tue Jun 30, 2020 9:57 am

Welcome!

I'd sell too. We've sold two of our rentals over the last couple of years. They've done well appreciation-wise but the hassle with tenants and the repairs wasn't fun anymore. Given the pandemic and the restrictions on evictions and repaying rent it's just not worth the risk.

Enjoy your retirement!
Every day I can hike is a good day.

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CAsage
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Re: Trying to retire. What to do with my rental property?

Post by CAsage » Tue Jun 30, 2020 10:06 am

mom72 wrote:
Mon Jun 29, 2020 10:15 pm
Liabilities
Primary residence mortgage balance $136,000 @4.5% (payment $1,237/mo) maturity: 8/1/43
Retire home mortgage $136,000 @4.5% (payment $1,159/mo)
Thanks in advance for your thoughts.
There's something wrong with that mortgage payment - I calculate a mortgage with that balance, interest and a 20 year term would have a payment of $860. Your current payment must be a 10 year loan? In either care, refinance to drop the rate (rates appear very low now), and if you extend the term you can improve your cash flow. $6k per month expenses also seems quite high, if that doesn't include any travel or classes.
Salvia Clevelandii "Winifred Gilman" my favorite. YMMV; not a professional advisor.

Jack FFR1846
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Re: Trying to retire. What to do with my rental property?

Post by Jack FFR1846 » Tue Jun 30, 2020 10:34 am

Sell the rental. It's a headache to you and the return you're getting is half what I see as benchmarks when looking at properties to buy to rent. Some of this is due to the appreciation of the property. Chances are good that after negotiations and sales cost, you'll make less gain, thus lower taxes (yay). But you'll have the money to put towards your home mortgage and the headache goes away without ibuprofen.
Bogle: Smart Beta is stupid

tashnewbie
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Re: Trying to retire. What to do with my rental property?

Post by tashnewbie » Tue Jun 30, 2020 10:36 am

I'd sell the rental and look into refinancing the mortgage on your primary home. Doesn't sound like you want to be a landlord any longer. Nothing wrong with that.

bearwithbear
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Joined: Thu Jun 28, 2018 5:55 pm

Re: Trying to retire. What to do with my rental property?

Post by bearwithbear » Tue Jun 30, 2020 10:41 am

OP,

Does the $72,000 include the mortgage on the primary residence?

Bear

Topic Author
mom72
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Joined: Sun Jun 28, 2020 5:14 pm

Re: Trying to retire. What to do with my rental property?

Post by mom72 » Tue Jun 30, 2020 11:59 am

HI, Bear. Yes, the $72k expenses includes mortgage payments.

Topic Author
mom72
Posts: 4
Joined: Sun Jun 28, 2020 5:14 pm

Re: Trying to retire. What to do with my rental property?

Post by mom72 » Tue Jun 30, 2020 12:26 pm

Thanks, tashnewbie. I hadn't seriously considered a refi. Rethinking that ....

bearwithbear
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Joined: Thu Jun 28, 2018 5:55 pm

Re: Trying to retire. What to do with my rental property?

Post by bearwithbear » Tue Jun 30, 2020 6:54 pm

OP,

So the $72,000 includes the mortgage payment. Annual mortgage payments about $15,000. So if you pay off mortgage and have $72,000 in income that would even include the extra $10,000 for travel and classes.
Currently Social Security is $36,000 and Pension is $13,932 ==> call it $50,000. Need another $22,000.
If the sale of the rental properties nets you after taxes, selling expenses and paying off the mortgage say $630,000 then you would only need to take 3.5% from that to get $22,000.
Wait, forgot the IRA of $143,775
Looks like it works.

Is the $630,000 net from the rental properties realistic?

Bear

Topic Author
mom72
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Re: Trying to retire. What to do with my rental property?

Post by mom72 » Tue Jun 30, 2020 9:42 pm

Bear, netting $630k from the sale would be terrific but, no, not realistic. Here are my numbers:

Estimated prospective sale
Capital gains (estimated, due from a 1031 exchange): $58k
Selling costs (8% x 425k) $34,000
Net from sale @$425k: $333,000
Retire home mortgage $136,000 @4.5% (payment $1,159/mo)
Estimated net proceeds after mortgage payoff: $197,000

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Watty
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Re: Trying to retire. What to do with my rental property?

Post by Watty » Wed Jul 01, 2020 12:17 am

mom72 wrote:
Mon Jun 29, 2020 10:15 pm
Rental property alternatives
Option #1
Move to the rental property (a small SF home in 10-unit HOA development); sell after 2 years
Pros
Avoid $58,000 est capital gains tax (1031 exchange in 2004) after 2 years
Break even & maybe profit from renting primary home
If you are talking about the homeowners capital gains exemption then you should double check on the capital gains tax on selling the rental property after living in it for two years.

I am not a tax guru but I am pretty sure that it is prorated and your depreciation is still recaptured.

It would be good to get some professional tax advice on the tax impact of selling the property so there are no surprises.

It would be good to know the details of what taxes will be due before you decide to sell it but there are so many negatives that you mentioned I would go on and sell it since it will only get harder to manage 10 or more years from now. If you delay selling it then decide you need to sell it in a few years it can be very hard to sell real estate in a bad housing market. Not only are the prices lower but you might have the property listed for six months and it still might not sell.

I did not follow all your numbers but it sounds like you are not netting enough from the rental to pay your mortgage payment on your primary house. If you sell it and pay off the mortgage and taxes then you would still have a big chunk of money left over that you could use for the travel and classes that you want to do.

One thing that you did not mention is that between the two properties you have over a million dollars in real estate that is in the same city. That is likely a diversification problem which could favor selling it.

IMO
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Re: Trying to retire. What to do with my rental property?

Post by IMO » Wed Jul 01, 2020 1:34 am

I do think, when you feel a rental is a headache, then it's probably a reasonable consideration to sell the rental and move on. Same thing to your freelance work as you do want to quit, maybe time to move on.

So rough numbers:

$72K year basic expenses, $82K year desired yearly expenses with extra things
Without mortgage (P/I about $12K year?), then expenses now at $60K year basic, or desired $72K year higher standard annual expenses.

Income without rental (selling -$13K) and without freelance (-$26K): $36K SS + $14K Pension + $5K Investments = $55K year and healthy $200K emergency/life fund (from selling rental).

If my rough numbers are correct, for basic expenses you are $5,000 year short, and for higher standard retirement your $17,000 short?
Are my numbers near right?

If they are, my 1st thought is your coming up just ($5K/yr) short each year to meet basic expenses, significantly ($17K) to meet higher of standard living expenses ($72K). Sure you can continue to work for the shortfall, but your also 72 yrs old which is getting up there on the hill, the clock is ticking, and the fat lady could be warming up (sounds like a bday card).

I'd want to look closely at your $60K basic expenses without a mortgage for a single person. Is there not ways to reasonable make your budget more efficient, so that your income without work would meet your now more efficient annual basic expense number? Your freelance could then at least be done as needed solely for your higher end standard of living things you desire as a compromise.

This of course is keeping you living at your primary home on the beach (which would likely be your way to fund potential long term care costs). You are also single, while it's often frowned upon for high fees, etc, I've heard from some that reverse mortgages are not as horrible as most make out nowadays (never really looked into it but some have posted that). Perhaps that's an unconventional way for a single person to stay in their primary beach home and meet expense shortfalls? How much would that give you in additional "income"?

bearwithbear
Posts: 59
Joined: Thu Jun 28, 2018 5:55 pm

Re: Trying to retire. What to do with my rental property?

Post by bearwithbear » Wed Jul 01, 2020 5:54 am

OP,

Sorry for my error.

So $50,000 from pension and Social Security.
Expenses are $72,000 with mortgage.
Sell rental and pay off mortgage.
Expenses reduced by $13,908 to $58,092
$8,092 short fall comes from IRA - $143,775.20 and proceeds from sale of rental - $197,000
This works but not much wiggle room.
Any additional expenses would need the additional $12,000 part time work.

I would not sell the primary house and move if it reduces your quality of life.

Bear

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