Sell or Keep Properties?

[ultravonder]

Looking for input from those wiser than myself. I own two townhomes, one is a rental making income, one is occupied by me at low cost. I bought them as investments and the property values have appreciated significantly since purchase in 2018/2019. My original plan was to keep the homes until I retire and they're paid off, then either sell or continue to rent for additional retirement income. I don't particularly enjoy being a landlord, but it's worked out so far.

I've recently moved out of state to occupy a vacant family home for free for at least the next year. I would really like to purchase a long-term home with some acreage to start a small hobby farm in the near future.

Details:

• Rental is bringing in about $750/mo average
• Other house could be rented out to bring in additional $675/mo, otherwise it costs $400/mo to keep empty
• Selling both homes today would put a liquid $315k in my pocket after fees (estimate based on recent comps sold in same neighborhood)
• Annual income from my employer is $85k gross
• I am 30 - 35 years away from retirement age
• Home values are up and acreage isn't cheap

So the questions start rolling in. Should I sell now, capture the profit off the investment and put into a personal home? Put profit into a fund and let sit for the next 30 years for ROI instead of actively land-lording? Should I keep renting and use residual income to help secure a third mortgage for personal home? Sell one, keep the other? etc.

There is an emotional component to this too - managing properties by oneself is pretty taxing, especially when you work a demanding full time job. Living in the same state is no longer feasible (choosing to be closer to family/friends again), so I'm now 1000+ miles away. Property management companies are very expensive, and add another layer of people that need managing/direction. The good news is the HOA takes care of all exterior maintenance/landscaping. I'm a 2hr plane ride away, but not close enough to justify taking care of all the maintenance myself like I normally do. So profit would disappear if I let others manage/repair, but the homes would still be building equity.

Because rents are high in the area, my total income is well into the 6-figures and income taxes are high. I'm unable to save much more than $10k per year liquid after I cover housing expenses, taxes, minimal personal expenses, contribute to 401K, HSA, and personal investment account. I also feel I have to maintain a 6-month emergency fund on hand for all expenses incase I lose my job, can't get renters in, HVAC blows up, etc. So saving for a minimum down payment/closing costs on a third house with acreage will likely take me 3 - 5 more years at the current rate, and it would be a real grind (minimum enjoyments). If I take profits from the sale and dump it into a personal property, there's a chance the mortgage would be small, possibly non-existent if I could find a good fixer-upper.

Conclusion: Life has been a largely unenjoyable grind for the past 5 years. It has paid off so far, but I feel I'm ready to invest in more personal endeavors. Would I severely impact retirement by selling homes now? Or should I leave everything alone and just keep scraping money together for my future home?

 

[mike93lx]

Have you factored capital gains into those fees?

Managing a property from out of state is either a pain in the *** or expensive. Often both

 

[BillK]

I would keep them. I wish somebody had told me about investment properties when I was a lot younger. I have a couple of customers who started when they were young and now they are sitting back retired living off the rental incomes.

The other thing you have to look at is what will it cost you in taxes to sell them now ?

I still say keep them or if you know where you plan to live long term do an exchange on some income property near where you will be. Be VERY careful how you do that if you choose. One wrong move on the paperwork and the taxes will get you.

 

[ultravonder]

Have you factored capital gains into those fees?

Managing a property from out of state is either a pain in the *** or expensive. Often both

Good point, didn't factor in capital gains tax, so deduct another $60k or so, I guess. In the few short weeks I've been gone, it has indeed been both.

 

[m6z]

I'd sell.

 

[dcg9381]

Tough question.
If this property management is really impacting you, I think that's a pretty good indicator of what you should do.
Your "savings" if you're doing 401k and HSA - I know it's not "liquid" but I'd guess you're doing better than 90% of the rest of America and saving quite a bit.

What are the tax implications of selling these properties? Something to consider.

Would it impact your retirement? Depends on what you're doing with the money. Back in the market? Probably not. Start buying late model Lambo's - probably so..

Frankly, I wish (on paper) I had kept every house I've owned, some of them have appreciated 300%.. But I know the lifestyle impact of doing that would be very substantial. And I hate caring for properties that I'm not enjoying.

We've been in a nuts-o real estate market here. Appraisals for the last 5 years have gone up like 30% per year, every year... You can't beat that with the market, but it's also definitely a one-off scenario... Or every once in a while scenario. Here, I am not expecting that appreciation again until interest rates come down and economy gets pointed in the right direction.

You can always split the difference, liquidate the more problematic / less profitable property...

I'd ask an indepenent financial planner.. Or two!

 

[bdbecker]

If it were me, I'd sell the rentals and set aside the money for a down payment on an acreage. You've got a roof for the next year or so, spend that time hunting for the right property. Even if you have to rent for a little while after that, it wouldn't be the end of the world. But you'd be in an excellent position to act quickly if the right property came on the market.

EDIT:
I'd also add, it sounds like you are ready to be done with them. It might not make the most financial sense to get out now and only you can determine if it's worth the stress. But being able to pursue your dream of having some land of your own right now might be worth more to you than the rental income long term.

 

[Bab029]

Disclaimer, I am not a lawyer, accountant, or realtor. The following is not advice.

But. You are in a unique position having secured two rentable properties. I'd decide how to proceed carefully.

I'd at least consider keeping the properties, renting both out. Hire the property management company, even if it is break even on cash flow so much the better (lower tax liability). Someone else is building equity in your property for you while you sleep or drink mojitos. There's resources online for calculating holdback for emergencies. Biggerpockets dot com got me started.

Next, cash out refinance both to take advantage of your equity. Use the cash to buy another property nearby, your next primary residence, or whatever. Consult a CPA for tax implications. Then you can sell, pay off the mortgage and it won't look like you made all that much money.

Again, ask someone who knows your situation better, but don't just take the tax hit lying down.

 

[ultravonder]

If it were me, I'd sell the rentals and set aside the money for a down payment on an acreage. You've got a roof for the next year or so, spend that time hunting for the right property. Even if you have to rent for a little while after that, it wouldn't be the end of the world. But you'd be in an excellent position to act quickly if the right property came on the market.

EDIT:
I'd also add, it sounds like you are ready to be done with them. It might not make the most financial sense to get out now and only you can determine if it's worth the stress. But being able to pursue your dream of having some land of your own right now might be worth more to you than the rental income long term.

At this moment, yeah, I feel done due to personal burn out. I don't want to kick myself later for selling, but I also would like to get some enjoyment out of life while I can. I've had trouble finding the balance.

 

[Red 17]

Hire a property management company that has a good reputation and doesn't remove all the profit. We have a bunch of apartments and I looked over what they do for us and it can't be beat the prices they charge. With two smaller units it's a question mark but at least you keep the property and income stream and don't have capital gains taxes. Otherwise, dump them, use the money for a new place and don't look back.

 

[yatg]

Rentals are all fine and dandy, until you need to do a major repair, like HVAC or roof, or you have a ****** tenant and have to replace the carpet, fix the holes in the walls and doors, and replace the appliances they stole.

 

[ultravonder]

Rentals are all fine and dandy, until you need to do a major repair, like HVAC or roof, or you have a ****** tenant and have to replace the carpet, fix the holes in the walls and doors, and replace the appliances they stole.

Agree, but knew that going into it. Already have spent more than a few grand on AC repairs (FL) and some other small issues. My workaround is to screen the heck out of potential tenants and work to be flexible enough to keep the good ones. The savings plan helps mitigate this.

 

[pbon]

There are strategies to avoid or defray capital gains taxes and depreciation recapture. One is a Section 1031 like kind exchange. I did that with a rental condo I sold and put the money into a commercial building I bought. I had a bit over $100k in capital gains and also had depreciation so I would have lost half that in taxes, but needed it for the downpayment on the commercial building so I rolled it over.

Another is to occupy the rental property for 2 years as your primary residence after having rented it out and depreciated it. You could take turns with the townhouses one day. This gets rid of the depreciation recapture.

Don’t know what is best for the OP. Being a landlord can be a pain or not so bad. Living near the property helps or paying someone to manage it helps.

In general, I lean towards enjoying life along the way. I am not one if the typical GJ members that demands others to fully fund their retirement as soon as possible, pay off their house as soon as possible, have no credit card debt, and live like a miserly old man. You might die unhappy along the way. I think most of those typical GJ members actually like living the way they do—those things define them.

So I would buy that house with acreage and start the hobby farm soon, selling the townhouses if that makes it easier. But I would be mindful of capital gains and depreciation recapture.

 

[Toomanytools?]

Some people are fine as landlords and see the pain now as a payoff in the future.
If you sell both and are rent free (about) for the next year you could invest some of that money into stock market as things are on sale now. The market is not for everyone. You could invest into a retirement account. You could save a chunk for the next year, then take the money buy a place land /house.
How old are the rentals ? Will you need to do major maintenance on them? You seem young enough that no matter which way you go you will have time (think compounding interest) on your side.

 

[ultravonder]

Some people are fine as landlords and see the pain now as a payoff in the future.
If you sell both and are rent free (about) for the next year you could invest some of that money into stock market as things are on sale now. The market is not for everyone. You could invest into a retirement account. You could save a chunk for the next year, then take the money buy a place land /house.
How old are the rentals ? Will you need to do major maintenance on them? You seem young enough that no matter which way you go you will have time (think compounding interest) on your side

Homes are less than 10 years old, they will sell as-is, and quickly. I wouldn't necessarily go to stocks, probably something safer like an index fund. I do see the payoff in being a landlord, which is why I got into it. As I get older, the time spent managing the tenants and homes on top of everything else in life has made me a shell of a person. I figured it would get easier as I learned more, and it has in some ways, but doing it all on my own has taken a mental toll.

 

[ultravonder]

From what I am reading, capital gains taxes would not apply to anything under $250k on at least one of the homes, because it's my primary residence and I've lived there full-time for more than two years now. I only lived at the now-rental home for about 1.5 years before I purchased the second home from 2018 - 2019. It sounds like it may be possible to make that my primary for 6 months in the near future to avoid tax on a sale, but that might beg some ethical questions. Not sure.

 

[dcg9381]

It sounds like it may be possible to make that my primary for 6 months in the near future to avoid tax on a sale, but that might beg some ethical questions. Not sure.

Ethics isn't really a factor in tax law. Comply with the law, but take full advantage of the laws as written - that's what everyone else does. (Not tax advice, see a CPA)

 

[Bab029]

The rules were written for any by rich people. Use them to their fullest extent.

 

[NUTTSGT]

No financial wizard here but $315K in your pocket to invest elsewhere right now vs. long term headache of being a landlord, replacing **** that others broke.

$750+$675=1425/mo x 12 months/yr = 17,100 x 30 years= $513K, minus repairs, property taxes, insurance over those 30 years. Anywhere near close to hurricane area ? take into account damage for that and lost rental/repairs.

No thanks, I'll take the cap gain taxes, invest it or buy where you are for a debt free forever home with no head aches.

 

[Uncle murph]

Looking for input from those wiser than myself. I own two townhomes, one is a rental making income, one is occupied by me at low cost. I bought them as investments and the property values have appreciated significantly since purchase in 2018/2019. My original plan was to keep the homes until I retire and they're paid off, then either sell or continue to rent for additional retirement income. I don't particularly enjoy being a landlord, but it's worked out so far.

I've recently moved out of state to occupy a vacant family home for free for at least the next year. I would really like to purchase a long-term home with some acreage to start a small hobby farm in the near future.

Details:

• Rental is bringing in about $750/mo average
• Other house could be rented out to bring in additional $675/mo, otherwise it costs $400/mo to keep empty
• Selling both homes today would put a liquid $315k in my pocket after fees (estimate based on recent comps sold in same neighborhood)
• Annual income from my employer is $85k gross
• I am 30 - 35 years away from retirement age
• Home values are up and acreage isn't cheap

So the questions start rolling in. Should I sell now, capture the profit off the investment and put into a personal home? Put profit into a fund and let sit for the next 30 years for ROI instead of actively land-lording? Should I keep renting and use residual income to help secure a third mortgage for personal home? Sell one, keep the other? etc.

There is an emotional component to this too - managing properties by oneself is pretty taxing, especially when you work a demanding full time job. Living in the same state is no longer feasible (choosing to be closer to family/friends again), so I'm now 1000+ miles away. Property management companies are very expensive, and add another layer of people that need managing/direction. The good news is the HOA takes care of all exterior maintenance/landscaping. I'm a 2hr plane ride away, but not close enough to justify taking care of all the maintenance myself like I normally do. So profit would disappear if I let others manage/repair, but the homes would still be building equity.

Because rents are high in the area, my total income is well into the 6-figures and income taxes are high. I'm unable to save much more than $10k per year liquid after I cover housing expenses, taxes, minimal personal expenses, contribute to 401K, HSA, and personal investment account. I also feel I have to maintain a 6-month emergency fund on hand for all expenses incase I lose my job, can't get renters in, HVAC blows up, etc. So saving for a minimum down payment/closing costs on a third house with acreage will likely take me 3 - 5 more years at the current rate, and it would be a real grind (minimum enjoyments). If I take profits from the sale and dump it into a personal property, there's a chance the mortgage would be small, possibly non-existent if I could find a good fixer-upper.

Conclusion: Life has been a largely unenjoyable grind for the past 5 years. It has paid off so far, but I feel I'm ready to invest in more personal endeavors. Would I severely impact retirement by selling homes now? Or should I leave everything alone and just keep scraping money together for my future home?

It sounds like this deal is wearing you down on top of whatever else is wearing you down,get rid of them and invest in what makes you happy.

 

[ultravonder]

No financial wizard here but $315K in your pocket to invest elsewhere right now vs. long term headache of being a landlord, replacing **** that others broke.

$750+$675=1425/mo x 12 months/yr = 17,100 x 30 years= $513K, minus repairs, property taxes, insurance over those 30 years. Anywhere near close to hurricane area ? take into account damage for that and lost rental/repairs.

No thanks, I'll take the cap gain taxes, invest it or buy where you are for a debt free forever home with no head aches.

So the $1425 a month accounts for repairs, but on an estimated depreciation schedule, not factoring idiot tenants who might break stuff ahead of schedule and disappear/can't pay. It also includes insurance, property tax, etc. but not the income tax (depends on what I can deduct throughout the year). Right now the one property rents for a total of $4,250 a month gross, and I'm under market value.

Regardless, I get what you're saying, $500k over 30 years plus sale of the house or continuous income might not be as good or just as good as another avenue where I contribute no additional time/energy. For example, if I put $100k into S&P500, avg yield 10%, 30 years later it could turn into $1.7M (or could turn into $0 if we're being honest about the value of historical data).

 

[dcg9381]

For example, if I put $100k into S&P500, avg yield 10%, 30 years later it could turn into $1.7M (or could turn into $0 if we're being honest about the value of historical data).

At no point in history would you have $0 by investing in an index fund tied to S&P500.... Taking a look at it's history, assuming you chose to buy in at the highest point and exited 10 years later at a low point, you'd be down about 20% - that's the worst you could do since 1982.

My take (opinion) - the market will outperform real estate for MOST of the USA long term. There are period exceptions (recently is one). And there are certain areas that do better than others, but it's a lot easier to manage investment in the S&P than it is to maintain two properties.

 

[NUTTSGT]

So the $1425 a month accounts for repairs, but on an estimated depreciation schedule, not factoring idiot tenants who might break stuff ahead of schedule and disappear/can't pay. It also includes insurance, property tax, etc. but not the income tax (depends on what I can deduct throughout the year). Right now the one property rents for a total of $4,250 a month gross, and I'm under market value.

Regardless, I get what you're saying, $500k over 30 years plus sale of the house or continuous income might not be as good or just as good as another avenue where I contribute no additional time/energy. For example, if I put $100k into S&P500, avg yield 10%, 30 years later it could turn into $1.7M (or could turn into $0 if we're being honest about the value of historical data).

So the $1425 is profit/month ?

Yes, idiot tenants. Another bout of what we just went through where people "lived free of charge" but property owner suffered. Evictions/lost rent.

You might be in a decent area and never have an issue with a tenant destroying the place but what I have seen locally on calls running fire/ems, no way would I want to be a landlord.

 

[nadogail]

In my opinion the best answer is "It Depends" there are too many variables and undisciplined personal circumstances for me to offer a more detailed response.

Today's cash could be decimated by massive inflation that might result from yet to be disclosed government actions to regulate the economy.

 

[ultravonder]

it's a lot easier to manage investment in the S&P than it is to maintain two properties.

THIS^

 

[dcg9381]

Today's cash could be decimated by massive inflation that might result from yet to be disclosed government actions to regulate the economy.

I'd say todays cash held in savings / low interest / low risk vehicles IS being decimated by inflation. Hopefully it won't stay that way.
Course as inflation goes up, the cost to build new homes goes up - which helps increase value of existing homes.
That's why I say this is an "investment question" - and what I really mean is you make the best guess you can!

 

[rsanter]

What you are setting up is a math equation.
First, if you sell you need to roll those into another property to avoid any taxes. So there is some timing there.

You need to look at the income from these properties verses the reduction in payment by rolling the sale of those properties.

I know operating a rental at a distance is a pain, but you also have to option to sell what you have and roll those into another rental property that is near you. Or sell both and roll one into your property and the other into a rental

As a rule, property is the best long term investment you can make

 

[vrinner]

I've had a few rentals over the years and once I got out of them it was a blessing. Just spend/save your money wisely to make things better for your current situation. A lot of peace can come from getting rid of old baggage even though it makes you a bit of money.

 

[jack stand]

Selling is short term thinking.
I've had 3 properties too far away to handle myself and left it to a management company.
You bought these for the "long haul" and are well on your way to accumulate wealth but short term thinking is tempting you.
In this economy rents are going up along with interest rates so that's only going to become more true.
Don't worry about the management costs. As long as you're not contributing monthly the renters are buying it for you. And for your "burn out", get over it. Your in your prime earning years and that's what it takes.
I've got 30 years on you probably and when you decide to sell (after they're paid off) , sliding that fat check across the counter at the bank.....
you'll be thankful for what the guys above that say keep them are I are telling you.

 

[mike93lx]

Selling is short term thinking.
I've had 3 properties too far away to handle myself and left it to a management company.
You bought these for the "long haul" and are well on your way to accumulate wealth but short term thinking is tempting you.
In this economy rents are going up along with interest rates so that's only going to become more true.
Don't worry about the management costs. As long as you're not contributing monthly the renters are buying it for you. And for your "burn out", get over it. Your in your prime earning years and that's what it takes.
I've got 30 years on you probably and when you decide to sell (after they're paid off) , sliding that fat check across the counter at the bank.....
you'll be thankful for what the guys above that say keep them are I are telling you.

Screw mental health. Profits are all that matters

 

[jack stand]

Screw mental health. Profits are all that matters

What are you trying to say?
You either got what it takes or you take the week off while you're menstruating.
"Mental health" is for pussies.

 

[mike93lx]

What are you trying to say?
You either got what it takes or you take the week off while you're menstruating.
"Mental health" is for pussies.

Ah yes. This attitude. Women are weak and mental health is irrelevant. Smart guy right here

 

[ltusler]

I would do what it takes to sell out and get into your hobby farm dream with as little remaining debt as possible. Then you can concentrate on investing for your retirement. Having no or little debt would be on the top of my list.

 

[ultravonder]

What are you trying to say?
You either got what it takes or you take the week off while you're menstruating.
"Mental health" is for pussies.

I certainly don't take the week off during my period, but it's pretty hard to be profitable when you're dead.

 

[finn]

Ditch the properties. You’re leaving the area, and, obviously, you’re not attached to them.

Yes, they provide some additional income, but there’s more to life than chasing dollars.

We ditched a property last year and it’s been a big relief. Still have four, and if I had a way to reduce that without causing family turmoil, I would do it in an instant.

 

[LOW1]

I would not want to have a residential rental property that I could not personally keep an eye on. I would sell. If you like the rental business use a 1031 exchange and buy different rental property near you. Or if not pay the cap gains and buy your Ponderosa.

You should look at this as an opportunity and not a problem.

 

[ultravonder]

You should look at this as an opportunity and not a problem.

I certainly see there are options, which is always a good problem to have. Just trying to make sure one option is not significantly more of a negative outcome than the rest.

 

[unslow1]

I have a couple of friends and family members trying to do the long distance landlord thing. It's been a nightmare for most of the places. One place has a professor that is renting because he plans to move. That one has worked out well. I would absolutely sell as fast as I could. The market has already nosed over in a lot of places and heading down. If you want rentals rebuy after the market crashes near you. The way I see it is if I wouldn't consider buying it today then I shouldn't consider holding it either. Myself and several people I know have sold most of our properties and are waiting to reinvest until prices drop.

 

[landlord30]

Hire a property management company that has a good reputation and doesn't remove all the profit. We have a bunch of apartments and I looked over what they do for us and it can't be beat the prices they charge. With two smaller units it's a question mark but at least you keep the property and income stream and don't have capital gains taxes. Otherwise, dump them, use the money for a new place and don't look back.

This is where I would start if I were you. Look into a couple of management companies and compare the costs as well as what you are getting for your money. What is the market like where these properties are now?

 

[loganb]

Here is what I would do

Stop looking at it as real estate, it's an investment asset. You bought it with the goal of it making you money, you're evaluating if the fees, mangt costs and risks are worth the continued investment. You can stay the course, trim the investment or get out completely. As others have shared, there are various ways to reduce taxes, maximize how much you pocket, but first you need to determine a direction

The "mangt costs" include realized costs like fees, updates, taxes but also soft costs like your time, stress etc. Risks in the stock market are the value could go down...same thing here. Property values go down, tenants pass away or turn out to be deadbeats...no investment is without risk.

You're 30+ years away from retirement with the ability to realize $300k in profit in a couple year time frame from an investment decision...that's fricking awesome. If you're not excited about the prospect of holding it, and the situation has changed, there is 0 shame or fault in taking profits and investing in something else that better meets your new situation We had an opportunity to keep our last house and try and rent it when we moved 7 hours away...decided we didn't want to be distant landlords and sold instead....we don't have regrets and neither should you as it sounds like you made an investment and it worked out very well...no shame in exiting it while profitable and when it no longer meets your needs.