Sell or Keep Properties?

[Augus7us]

Put it in the market. Learn the ropes and diversify your investment. Don't just put it all in SPY. You'll do better in the long run, based on historic data. And if you don't and the investments drop to zero, this is also ok as it means Armageddon has occurred.

Question, why would he pay capital gains on a property he lives in? Or are you talking the unit he is renting? Not sure how that works for a duplex.

 

[thebmrust]

I have rarely heard anyone say they are glad they sold a property unless it’s sold to buy another property. But everyone is almost always happy they bought property.

 

[mepstein]

It’s hard to find an investment that someone else pays the majority of the purchase price. Real estate is one of the few investments where this is common. Most people wish they held property. Over time, it usually goes up but even if it didn’t, your renters are paying for most of it and you’re getting the tax deductions. Pretty sweet deal.

 

[mike93lx]

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?

My folks have owned a bunch of rentals over the years, always close b they now have one out of state with a management company and it is a pain in the ***. The management company is good, but everything costs money, when they are used to dealing with stuff themselves. A clog is a couple hundred dollar plumber, a breaker trip is a couple hundred aollar electrician, on and on.

It's "easy" now not having to go over, but it's expensive

 

[CraigStu]

I am thinking that the tax implications have the biggest impact on your decision so I'd be talking to a tax specialist. I know you are burnt out at the moment, but your original idea is solid and always will be. I don't know but, like rolling over a 401k, is there any way you could sell the properties and then buy some locally w/o paying income tax on the profit from the sales? Somewhere above it was mentioned that you could eliminate tax on the one you have lived in the most. Maybe, but I'd be looking at the tax details of that. I think some of that may be a once in a lifetime deal so may not want to use it up now. One other thought is try a property management deal for one year and see how it actually works out. Maybe it won't be as bad as you suspect.

 

[finn]

I have rarely heard anyone say they are glad they sold a property unless it’s sold to buy another property. But everyone is almost always happy they bought property.

I’m, for one, glad I sold.

Made a nice profit, if I don’t include my labor. Probably made more per hour in the stock market over the same period, with a fraction of the man hours invested.

 

[yeldogt]

I'm confused ..... help me out. The different numbers you have posted have me scratching my head.

How much did you pay for each property? What is each worth today? What is the gross rent for each ? What are the HOA fees and insurance/taxes for the year?

How much is your initial investment in the properties?

I have owned rental properties all my life and started out rehabbing in my spare time .... I had that in my 20's (spare time) So -- I am biased towards keeping them. My goal was buy properties that would return value over time and generate rents that would cover costs. My goal was not max income as that usually required more interaction with tenants than I wanted ..... rather the goal was to have someone else buy me the house over time with the least amount of input on my part. I never viewed them as a bank to cash out ---- we have real banks for that. Condos are a bit harder to make the numbers work as the fees can be high ---- so with yours doing that ....you are ahead of the pack.

No one can give you all the life answers .... we go through cycles in life. At 30 -35 years out and no mention of a partner ... future earnings. Only you know those answers . I had a good income starting out and always leveraged that to buy RE ..... Income solves a lot of problems but tossing two properties to cash out at your age should be done with care

 

[tez929rr]

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.

I tell people this all the time. The way some (actually, lots of) people live is incredible. We were picking up a stroke victim recently and the landlady dropped by to demand to know what we were doing and then argued with the victim’s daughter about the (apparently) unpaid rent. And the place was a dump before they moved in. What did the landlady expect?

To the OP: take the cash, minimize your tax burden, and invest it. You’ll be a lot happier.

 

[dcg9381]

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.

In my experience as a landlord, the biggest issue has been when people decide not to pay. In my state, tenants are protected and the process of eviction can take months in the best case. During covid, there was a moratorium on evictions and on top of that the courts were backed up additionally for another 6+ months. We've got people in my neighborhood that were renting ADUs and a few tenants that simply took advantage of the situation and stopped paying. It took 1-2 years to get those tenants out as you literally couldn't process an eviction around here. Sure, you can write those losses down and you can also screen tenants by financial solvency, but like all investments, it's a risk.. Good tenants are worth quite a bit!

Course, while all this was going on, property values were going up 30% every year.

 

[redm18]

I would personally feel very uncomfortable owning residential real estate that was to far away to frequently at least "drive by." I have read and seen way to many horror stories.

 

[TractorJeff]

FWIW: OP doesn't say what state he has the rentals in nor does he say what state he moved to. A few years ago, a couple bought some land down the road. Talking to them I found out they owned multiple properties. Eventually the DNR made it impossible to build, so they opted to sell. They had a year to re-invest before they would have to pay Taxes. COVID hit and they didn't find another property, they bit the bullet and paid the Taxes. Point is; They lost some but not all and were able to move on with their Lives.
I guess if it was burning me out / depressing me, affecting my quality of life, then I would sell it and move on after fully understanding the Tax Implications in my State!

 

[yeldogt]

I tell people this all the time. The way some (actually, lots of) people live is incredible. We were picking up a stroke victim recently and the landlady dropped by to demand to know what we were doing and then argued with the victim’s daughter about the (apparently) unpaid rent. And the place was a dump before they moved in. What did the landlady expect?

To the OP: take the cash, minimize your tax burden, and invest it. You’ll be a lot happier.

The property picks the tenants ... think about it.

The best tenants are Nuns .... hard to find today !! I bought a big old place about an hours drive north of Philly back about 20 odd years -- originally I was thinking of doing a weekend place. But .... it was too big -- cool old stone victorian. I'm at the place one day -- thinking .... What am I going to do with it? This nun pulls up and says they were looking at it but the order would not let them buy ... I say you want to rent ? It --------was a deal made in heaven.

Really -- that was just dumb luck. They were my only tenants and when they left -- I sold it a few years back. In all honesty -- the house picks the tenants. Nice small houses in good areas that rent on the high side .... attract nice people. I have done very well with single mothers with good jobs ... many want to rent in a good town with good schools and often they are not able to buy. Keep the rent stable -- try to keep them from getting a cat -- golden

 

[ScottsGT]

I vote to keep it and turn over to a property management company. My son did this after relocating with the Army. He makes enough off the small rental to cover fees, mortgage and put over a grand a month in his pocket. His house is in a college town pulling about $1800 a month in rent and will be going up next year. He already had it rented to a friend before turning it over and told them they have to keep the rent at this rate until he graduates next May.
But the property is worry free now and if he would get off his **** he could form his LLC and get all kinds of tax breaks.
Properly managed rentals should give you a guaranteed income to help finance the land you want?
As friends in the rental business told me, it’s not the money you make now on rentals, but the profit when you sell to retire. If you’re clearing cash now, even better.

 

[scgms1]

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?

Hi ultravonder,

Didn't you answer your own question with this statement?

I personally believe we should have a purpose as well as a plan(s) for our life, but... What happens when our plans don't match up with what life tosses in our direction? How do we deal with adversity when something doesn't go as planned?

I'm not saying not to plan, but in my own personal life I'm coming to the point where I think control is an illusion, and the more I try to regain what I think I can control the less I feel like it really matters. Only you can answer what really matters to you.

My advice would be to try and get a balance for your life. Money is something that can be a obstacle to finding a balance. A bit of advice I've heard about money would be to -

• Esteem it accurately - what is money and what role do I place with that in regards to my life? Money can be benign, or an overwhelming focus. There's obviously a need for money, but at what point do the things we own, actually take over and own us?
• Earn it honestly
• Give it away generously

That's not an answer to your query, but offered as something else to consider.

 

[jives]

Given the lack of complete financial picture it is hard to make informed advice. However, as others have stated, the stress caused by the rentals is potentially the deciding vote. . . if that stress remains after you no longer have the free living. It seems to me, and others, that having a rental agency or property manager will relieve much of the stress and still allow you to begin working toward the dream property.

 

[Old Man Roger]

As far as capitol gains tax goes, I believe if you have lived in a residence for 2 of the last 5 years it is exempt.

 

[mikedodge]

Around here prices have doubled since the pandemic and are starting to come back down. If thats the case in your area too I'd consider selling now and if you want to keep doing rental or have something as an investment buy again when the prices are lower.

 

[yeldogt]

As far as capitol gains tax goes, I believe if you have lived in a residence for 2 of the last 5 years it is exempt.

Personal properties is 250k --- married couples 500k

 

[mike93lx]

Personal properties is 250k --- married couples 500k

To add a point of clarity, that is the gain excluded, not the property value.

Still have to live there, so the OP.only gets a benefit from one of the properties, unless he moved between them a few years ago...

 

[bdbecker]

Hell of a first post @scgms1... well said and welcome to GJ!

 

[Viper98912]

There's a lot of good responses in here, it appears that most people here are pretty level headed depending on whether you're a little over on this side of the fence or on that side of the fence.

My opinion -

One of my family members is big into buying rentals now. He's on number 4 I think. Each time, it's been a massive amount of work. And luckily, he has a spouse that is also a great property manager who can take care of making the calls to the techs when something goes wrong. He's definitely on the path to wanting to own more for retirement - buy now, let them appreciate, the rental pays the mortgage, and in the future not only do you have income but you have a valuable asset.

I thought about doing this recently. And it's just too much of a PITA for me. I have too much going on in life to be able to deal with something like that. When adding in the cost of a professional management company, I may not even break even. Even most recently I looked at a place that was 2.5 hours away, and after driving up there, that alone made me realize that this is not for me. While I want someone else to pay the mortgage for an investment, I just do not have the time nor energy to deal with renters and a rental property.

Given your situation -
1) You are far away and it's hard to deal with
2) Dealing with renters in general, is difficult
3) Hiring a professional company costs you money
4) You're young enough that you don't really know where you're going to be in 30 years
5) You currently are living rent or mortgage free for the next year (or more if you can extend it...)

- I would cash out the $300K+
- You wouldn't pay capital gains tax on your primary home if you've been there for 2 years or more
- You would on the second property
- I would live as long as you can for free in your current place
- Use the 300K+ to buy the property you want in cash. Do not get a mortgage. This will probably limit the size and location of the dream castle you were thinking of buying. But be realistic with what you currently make. So that means you may need to come back down to earth a little bit
- Remember mortgages cost money: 1% origination fee, this fee, that fee, etc. AND THEN, the interest starts.
- There is no better feeling than living without a mortgage (I'm not there yet, but definitely look forward to it).
- Use your extra mortgage money to buy a rental property near you and mortgage that. This way, it's literally an almost-passive investment. You put very little money into it to buy it, a renter practically pays for it (P&I, taxes, etc), and you just let it sit appreciating over time. Keep all of the income and expenses in a separate business account. DO NOT TOUCH THAT ACCOUNT. Do not take a single dime out of that account for your personal use, ever.
- Let the money sit there - pay for all the bills and expenses and repairs from your business account. Keep it fully separate. Then run your taxes as a separate business.
- One day, you will realize that your business account has way too much money in it. Let's say you need to save $20k for an extreme expense like replacing a roof. And you currently have $40k in your account. So either: 1) buy another property if you want to deal with it, or 2) cash out $20k and reward yourself for your hard work. [Note: taxes may apply...]
- All the meanwhile, you have equity continuing to build in the property, on someone else's dime.
- And all this time, you've had no mortgage to pay for. You've also had no mortgage to pay for on your rental property (as long as you keep it rented and ppl are paying). So your income you have from not paying for a mortgage can fund the rest of your lifestyle, such as upgrading your home.

That's what I would do at your current age, income, and desires.

 

[yeldogt]

Given the lack of complete financial picture it is hard to make informed advice. However, as others have stated, the stress caused by the rentals is potentially the deciding vote. . . if that stress remains after you no longer have the free living. It seems to me, and others, that having a rental agency or property manager will relieve much of the stress and still allow you to begin working toward the dream property.

"stress" ... hard one to define. Another is "risk tolerance". As I got older it was clear to me that I was able to handle a fair amount of the first and I was at least moderately high on anyones scale of the second. That said ... I hated getting new tenants and any phone call drove me nuts --- not what they were calling about. I work for myself ... so any thing that changes my plans drives me nuts. I learned early on that being able to have rentals in my life -- I needed to figure out how best to have them on some sort of auto pilot. This does not maximize profit ... the guys I knew who made the most owned student housing, multi family and singles/ multifamily rentals in lower income areas. All required way too much input for me .... I'm on the golf course Saturday morning.

I also started early with a heloc checking ... I used the heloc as a bank. I got it to pay off a high mortgage on one of the properties (rates were high years ago and are always higher for a rental buy) -- once opened it was used to pay all the bills. All the rent payments went into the Heloc -- it smoothed everything out. I never worried about the balance -- property A need a roof .... heloc. B needs something .... heloc. Overtime the balance is falling ... no stress. There are lots of small thing that you can do to make things easier .... they all tend to lower income.

my goal was nice properties later in life for retirement -- that others paid for

 

[gba2331]

Have you considered acquiring more rentals? (probably not ).

"Rich Dad, Poor Dad" is a book with a lot of vague guidelines for accumulating wealth, but some of the valuable insights were that real estate investments are favored by the tax code (eg long-term gains) and leverage (using profits and equity from current rentals to purchase new rentals).

This would definitely require a certain level of commitment, but the hardest part about owning multiple rentals seems to be getting started… which you’ve already done.

I looked into buying a rental but would have accumulated multiple years of tax "losses" that I could only use when the place became profitable. If I had a profit-making property to start with, then my startup losses would’ve been cancelled by that profit, essentially paying for the new place.

It’s definitely complicated but long term it’s definitely a viable path to wealth.

 

[yeldogt]

Have you considered acquiring more rentals? (probably not ).

"Rich Dad, Poor Dad" is a book with a lot of vague guidelines for accumulating wealth, but some of the valuable insights were that real estate investments are favored by the tax code (eg long-term gains) and leverage (using profits and equity from current rentals to purchase new rentals).

This would definitely require a certain level of commitment, but the hardest part about owning multiple rentals seems to be getting started… which you’ve already done.

I looked into buying a rental but would have accumulated multiple years of tax "losses" that I could only use when the place became profitable. If I had a profit-making property to start with, then my startup losses would’ve been cancelled by that profit, essentially paying for the new place.

It’s definitely complicated but long term it’s definitely a viable path to wealth.

There are various ways rentals work for you on the tax side ..... I never did it for the tax.

I keep jumping back into these discussions because I am a proponent of getting people thinking about rentals when young -- like all investments ....... Time is your friend. When I started out with my Philly row homes in the late 80's they rented for under $500 .... even as late as 1995 I was paying just over 50k for them. When I started to let them go a while back they all rented for 2k and above and all sold w/o an agent --- 400k and up. They had long ago paid for themselves and paid to buy others ....

 

[evildky]

Keeping the properties is a tax advantaged way to build wealth while netting a small cashflow. Real estate has continuously outpaced inflation.

If you sold the properties you'd have a tax bill and money that would be deflating in value unless you redeploy it into a non tax advantaged investment that hopefully outpaces inflation

If your concerned about managing these properties there are professional managers out there. Might eat into your cashflow a bit but cashflow doesn't seem to be an issue for you at present and these expenses are again offset any taxable cashflow.

www.biggerpockets.com

 

[yeldogt]

Keeping the properties is a tax advantaged way to build wealth while netting a small cashflow. Real estate has continuously outpaced inflation.

If you sold the properties you'd have a tax bill and money that would be deflating in value unless you redeploy it into a non tax advantaged investment that hopefully outpaces inflation

If your concerned about managing these properties there are professional managers out there. Might eat into your cashflow a bit but cashflow doesn't seem to be an issue for you at present and these expenses are again offset any taxable cashflow.

www.biggerpockets.com

When you are 28 looking at 50 it seems like it is sooooo far away. It's not .. 20 odd years is quick and the next thing you know -- 60 is getting too close.

Looking at a 25 year held property that is now worth 400k and generating 24k in rents makes little sense. One would never buy that in todays money for a rental with those numbers ... especially when you factor in 10k for taxes and insurance. It's all about the input .. what did it really cost you for that asset. My NJ bungalows cost me more and are worth less but generate almost 3k in rents each month. Buying the right property in the right location for what you want out of it is so important

 

[tstaude]

Let's reverse engineer the situation-

If you have $315k on the table right now in front of you, would you buy two rentals 1000 miles away?

Probably not.

 

[My Old Tools]

Sell and reinvest where you are going to be living

 

[Blk88GT]

Let's reverse engineer the situation-

If you have $315k on the table right now in front of you, would you buy two rentals 1000 miles away?

Probably not.

I like this way of looking at it.

Personally, I'd sell.

 

[rlwhitetr3b]

We were landlords for a few years, what a PITA! Could depend on the location and type of property.
I just read that someone is predicting that we are going into a housing market crash. I don't remember where I saw that, so take it with a ton of salt. If it works for you, do it. Only you can tell how well you deal with the stress.

 

[evildky]

When you are 28 looking at 50 it seems like it is sooooo far away. It's not .. 20 odd years is quick and the next thing you know -- 60 is getting too close.

Looking at a 25 year held property that is now worth 400k and generating 24k in rents makes little sense. One would never buy that in todays money for a rental with those numbers ... especially when you factor in 10k for taxes and insurance. It's all about the input .. what did it really cost you for that asset. My NJ bungalows cost me more and are worth less but generate almost 3k in rents each month. Buying the right property in the right location for what you want out of it is so important

These particular properties may not be highest and best use of equity. The popular argument is to 1031 into something with a better yield. Set aside ethe cost of selling these homes and buying different ones. My problem is that yield is based on cashflow which isn't his main issue at present, Better cash flowing properties will likely see less future appreciation. Is the goal to have cashflow now or more equity later? There is no single right answer.

Me, I have a portfolio many of which I've had a long time and yield low income relative to their value. I have sufficient cashflow for my needs and continue to build equity at a rate that far exceeds inflation. One day it might make more sense to shift that, but for now, it works for me.

 

[yeldogt]

These particular properties may not be highest and best use of equity. The popular argument is to 1031 into something with a better yield. Set aside ethe cost of selling these homes and buying different ones. My problem is that yield is based on cashflow which isn't his main issue at present, Better cash flowing properties will likely see less future appreciation. Is the goal to have cashflow now or more equity later? There is no single right answer.

Me, I have a portfolio many of which I've had a long time and yield low income relative to their value. I have sufficient cashflow for my needs and continue to build equity at a rate that far exceeds inflation. One day it might make more sense to shift that, but for now, it works for me.

You understand the various distinctions. It's hard to explain to people that cash flow is often higher in lower income areas w/ cheaper housing. The return to the owner is the cashflow over time vs higher market price later when it's sold.

The OP has not come back and provided the clarity to his original post --- but, the best type of property may not be close to where you live. I will say it again ... the property picks the tenant.

Many times people get into rentals by accident. Often it's a property they live in currently and are transferred or they move in with someone and don't want to sell. Other times it's a property they come by though a death in the family. It may or may not be a good property to rent .... often, they are not good rental candidates and people sour on being a landlord.

 

[rayra]

Cant really discuss the future without treading on politics, but having recently been involved in a couple policy-compelled moves and sell / buy transactions and seeing how far you are from retirement, I'd cash out those distant properties RFN, as it seems the rollercoaster ride is just ticking over the top of the big plunge. In a year you might otherwise have trouble tenants, a management company expense, and greatly decreased market value when you finally decide to sell. Better to do it now.

And that's not even factoring rapidly increasing mortgage rates impacting potential buyers. The fed has already raised rates by .75% twice this year and is making noise about doing it again very soon. They're going to keep raising rates at this heightened pace until they quench inflation.
The last time this tactic was necessary - and successfully employed - in the early 80s, rates went up to 17%.

OP, talk to a qualified tax accountant, find out what your real exemptions, deductions might be on these sales. CapGains won't be the least of it. Also learn what taxes you can avoid if you can plow the money back into another property - either one you can live in where you are now, or are heading, or longer term where you will build on in retirement (if that is in consideration).

But above all, get informed and act as promptly as you can reasonably do so.


ETA
I retained a condo in San Diego county, near Miramar NAS when I got off active duty and moved back to the L.A. area. I was a long distance landlord for several years and it was a miserable PITA. Will never do that again.

 

[matt_i]

As a pure math problem, I look at it as, assuming you can keep it rented, someone else is paying those mortgages on your behalf. Just a pure WAG but the property values will double over 30 years (could be more or less we don't know). If you looked at "average" 2% inflation the 1.02 ^ 30 is around 1.8 as a basis if you understand the idea there.

To me it makes sense even if you totally broke even on the month-t0-month as after the 30 years you are sitting on a nice chunk of change.

But alas, we aren't machines, there are stresses to life and everything around us is known to somehow shorten its length. If your directional arrow is somewhere else, the overriding priority is probably then to sell, take your profit as a boost into the next phase of life.

 

[clmeredith]

It’s not all or nothing. Maybe this was said. The one townhouse that was the pure rental one, I would do a 1031 exchange, which allows you to trade for a rental by your new home tax free. I personally would sell the other and if it was your home the last 3 out of 5 years there is no capital gain unless you made I believe 500,000 gain. Buy your acreage and at least it would cheapen the mortgage And you would have some rental income

 

[Walkers]

My opinion, sell now while you can’t make a fair bit, then buy something close to you later after interest rates have gone up and property values have come down. You should easily be able to make 8 percent with fairly safe investments, replacing a chunk of the rental income while you are out of the market.

 

[PoorUB]

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.

I will repeat, you have some expense for that income, it is not all profit.

$300,000 invested in a mutual fund on the stock market, going off past history will return close to 10% at least I have done it for over 30 years. Drop that number in an investment calculator at 9% and it returns an additional $3.6 million on 30 years. and no work or expense involved.

 

[MattRMagnum]

Note: I'm not any kind of financial person or expert. These are just my thoughts, and they probably aren't good ones.

I would suggest keeping them. Even if they only break-even, you're still decreasing your amount owed vs. the amount you have in equity. If you want/need money? Pull from the equity. It gives you a slowly growing source of money that you can pull from, regardless of your salary.

 

[Pen & Wrench]

I agree with "My Old Tools", if you want to have an investment property, sell the one that's a thousand miles away and buy one close to home where you are going to be. You will be able to manage it more closely and hopefully less costly. You could always sell and invest it in your personal home, but then the business investment seems to go away. Reinvesting to keep that venture alive and producing income may allow you to retire earlier. And if you have a good income, will it allow you to finance a personal home without dipping into the funds you have invested in the rental? Also, a side note, I don't know your market, but do you feel your rents are high enough based on the value of the property?

 

[nadogail]

I am thinking that the tax implications have the biggest impact on your decision so I'd be talking to a tax specialist. I know you are burnt out at the moment, but your original idea is solid and always will be. I don't know but, like rolling over a 401k, is there any way you could sell the properties and then buy some locally w/o paying income tax on the profit from the sales? Somewhere above it was mentioned that you could eliminate tax on the one you have lived in the most. Maybe, but I'd be looking at the tax details of that. I think some of that may be a once in a lifetime deal so may not want to use it up now. One other thought is try a property management deal for one year and see how it actually works out. Maybe it won't be as bad as you suspect.

Do you know an honest handyman who can answer the phone and take care of the minor problems?

I am in the rental business and I have learned that I must be very careful about who I allow to be my tenants. I have two part time employees that handle all the paperwork and tenant complaints.

I no longer climb ladders, but I have provided my employees with everything that need to get things fixed.

It took a while, but I have developed a network of trusted vendors for my big jobs.

Every time you go to visit a rental is a deductible trip, everything your rental needs is another deduction.

After all is said, the only real answer is going to be “it depends”.