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  • Liquidating rentals now what?

    I am going to list one of my rental properties since the long term tenant just gave notice. I will only have one left, lease expiring this spring, and I am thinking about listing it also. My rationale is the prices are significantly inflated and properties are selling quickly. I probably won't have to do a $50,000 renovation which would generally be required to make it more competitive. Both are solid rentals in good neighborhoods with a chance of continuing to increase in value but I am skeptical this will happen. I'm not sure the hassle of renting is worth the chance that in 5-10 years the house will not have increased in value if I could have just parked the funds somewhere and coasted.

    My questions include does this sound reasonable? I started the landlord gig when I was in my late 20s and had minimal income. They have been very good to me but now feel like an unnecessary burden/liability. Second question is where do I put the proceeds? My rental properties are in the safe with appreciation potential category and despite being less than 10 years from retirement I'm not interested in being too safe at the expense of some income. REITs?

    Thank you in advance for your insight and advice.

  • #2
    Sounds very reasonable. Wise, even, considering the circumstances. Do it.

    The question now becomes, do you want to keep this money in real estate or are you looking to shift your AA?

    How safe is “too safe,” and is income the primary goal or are you also targeting appreciation?

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    • #3
      If your AA is light on stocks this is a better time to buy than a couple of months ago.

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      • #4
        Your logic sounds reasonable. I would put the proceeds wherever they're needed, whether that's cash, stocks, bonds, sleeveless hoodies, etc.

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        • #5
          Get out for the right reasons -- don't want the hassle of direct ownership.

          The 'less risk' or income hassle are all of personal opinion. If you concentrate proceeds into equity market where the balance of your portfolio is, then one could argue that you're increasing your risk with less diversity and income stream sources.

          All depends going back to the direct ownership hassle. Yes, you can do REITs or syndicates. you lose your depreciation. That said, it appears you're about to hit that end too so only options is 1031 to reset that in a hot market or simply cash out and pay the gains.

          We have 5 properties (3 income and 2 with parents). All managed. All good income streams that we plan to continue into retirement and 1031 to vacation homes and estate as exit plans for tax efficiency.

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          • #6
            Is this money you’re planning to spend in retirement or leave to heirs? The largest potential downside that comes to mind is loss of step up in basis.

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            • #7
              Originally posted by bovie View Post
              Sounds very reasonable. Wise, even, considering the circumstances. Do it.

              The question now becomes, do you want to keep this money in real estate or are you looking to shift your AA?

              How safe is “too safe,” and is income the primary goal or are you also targeting appreciation?
              Really appreciate your insight. I always considered my real estate sort of like a bond fund, but with superior appreciation and earning potential. I want reasonably safe but not bond safe if that makes sense. I'm not necessarily looking to shift AA but can change holdings in either my taxable or nontaxable accounts. I'm heavy on VTSAX and SCHB in both right now due to the real estate. Other than some cash and I-bonds the remaining is real estate holdings. I sold my 3rd rental last year and am DCA the proceeds from that into VTASX.

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              • #8
                Sounds like a reasonable plan. REITs would go best in a tax-advantaged account if you access to them and shift funds that way.

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                • #9
                  Originally posted by Lithium View Post
                  Is this money you’re planning to spend in retirement or leave to heirs? The largest potential downside that comes to mind is loss of step up in basis.
                  It will be to use for retirement with anything remaining going to charity when spouse and I kick it.

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                  • #10
                    Originally posted by CordMcNally View Post
                    Your logic sounds reasonable. I would put the proceeds wherever they're needed, whether that's cash, stocks, bonds, sleeveless hoodies, etc.
                    Thank you and thankfully my sleeveless hoodie allocation will remain intact regardless but I'd rather not have a chunk of my net worth sitting in bonds with minimal chance of even keeping up with inflation.

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                    • #11
                      Originally posted by StateOfMyHead View Post

                      Really appreciate your insight. I always considered my real estate sort of like a bond fund, but with superior appreciation and earning potential. I want reasonably safe but not bond safe if that makes sense. I'm not necessarily looking to shift AA but can change holdings in either my taxable or nontaxable accounts. I'm heavy on VTSAX and SCHB in both right now due to the real estate. Other than some cash and I-bonds the remaining is real estate holdings. I sold my 3rd rental last year and am DCA the proceeds from that into VTASX.
                      I view REIT's as a type of asset sector in a portfolio. The same way you rationalized your direct real estate as being a type of bond equivalent. From that viewpoint, you are adding more tilt that is already included in your total market equities. You might consider some type of bonds for the AA diversification you desire.
                      Just another way of looking at your desired AA. Stock vs bonds. Without the tax/cashflow advantages I view REIT's more equity than bonds.

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                      • #12
                        I just did a $50k renovation on one of my properties this summer. The rent increased $700/month so if you think of it like a bond that is 16% interest. In my market investment properties like mine are selling at 15X gross rent multiplier so an $8400/year increase in rents translates to a $120k increase in value. With bonus depreciation the $50k renovation will shelter my rental income. Not sure I could find a better place to have put this $50k. While stocks are sinking on inflation and Putin I'm raising rents. I'd at least look at the numbers closely and how much you'd owe in tax with a sale. Don't know if you still have a mortgage on these but as someone recently retired it's nice to have a steady income from rents. The director of investments of Vanguards recently predicted 2-4% return for US equities over the next decade.

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                        • #13
                          Originally posted by pit.alumni View Post
                          I just did a $50k renovation on one of my properties this summer. The rent increased $700/month so if you think of it like a bond that is 16% interest. In my market investment properties like mine are selling at 15X gross rent multiplier so an $8400/year increase in rents translates to a $120k increase in value. With bonus depreciation the $50k renovation will shelter my rental income. Not sure I could find a better place to have put this $50k. While stocks are sinking on inflation and Putin I'm raising rents. I'd at least look at the numbers closely and how much you'd owe in tax with a sale. Don't know if you still have a mortgage on these but as someone recently retired it's nice to have a steady income from rents. The director of investments of Vanguards recently predicted 2-4% return for US equities over the next decade.
                          This is exactly what is weighing on my mind. I'm not one of the docs who came from an affluent background or is well off. I'm looking at retiring with $3mil so I don't want to make a foolish decision. From strictly a financial standpoint the last house is unequivocally a solid investment and has been easy to rent. The mortgage is paid off and I could get $300 a month increase on current rent with $50,000 rehab. The tax hit now if I sell both would be be rough. I'm just not sure I want to be a landlord any longer. I imagine this is due in part to the chronic nature of the pandemic and being crushed at work but having one less aggravation, one less phone call to answer sounds very attractive right now.



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                          • #14
                            Personally, I like having roughly half of my investments in real estate and half in stocks. We have switched over to mostly professional management for the real estate portfolio. In retirement, the juicy monthly cash flow on the real estate will be a nice counterpoint to the lower dividend income but higher growth potential of stocks.

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                            • #15
                              No doubt we're in an extreme seller's market now and I expect with the Fed starting to raise rates money will be shifting out of the real estate market eventually. Since you don't want to be a landlord anymore I would take the opportunity to sell now, pay the LTCG and move on with your life. No one need be a landlord forever.

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