Sell and retire, or KEEP and retire?

[Kenneth LaVoie]

Per usual, it's very rare that any of the listed categories fit my questions so I hope this is at least close.

Anyone struggling with the decision on whether to sell your rental properties or not as you get near retirement? We have had some interest.

We've had our properties for about 10 years, and sales prices would give us around a 20% or more annual return on money invested, and leave us with 25% more in money than we need for "safe withdrawal rate" of 3.5%.

But the money we have in our buildings seemingly will always outperform the money we'd put in our investments, though nothing is for sure. (i.e. our $$$ staying in buildings gives us around 10% give or take, plain cash flow, not including depreciation benefits, mortgage paydown, possible appreciation, etc.) but when we sell and put that cash in our 60/40 ish investment porfolio,

I don't want to withdraw more than 3.5% (Based on the supposed SWR of 4% wiht a little cushion).

I just find myself really "hemming and hawing" and "on the fence". On one hand, if the MARKET says SELL, you SELL, but on the other hand, these buildings are solid, have ten years of us constantly upgrading, and represent only 50% of our net worth. In other words our eggs aren't all in this basket.

We also want to be free to travel. We can do that and still "manage from the road" but it's a little more scary and units might have to sit vacant from time to time. My wife would prefer to be done with them no later than age 62 (54 now). Lots of thoughts here.

Not looking for someone to tell me what to do, just looking for different ways to look at it. As many perspectives as possible. There's always the "hire a manager" but that's one of those things that sounds so simple and great on paper that's MUCH more difficult to pull off and still make money than it sounds.

Thank you!

[Anthony Gayden]

Great question and I often think about this myself. The buildings themselves will cash flow and provide you with great income during retirement. The problem is that if you are managing them yourself, it basically is a job and that may not be congruent with your desired retirement lifestyle.

I say that you should manage your investments so that you can enjoy your lifestyle. That may not mean selling them, but it may mean having to create processes that allow you to do the things you want to do in retirement. Just as an example imagine hiring someone to do a lot of the day to day tasks. This could free you up to travel and enjoy your retirement.

[Kenneth Garrett]

@Kenneth LaVoie

Great question.  The way I look at it, my real estate investments cash flow are not only part of my retirement but part of my generational wealth plan for my children and their children.  It’s only part of the retirement plan as we should have other investments to carry us through.

In my situation, my real estate cash flow will be about 50% as well.  I can then choose to continue to self manage or hand it over to a pm or family.  As long as you can meet your goals I would not sell them.  On the other hand there may be tax consequences in selling as well, but if you need to sell one or two to enjoy retirement then I would sell.  Quality of your life is more valuable then anything.  Being happy is the goal.  What good is having great net worth if you feel your missing out on life.  

[Tyler Weaver]

The tax hit on capital gains and depreciation recapture will likely hurt. 

Seems like a good market timing to sell. Could go away and not reappear for another 7-10 years. If you are comfortable holding through one more entire cycle then it sounds like you will make more money that way.

You could sell and invest in a syndication(s). There are some great operators out there that have solid performance records. 

Rather than hiring a management company, you could look into paying someone to be your boots on the ground while you are traveling. Basically someone you can pay $20 an hour to act on your behalf getting turns handled etc.

[Kris L.]

@Kenneth LaVoie

To me, it would depend on how much time and energy I am having to put into the properties. If it’s minimal, might be good to keep them. If they are a lot of work, well then that’s not really retiring and if retiring is the goal, selling them might be a better path.

[Steve Vaughan]

Eventually we all face this. Transition and succession should be discussed more.  It was #1 on my list when a financial plan her asked what we need. 

As a lifetime DIYer, it's hard for me to answer but I've had a few thoughts.  

First I've been selling 1 to 2 headache houses a year by owner to first time buyers for the last few years.   i get less indigestion, they get value.  We have to keep our mission statement in mind.

We've basically got a 3 pronged approach to our transition.  

We will seller carry 2 or 3 commercial multis.  Get a 20-30yr annuity and spread out the tax hit.

We will continue to sell 1 to 2 houses per year, depending on tax implications.   Some have a much lower basis and more recap than others.

New acquisition lately have had management in place.  Will give that a chance for the 1st time but am nervous.  

The legacy property we want to leave to the kids is tougher.   4 multis.  3 are together so can support on-site mgt.  The 4th has a sister property that could support on-site mgt if acquired.  Need to double down or exit. 

Basically,  portfolios can have different transiton approaches within it.  As we've considered selling or exchanging things over the years, we've realized ROE is tough to beat anywhere.  We are comfortable with a minimum SWR on RE of 6%, stocks/funds 4%.  Definitely be ok selling any 80/20s. 

[Damaso Bautista]

I am with @Kenneth Garrett on this one. I personally view the properties I own as a way to pass down wealth to my two kids.  I will be in a position not to have to use any of this passive income or equity because of the great pension that I will be receiving.

The question I ask myself is if I want to trade up in retirement.  Do my wife and I sell to cash in and buy our dream beach house somewhere.  Basically cashing out to live a more luxurious life (something we have never done in our life).  We have built this wealth by living beneath our means, maxing out our retirement funds every year and purchasing some real estate.

@Kenneth LaVoie like anything in life it is a personal choice.  There is no right or wrong answer. If I were you I would sit down with your wife and come to an agreement about what is going to make your life together the best it can be.  What is going to make you two happy.  That is what really matters.

Good luck and I hope you do what is best for you!!!

[Brian Briscoe]

Following...

I'm still a ways away from full retirement (though only a year away from retiring from the USMC).

I tend to agree with @Kenneth Garrett and @Kris L.

When I fully retire, I want income-producing assets that don't take a lot of time and effort to manage.  I also want something that's easily transferable to my children when I die.  So my decision to sell or keep will be based on those two considerations.  

Retirement for me will be when the earnings from my assets complete pay for my expenses.  The military retirement pension will help -- that'll already pay for a mortgage on a really nice house and put food on the table 24/7/365.

[Jon Kelly]

@Kenneth LaVoie Great question! The good news is you really can't make a wrong decision. LOTS of factors to consider, but I'll answer it from the perspective that I believe REI returns outperform the stock market and therefore you should hold onto your income producing assets. The biggest challenge then is your time and energy. You mentioned a property manager is much more difficult to pull off. It doesn't need to be an all or nothing decision. I would suggest trying a well respected property manager on 5-10% on your properties and see how they perform. If you're satisfied with the property manager and the returns after 1-2 years, then slowly transition more properties to the property manager. Before you know it, you'll be 62 and completely hands-off your REI portfolio, still make great cash flow and be able to travel the world!

[Kevin McGuire]

I’ve gone through a related decision process myself (56 and retired, I think, we’ll see if it sticks). However, I bought mine for the expressed purpose of passive income in retirement, so your situation is a bit different. My pricing model was that they’d produce a 4% cap rate, including management, to match the 4% SWR. Intrinsic in my model was that I’d have a property manager. This is the only thing that makes sense for me in retirement, I want to be sitting on a beach sipping drinks with umbrellas in them while money arrives every month.

I like REI for retirement because of the passive income without reducing the capital, which removes the risk of running out of money, and the steady heartbeat of income reduces the sequence of returns risk. I didn't build my wealth this way, I'm using REI to manage risk in retirement and I've invested in training and processes to make it as passive as possible.

Perhaps you should take a fresh look at it. Pretend you don’t own any of your properties, they’re all converted to cash, but you have options on all of them. Now design your retirement and see if any or all of the properties contribute to that goal.

[David Diaz]

@Kenneth LaVoie

So I am 30 and far from retirement myself however I think about what I will do with my investments when I’m older as well as think the reasons why I am creating wealth.

Simple answer for me is financial freedom. I am investing now and making moves so that I can retire within the next 10 years(hopefully not to aggressive goal). I might not retire at that age but at least have the option to if I wanted to. My second goal is to build a steady income for myself but also to have my future kids be a step ahead of most people with the investments that I left behind.

I guess long story short is, think back when you first started to invest and what were your goals back then. Did you invest to have a steady income for retirement? Do you have kids? Would you want them to be a step behind or in front of everyone? A property will always go up in value eventually and is in my opinion the best investment you can leave behind.

Maybe another option would be to sale the properties that give you the most trouble and take most of your time. If you were going to sale this is the best time to do so but again maybe only getting rid of those doors that don’t let you enjoy retirement.

Good luck with whatever your decision is!

[Kenneth LaVoie]

Boy what a lot of great answers. There are so many ways to approach this. I've actually created a file called "Sell or Keep Forever" so that I don't have to rethink everything. 

1. We've gotten rid of all our lesser performing properties, 3 singles and a duplex 

2. We sold an 11 unit for annualized 37% CAGR or IRR per year over 7 years of ownership.

3. We ALMOST sold a 7 unit but it was going to cost around 80K in ACA payback, dep. recapture and cap gain so backed out. Sticking with 5 buildings consisting of 29 units giving us approx 90-120K cash flow per year. 

4. I LOVE the idea of some day seller financing a building or two. ESPECIALLY when we hit 60, we can do a 20 year seller financed 5-10% down and really have a nice annuity payment. 

5. It really does NOT take much time or energy to manage our buildings as we've been managing these same properties since 2010, year after year. Wife does the leasing, I do the paperwork, our contractors do everything maint. related. I do lots of tasky stuff like hedge trimming, bark mulch, pruning, cobweb removal, stuff that I can do without being tied up all day on a place, but still saves a few grand a year. 

Thank you all. Best of luck to you all!

[Kenneth LaVoie]

As an update we sold that 7 unit that we initially backed out on, held 15% of proceeds as seller financing, rest in cash, helped manage and maintain for a year, and my maintenance person is now "managing" it for the buyer. THAT buyer is now under contract to buy another of our buildings. We have a built in circuit breaker, in a way: If it appraises, great, we sell it and take another step toward sailing of into the sunset.... if it doesn't, great, we keep it!