Nearing Retirement Age

[Sam C.]

After being in the business for almost 30 years, I think it's time to sell my singles and move on. I'm torn about doing it for a number of reasons but mainly because after netting out, there's nowhere I can put the money and generate the kind of returns I've enjoyed. The best I can do securely is with annuities that will return about 7% a year. Then of course there's the capital gains. These are the last for singles I own, 2 in west Allentown, 1 in Bethlehem, and 1 in Easton. Planing on listing them soon but will shop them privately for a while. I have always loved singles because they're easy to take care of and the tenants usually stay for years. Net cash on cash, even after the sale will generate at least 10%. A cash buyer will see closer to 15%. Anyone find a secure place to invest money outside of real estate?

[Dave Foster]

@Sam C., If the returns you'd get from annuities are acceptable there are ways to get that and a bit more while still avoiding the cap gains from your sales.  1031 exchanges would obviously be the ticket to avoid capital gains.  There's two main routes that are 1031 compliant but will let you exit the game to dabble when you want.

1. NNN Commercial properties are the playground of the rich and retired. These are steady slow moving assets that come generally with guarantees from the parent corporation. So it takes quite a bit to upset their returns. And the corporate tenant pays all taxes insurance and maintenance. You're just left with cash every month and no management. When you buy these you are getting the cap rate/cash flow, the rent increases, and ultimately the property appreciation as well as continued depreciation.

2. DST/TICs. The are fractionalized assets of the same types of commercial properties and sometimes larger residential properties. The hold times are shorter at 4-7 years. And again you just receive the monthly cash flow and continued depreciation. The down side is that the appreciation play is not as strong. But that's balanced by the assumed debt that is non-recourse to you. So you're no longer personally liable for any debt.

Both of these will return in the same range of your annuities but shelter the large cap gains and depreciation recapture looming if you sell and move completely out of real estate.

a couple other options our clients will exercise:
1. Purchase an eventual retirement home but use it for investment for a year or two.  This is compliant with 1031.  And when you convert and move in you can sell your current primary and take up to  the first $500K of profit tax free.

2. use the 1031 to purchase vacation rentals in places you like to spend time.  Generate some rent.  Have them managed.  And enjoy some personal use in them.

If you have heirs and pass while holding either your current or the successor 1031 properties they will inherit them at a step up in basis and will get the properties tax free.