Should I keep these properties or sell and invest in stocks?

Question

Posting on behalf of a family member:

“I am trying to decide whether to continue to rent vs. sell two investment properties. Two equally important goals: first is to maximize return on investment without eating into principal; second is minimize headaches/stress/uncertainty. I am retired and living in a paid-off house. If I want to have enough investment income to maintain my current quality of life, is it better to continue to rent vs. sell these properties and put the money in the stock market instead, and live off the dividends?

Both properties are in NYC:

Property 1:

• Valued at 800k
• No mortgage
• If I sell, I estimate walking away with 720k after fees and capital gains
• Rent = 3300/month; expenses (condo fees, etc) = 1550/month. So yearly profit is 21k

Property 2:

• Valued at 625k
• No mortgage
• If I sell, I estimate walking away with 562k after fees and capital gains
• Rent = 2400/month; expenses (condo fees, etc) = 800/month. So yearly profit is 19.2k

So if I sell both properties, I would walk away with 1,282,000. If I put this in the stock market, I would need to make a return of 3.14% to match what I’m making in rental income.

Some variables include: fluctuations in the NYC rental market and value that properties may appreciate, increasing NYC taxes and condo fees, fluctuations in the stock market, maintenance costs that will be needed in the next few years that will not do much to increase the value of the properties.

I am not interested in leveraging these properties to buy a third. Too much headache for me.

In 10-15 years’ time, which is the better decision? Keep renting or sell and invest in stock market?

Any advice?”

Bill B. · Answer

1) you can’t put $400k (1/3rd) in to a Roth IRA unless you make $400k at your job.

2) you show netting 90% of your sale price “after fees and capital gains”. Do you have almost zero gain? Figure 6% for the realtors, then you have 4% left for 15% capital gains and 25% depreciation recapture, and don’t forget NY is going to have their hand out. I think you’d be lucky to net 80%.

3) what if you had asked this question 2 months ago and now you were down 20-30%. Could you stomach having lost $200k in 2 months and still owing the $200k in fees and taxes on your sale? Thee are zero experts that guaranteed you will make 3% in the stock market this year.

4) can you live on the rent? Could you do a cash out refi and live on that money and the residual cashflow? Could you do a 1031 exchange in to something with better returns in a tax free state? Maye. Somewhere you’d want to retire eventually.

GL with whatever you do but double your cost and tax expectations and be ready to see huge variations in your net worth which use to be much more stable.

Alex Olson · Answer

@Jon Gorman Have you thought about selling and then 1031 exchange into a cash flowing market either into multifamily with an asset manager to make your investment passive or into NNN commercial properties where tenants are responsible for all expenses?

Sarah Bojorquez · Answer

Could you sell the properties and become a private lender? You would probably make better returns than in the stock market without the headache of dealing with tenants.

Jon Gorman · Answer

Thanks everyone!

John M. · Answer

Market is very risky right now. I too would consider a 1031 exchange into a no hassle property or syndication of sorts. Both are passive and with ownership of property your heirs will get a step up in basis. Of course we would need to know more about the rest of your portfolio or your goals for cash flow.

Jacquelyn West · Answer

The advise given is very helpful. My perspective is, sell the properties but I would not put the entire amount into stocks, they are too volatile. I would invest about 1/3 in high yield stock (Apple, Berkshire Hathaway, etc) and 1/3 into a Roth IRA and live off the rest.

Jeff S. · Answer

Not only should your family member sell these properties, with a 3.14% return on equity, he or she should have done this a long time ago. They are not being paid anything close to enough to justify the work they’ve been putting in, @Jon Gorman, nor for the risk.

We are huge believers in private lending and self-fund our loans, thus putting our hard-earned money where our mouths are. It’s not hard to learn, takes minimal time, and they should easily be able to earn at least a 10% annualized return. It’s also relatively safe if you only make first position purchase money loans (on flips, in our case).

As a retiree, I’d normally strongly recommend private lending – especially since they understand real estate. Private lending is a relationship-based business, and in our view, it should only be done locally with others you’ve personally met. This brings up a problem.

They are in New York, which is a judicial foreclosure state where it can take years to foreclose on a property if they must. Done properly, they should never have to foreclose, but this is not something you bet retirement income on. Thus, I don’t think lending like this would be safe.

Having made and lost plenty in the stock market, you probably came to the wrong place if you think many here would recommend equities. It’s not an either/or decision though. Another option would be a portfolio of real estate syndications. Here your family member could diversify among various real estate specialties and perhaps even save on taxes if they could do a 1031 exchange. No headaches, since all work is done by the operators, and even enjoy some safety from diversification.

Real estate clubs are a good way to meet the principals behind many syndicated real estate investments.

Nick Barlow · Answer

@Jon Gorman the etf NOBL (dividend aristocrats) pays out less than 3.14%. I used that as the proxy as bond yields don’t exceed 2%, and companies raising dividends for 25+ years are in it for the long haul, with proven products/systems.

Sounds to me you should hold in your scenario. This “advice” is free, and worth what you paid for :) lol

Standard disclaimer I have no qualifications and am a stranger on the internet.

Should I keep these properties or sell and invest in stocks?

Should I keep these properties or sell and invest in stocks?

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