Selling rental properties and moving into Fixed income for early retirement

[David Charles Edwards]

I'll be 55 this and our last one graduates high school and will go off to college this year. My wife and I a debt free and own 15 rental properties worth around 1.5 million (net after sale taxes). We also have healthy IRA's and will both qualify for social security in the future.

After being a landlord for nearly 25 years,  I'm thinking about selling it all and moving the money into immediate income annuites or some other fix income vehicle so we can travel and live a less stressful lifestyle.

There doesn't seem to be an easy way to avoid capital gains and I realize many of these fixed income investments don't hedge against inflation.  Just wondering if anyone else has thought of doing this and what some pathways might be.

[Marcus Auerbach]

You have a relatively low value and rent per unit. Another path to consider is to sell them under a 1031 exchange and trade into higher-value real estate. Double value, double rent per tenant. Maybe finance 50-70% and hire PM.

I would stay in real estate, it is hedged against inflation and you can consume part of the cash flow instead of depleting equity, you can actually let the continue to grow. Personally we have long stopped buying "doors" - we want as much revenue with as few tenants as possible, so we buy higher-priced homes in the Milwaukee suburbs.

Last suggestion: look into DST's. You can 1031 into a DST and avoid taxes.

[David Charles Edwards]

Quote from @Marcus Auerbach:

You have a relatively low value and rent per unit. Another path to consider is to sell them under a 1031 exchange and trade into higher-value real estate. Double value, double rent per tenant. Maybe finance 50-70% and hire PM.

I would stay in real estate, it is hedged against inflation and you can consume part of the cash flow instead of depleting equity, you can actually let the continue to grow. Personally we have long stopped buying "doors" - we want as much revenue with as few tenants as possible, so we buy higher-priced homes in the Milwaukee suburbs.

Last suggestion: look into DST's. You can 1031 into a DST and avoid taxes.

 Dang,  that almost feels like an insult lol.....   "low value and rent per unit"....  Ive done some 1031 research but the fees and hoops seem high to me.  I'll look into DSTs. thank for the Tips

[David Charles Edwards]

 I have the same setup as you. Don't overthink it. Maximum liability coverage and a good umbrella policy is going to take care of 99.9% of your needs and exposure. As far as your kids, that's easy too - set up a trust and move everything into the trust. 

Real estate is best served by holding it forever, at least the way our current tax system is designed. 

I have all 15 of these insured with Erie under a single policy which has been great since I only get ONE bill ONCE a year opposed to the mounds of paperwork I used to get. I think it's 2 million per claim and 4 or 6 million per year in total liability. Then I have a personal umbrella for another 2 million. We require tenants to carry renters insurance as well. I would love to hear some strategies you hear to limit exposure and protect assets. I went this route a long time ago after a close friend who's a lawyer told me to save the time and money on LLC's and accounting and keep everything in your name with a large cheap umbrella. If something really bad happens, the lawyers would "Pierce the corporate veil" of those LLC's to get to your assets anyway. IF I turn things over to a PM, I wanna reduce my exposure at the same time.

[Jay Hinrichs]

Quote from @Sergio A. Chucaralao:

Quote from @David Charles Edwards:

I'll be 55 this and our last one graduates high school and will go off to college this year. My wife and I a debt free and own 15 rental properties worth around 1.5 million (net after sale taxes). We also have healthy IRA's and will both qualify for social security in the future.

After being a landlord for nearly 25 years,  I'm thinking about selling it all and moving the money into immediate income annuites or some other fix income vehicle so we can travel and live a less stressful lifestyle.

There doesn't seem to be an easy way to avoid capital gains and I realize many of these fixed income investments don't hedge against inflation.  Just wondering if anyone else has thought of doing this and what some pathways might be.

 First of all congratulations on that early retirement. This is just me brainstorming ideas based on the scenario you wrote. This is not advise I'm not CPA, this is just something for you to think about. If it is necessary for you to get all the funds from the sales at once then it doesn't seem like you have another option than paying capital gains. But if this is not the case one option would be to seller finance that way you can have control of how much income you are getting every year. The other option would be if there is a possibility for you to sell your primary residence and every two years move to one of the property and gradually sell each property once you get that tax exempt which is $250 thousand if single or $500 thousand is married. I wish you the best luck with this good problem that you have whatever you decide to do make sure you consult a professional to assist you with the transaction. Happy retirement!

I love the 250k  500k I suspect though with what sounds like 150k and under houses this might not really play out.. And I suspect the OP and his wife probably dont want to move into one of their rentals .. just speculation..

The other thing is to sell the portfolio over a few years and be the bank.  with todays rates one could get7 to 10% interest on that long term and then defer your Cap gains over a course of years.

[JD Martin]

Quote from @David Charles Edwards:

 I have the same setup as you. Don't overthink it. Maximum liability coverage and a good umbrella policy is going to take care of 99.9% of your needs and exposure. As far as your kids, that's easy too - set up a trust and move everything into the trust. 

Real estate is best served by holding it forever, at least the way our current tax system is designed. 

I have all 15 of these insured with Erie under a single policy which has been great since I only get ONE bill ONCE a year opposed to the mounds of paperwork I used to get. I think it's 2 million per claim and 4 or 6 million per year in total liability. Then I have a personal umbrella for another 2 million. We require tenants to carry renters insurance as well. I would love to hear some strategies you hear to limit exposure and protect assets. I went this route a long time ago after a close friend who's a lawyer told me to save the time and money on LLC's and accounting and keep everything in your name with a large cheap umbrella. If something really bad happens, the lawyers would "Pierce the corporate veil" of those LLC's to get to your assets anyway. IF I turn things over to a PM, I wanna reduce my exposure at the same time.

You're doing everything right - hilarious in that I have the same insurer as you and similar coverage. We also require renter's insurance. At those levels you are worrying about exposure needlessly. *Even if you got sued and lost, you would have to do something so egregiously negligent that it probably resulted in multiple deaths before you would be looking at any exposure. Even on a trial you're assigned percentages of liability, and it is difficult to imagine what you could do in a condo to have 100% liability in any lawsuit. 

[David Charles Edwards]

@Jay HinrichsI love the 250k  500k I suspect though with what sounds like 150k and under houses this might not really play out.. And I suspect the OP and his wife probably dont want to move into one of their rentals .. just speculation..

The other thing is to sell the portfolio over a few years and be the bank.  with todays rates one could get7 to 10% interest on that long term and then defer your Cap gains over a course of years.

 Nah,  we wouldn’t be interested in playing the primary residence shell game.

I like the “be the bank” idea and we have done that with other properties in the past but it always blows up over time.  There is a reason those people couldn’t get financed so I wouldn’t do it again.  We’ve learned most of the lessons the hard way.  I’ve rented to people with every sob story out there and rented to people with poor credit.  I don’t listen to any of that crap any more.

[Colleen F.]

@David Charles Edwards do you have a day job too? If that is the case I would wait until you retire to decide. I wouldn't want to take the capital gains tax hit so personally I would lean towards a 1031 with a lower maintenance property. If you can sell them as a package I believe you could go into a single property, maybe a STR in a location you like and turn that over to a PM and use it 2 weeks a year. Or I believe you can 1031 into syndication or a REIT although that's not my knowledge area. I think any of the ideas you see here are worth considering before taking a huge tax hit even if you spread it out.

 I assume you don't have a kid that wants/is capable to run things for you. When you retire is a good time to get a feel for this. 

[Allan C.]

@David Charles Edwards to reinforce your preference to not move around a lot, making your rentals your primary residence won’t get you that far. If you rented the property first, you’ll have to pro-rate the gain based on non-qualified use. For example, if you rented for 25 years and then lived in it for 2 years, the capital gain exclusion you’ll be eligible for is 2/25 of your gain. You’re also on the hook for depreciation recapture, which is likely larger than your cap gains.

You can consider 1031 into a DST to simplify your transactions. Then you can 1031 your DST into a single property and figure what you want to do with that property.

[Paul Azad]

Those Annuities don't sound great, 6.4% yield if just you on the policy and only 5.8% if you add your wife to inherit the policy if you die someday (sorry but high likelihood, nothing lasts forever)

consider as recc above, find a few good syndicators with several upcoming deals you can identify within 45 days of the sale of your condos (sell all 15 as a package to some investor), then invest as a TIC, tenant in common, with one syndication deal, there won't be any fees, then make sure it's a longer term 10 year at least investment, then keep rolling until death. Then kids get the step-up. I recc NNN-multi-tenant large shopping centers that due cost segregation analysis at purchase to get maximum depreciation up front. CRE retail has good fundamental outlook next 5-10 years due to lack of supply. This segment has been big picture stable last 100 years. Also, multifamily (now down 30%) but wait 1-2 more years for massive new supply to be absorbed. I just invested in 3 different Data centers, they are too high risk for most people to consider, especially in retirement. Industrial is great too, long term, but a little overpriced still for now.

or sell, pay the taxes, invest in VOO, get 8-10% next 30 years, or invest in REITs, get 10-12% next 30 years

or buy MUNIs, i'm getting 5% tax free, which is an effective yield of  7.94% for part of my emergency fund

If you die 1 day , 1 yr, 1 decade after you sign an Annuity, they keep all your money, your wife/kids get nothing, unless you add them, but then the returns do go way down and they were low to begin with, Remember the Annuity company is investing in VOO and last 20 years got 13% a year, (long term 8.4% since 1801) they pay you 6 and keep the rest, good luck brother :)

[John McKee]

Take the capital gains hit and then put your profits into a mortgage note fund that earns 12%.  You will stay ahead of inflation, have no management, and enjoy significant cash flow.

[David Charles Edwards]

Quote from @Paul Azad:

Those Annuities don't sound great, 6.4% yield if just you on the policy and only 5.8% if you add your wife to inherit the policy if you die someday (sorry but high likelihood, nothing lasts forever)

consider as recc above, find a few good syndicators with several upcoming deals you can identify within 45 days of the sale of your condos (sell all 15 as a package to some investor), then invest as a TIC, tenant in common, with one syndication deal, there won't be any fees, then make sure it's a longer term 10 year at least investment, then keep rolling until death. Then kids get the step-up. I recc NNN-multi-tenant large shopping centers that due cost segregation analysis at purchase to get maximum depreciation up front. CRE retail has good fundamental outlook next 5-10 years due to lack of supply. This segment has been big picture stable last 100 years. Also, multifamily (now down 30%) but wait 1-2 more years for massive new supply to be absorbed. I just invested in 3 different Data centers, they are too high risk for most people to consider, especially in retirement. Industrial is great too, long term, but a little overpriced still for now.

or sell, pay the taxes, invest in VOO, get 8-10% next 30 years, or invest in REITs, get 10-12% next 30 years

or buy MUNIs, i'm getting 5% tax free, which is an effective yield of  7.94% for part of my emergency fund

If you die 1 day , 1 yr, 1 decade after you sign an Annuity, they keep all your money, your wife/kids get nothing, unless you add them, but then the returns do go way down and they were low to begin with, Remember the Annuity company is investing in VOO and last 20 years got 13% a year, (long term 8.4% since 1801) they pay you 6 and keep the rest, good luck brother :)

 There is a lot to unpack in your post and Im not familiar with most of the options you listed so I'll do some homework.  Thank you for the ideas.

[David Charles Edwards]

Quote from @Allan C.:

@David Charles Edwards to reinforce your preference to not move around a lot, making your rentals your primary residence won’t get you that far. If you rented the property first, you’ll have to pro-rate the gain based on non-qualified use. For example, if you rented for 25 years and then lived in it for 2 years, the capital gain exclusion you’ll be eligible for is 2/25 of your gain. You’re also on the hook for depreciation recapture, which is likely larger than your cap gains.

You can consider 1031 into a DST to simplify your transactions. Then you can 1031 your DST into a single property and figure what you want to do with that property.

 I've looked into 1031 a couple times and I was always surprised at the fees involved but I suppose its still a fraction of the depreciation recapture and capital gains.

[Marcus Auerbach]

Quote from @David Charles Edwards:

Quote from @Marcus Auerbach:

You have a relatively low value and rent per unit. Another path to consider is to sell them under a 1031 exchange and trade into higher-value real estate. Double value, double rent per tenant. Maybe finance 50-70% and hire PM.

I would stay in real estate, it is hedged against inflation and you can consume part of the cash flow instead of depleting equity, you can actually let the continue to grow. Personally we have long stopped buying "doors" - we want as much revenue with as few tenants as possible, so we buy higher-priced homes in the Milwaukee suburbs.

Last suggestion: look into DST's. You can 1031 into a DST and avoid taxes.

 Dang,  that almost feels like an insult lol.....   "low value and rent per unit"....  Ive done some 1031 research but the fees and hoops seem high to me.  I'll look into DSTs. thank for the Tips

Hey, I said "relatively low"! lol - definitely did not mean to insult, but show you an option.

Managing a tenant/unit takes the same amount of effort, regardless of how much the rent is. Actually, you typically have more headaches with lower-rent tenants.

So why would you not want to manage half the units for the same revenue?

[David Charles Edwards]

Quote from @Marcus Auerbach:

Quote from @David Charles Edwards:

Quote from @Marcus Auerbach:

You have a relatively low value and rent per unit. Another path to consider is to sell them under a 1031 exchange and trade into higher-value real estate. Double value, double rent per tenant. Maybe finance 50-70% and hire PM.

I would stay in real estate, it is hedged against inflation and you can consume part of the cash flow instead of depleting equity, you can actually let the continue to grow. Personally we have long stopped buying "doors" - we want as much revenue with as few tenants as possible, so we buy higher-priced homes in the Milwaukee suburbs.

Last suggestion: look into DST's. You can 1031 into a DST and avoid taxes.

 Dang,  that almost feels like an insult lol.....   "low value and rent per unit"....  Ive done some 1031 research but the fees and hoops seem high to me.  I'll look into DSTs. thank for the Tips

Hey, I said "relatively low"! lol - definitely did not mean to insult, but show you an option.

Managing a tenant/unit takes the same amount of effort, regardless of how much the rent is. Actually, you typically have more headaches with lower-rent tenants.

So why would you not want to manage half the units for the same revenue?

 I see what you're saying and if we are going to stay IN to actively management of our properties,  we will just keep what we have.  They are nearby, all at the same complex, and we have refined the formula pretty well over time.  I'm mostly exploring options that get me OUT of the day to day.  Turn over to PM, 1031 into something I don't have to be involved with, or cash out and deal with the recapture and capital gains and move the money into fixed income.

[Michael P.]

There is no middle ground with rental property.  Owning 2 or 3 is the same headache as owning 15.  Thanks again for the brainstorming.

 There is plenty of middle ground. Owning 2 is significantly less headache than owning 15. 

[David Charles Edwards]

Quote from @Michael P.:

There is no middle ground with rental property.  Owning 2 or 3 is the same headache as owning 15.  Thanks again for the brainstorming.

 There is plenty of middle ground. Owning 2 is significantly less headache than owning 15. 

 On this point, I'm gonna disagree,  especially in my situation where all the units are at the same complex.  I suppose I could cherry pick the best few units and keeps those (although they are really all the same) but it's just not that much more work to manage them all which is why I made that statement to begin with.  

[JD Martin]

Quote from @David Charles Edwards:

Quote from @Marcus Auerbach:

Quote from @David Charles Edwards:

Quote from @Marcus Auerbach:

You have a relatively low value and rent per unit. Another path to consider is to sell them under a 1031 exchange and trade into higher-value real estate. Double value, double rent per tenant. Maybe finance 50-70% and hire PM.

I would stay in real estate, it is hedged against inflation and you can consume part of the cash flow instead of depleting equity, you can actually let the continue to grow. Personally we have long stopped buying "doors" - we want as much revenue with as few tenants as possible, so we buy higher-priced homes in the Milwaukee suburbs.

Last suggestion: look into DST's. You can 1031 into a DST and avoid taxes.

 Dang,  that almost feels like an insult lol.....   "low value and rent per unit"....  Ive done some 1031 research but the fees and hoops seem high to me.  I'll look into DSTs. thank for the Tips

Hey, I said "relatively low"! lol - definitely did not mean to insult, but show you an option.

Managing a tenant/unit takes the same amount of effort, regardless of how much the rent is. Actually, you typically have more headaches with lower-rent tenants.

So why would you not want to manage half the units for the same revenue?

 I see what you're saying and if we are going to stay IN to actively management of our properties,  we will just keep what we have.  They are nearby, all at the same complex, and we have refined the formula pretty well over time.  I'm mostly exploring options that get me OUT of the day to day.  Turn over to PM, 1031 into something I don't have to be involved with, or cash out and deal with the recapture and capital gains and move the money into fixed income.

That should be even easier to turn over to a PM - any good PM would love to land a portfolio of 15 condos in the same complex (assuming it's a decent complex) as that's [relatively] easy money, especially compared to a 15 SFH portfolio. In fact I'd guess you could probably structure a discount into your agreement just because of the logistics (no roofs, no foundations, no yards).

1031 isn't a terrible idea but you've got a few hurdles outside of costs - you're going to have to have some possible properties already identified as your window is small, you'll still have to manage the property unless you go through a PM, you'll lock up more/most of your principal since you're going 'bigger'. All of that takes bandwidth which you're trying to avoid. 

Don't be afraid of going the PM route. You will spend some time finding a good one at the outset but once you do that it will be almost set-it-and-forget-it. The fee you pay the PM will be buying your own time back. It's a hard transition to make, I get it, because you sound like me - all of my properties are close, we self-manage better than virtually any PM around here could do it, and keep control of everything. But I'm going to be doing the same thing as you in the next few years as my goal is to have everything under management by the time I hit 60. In my case, however, I'm setting things up to own the PM company, bring other properties in under the umbrella, and then hire a manager and let him/her run everything from there; I've already got a brokerage set up, identified other clients, etc to make it work. Same thing as what I'm suggesting for you but bringing the PM to me instead of the other way around. 

As for setting up the trust, that's not very complicated either. There are internet resources that can do most of the work for you, or you can find a local estate attorney that will do it as well. Make sure it's revocable, so you can make changes as necessary. 

There's no getting around dedicating a little time and bandwidth to this on the front end other than paying the hefty tax hit. If you do the work on the front end, you can save all those taxes paid and get some additional benefits from holding the properties, and still achieve your freedom level. 

[Victor Hong]

Apollo, the big RE empire, sells annuities via its fast-growing Athene insurance entity.   They are smart and sharp folks, indicating that those annuities are worth a look.

[Michael P.]

Quote from @Robert Cucino:

Quote from @David Charles Edwards:

Quote from @Robert Cucino:

I'm trying to start up my portfolio, any interest on off loading a couple? 

 Money talks but keep in mind,  I get calls every week from wholesales and flippers and I have zero patience for low ballers

 Course, I'm neither. Just a family guy in law enforcement trying to leave my kids more than i Had. I'd love to see what props and locations you have and talk though!

 What draws you to these specific properties? Condos bought at retail are not typically going to give you good returns. 

[Amit M.]

@David Charles Edwards  Hi, I did a similar thing 3 years ago. In my case I sold some properties that I felt didn’t have strong appreciation upside, and used the proceeds to pay off the few others I wanted to keep long term. So now I’m managing 4 higher end condos with class A tenants, and not the 9 others that were class C. In my case that made enough of a difference to make property management very light. And I get to keep prime properties with good appreciation potential. 

So a question you should ask yourself is if your condos have strong appreciation potential/future owner user, or are they more limited and seen as only rentals in the future? Also do your kids really want these? Or would they be equally content with paper assets in the future?

you do have the 1031ex as an option, but I passed on it for both NNN commercial and for DST. When I sold in latter 2021/early 2022 interest rates were super low (as well as cap rates). So I knew that once rates went up most commercial props would drop in value or go flat. Plus I dislike investing in areas I know nothing about. My properties are all in San Francisco proper which I know like the back of my hand, and I didn't want to exchange into a random NNN in middle America where I know f*ck all about the area. You don't know what you don't know, and that's risky dropping big cash on IMO ;)

I also couldn’t get on board for DSTs. Now THAT is where you pay fees up the wazoo, plus have zero control over your asset. I preferred getting rid of all debt (incl. on our primary and second home). Once you’re at zero debt it’s amazing how far you (more limited) cashflow can go. Remember, except for property taxes (in our case CA locked in super low) insurance, utilities and some maintenance, all other $ goes for the fun stuff in life. So I wouldn’t discount that approach, unless you really feel your units have strong appreciation potential (and in that case maybe a PM makes sense.) Best wishes.

[Victor Hong]

Quote from @David Charles Edwards:

Quote from @JD Martin:

Quote from @David Charles Edwards:

I'm not referring to a HELOC, since you normally don't get those on investment properties - I'm talking about straight up mortgages on the property. Read up on equity harvesting here and elsewhere, but yes you get the general idea in your last paragraph - cash out, let the PMs deal with the properties, rinse and repeat every 15 (or 20, or 30) years. Yes, you have to open up a little bit from the Dave Ramsey mindset which works great for people on the edge but not very well for investors or those with money.

Even at 8.5%, as long as everything gets paid for it's largely irrelevant. If rates fall significantly, refinance. Now if you don't need or want the extra income, then you can just leave thing as is, but then there's also little compelling reason to sell and take the tax hit. 

After 25+ years of acquiring and managing our rental properties,  the "compelling reason" to sell is just freedom, peace of mind, reduced liability, and guaranteed income from an annuity.  I suppose I need to at least try the Property management route first before I cash out and walk away.  I've still got another year before the last one graduates high school and we are empty nesters.

Another wrinkle to consider.  I own all these properties in my name.  Rather than setup LLCs for each property and deal with the added expenses and book keeping,  we just file them on schedule E and I have a butt load of liability coverage.

If I keep them,  I might want to restructure as part of the refinancing to reduce my exposure and maybe even set them up so the kids could take over without having to be actively involved.  I'm not sure how that would be done.

 I have the same setup as you. Don't overthink it. Maximum liability coverage and a good umbrella policy is going to take care of 99.9% of your needs and exposure. As far as your kids, that's easy too - set up a trust and move everything into the trust. 

Real estate is best served by holding it forever, at least the way our current tax system is designed. 

 So is there a way to do all these things at once?  turn over to PM, move into trust, set up equity harvest.  Esentially walk away from the day to day and cash out refi.

A property manager has no incentive to maintain the property values, and is more likely to bleed away those values via fees.

[Lee Singleton]

Hi David,

Congratulations on your upcoming empty nest and all the financial options you have set up. 

I would suggest reviewing DSTs as an option for passive real estate ownership. You can use a 1031 and receive the tax deferral advantages to invest in individual DSTs. I would gladly send you a list of our current DST inventory and discuss your situation, goals, and what might make sense.

I also sent you a direct message.

Thank you

[Marcus R.]

@JD Martin - Really good insights on this thread.  Thanks for the lesson on equity harvesting.  Excited to learn more about this process. 

[Bryan H.]

Quote from @JD Martin:

Quote from @David Charles Edwards:

Quote from @Jeremy Russell:

Quote from @David Charles Edwards:

Quote from @JD Martin:

Quote from @David Charles Edwards:

Quote from @Benjamin Aaker:
Are you possibly undervaluing your properties? You are in North Carolina and have 15 worth 100k each? That seems pretty low, though I don't know the market.
I know you said all in or all out, but what about getting a full service property manager so you don't have all the headaches of being a landlord? This would satisfy your annuity need, though would be variable of course.

 Retail on these condos is around $125k ea.  I'm looking at roughly $100k net after commissions and capital gains.

We may turn over to a property management company but it costs 8% off the double and probably double the repair budget since you use their guys.  Here are the options we've considered.

1.  Keep until we die and let the kids inherit on a step up basis. headache but built in inflation protection, property appreciation, and tax benefits.  This is the smart thing to do but I've been doing this 25 years and I'm tired of worrying about this crap when I'm off shore trying to catch flounder. 

2.  Keep the units but turn over to a management company 8% off the top plus roughly double my normal repair budget.  relieves some of the headache.  reduces net income to roughly the same as a lifetime annuity.

3.  Sell them all over a period of 4-6 years. Put the money into fixed income vehicles of various sorts and walk away and spend more time drinking wine and catching fish.  Much less inflation protection. Big capital gains expense

4.  seller finance I explored this in depth a couple years ago but it didn't really save that much in capital gains and all the state taxes are due in year one and all the depreciation recapture is due up front. not enough of an upside.

5.  Primary residence shell game this might work for the first few units but would take too long for all of them and the hassle of changing addresses every two years to fake my primary residence for the IRS sounds like a hassle.

6. Borrow against one property every year on a 15 year note and put them all under property management, or borrow against all 15 all at once. Aim to cash in 80% LTV on each property every year, and in 15 years you will have the first one free and clear again and can do it all over. Just make sure the rents cover the PM+Note+Maint/cap expenses. Then you get to access all your capital, pay no capital gains, and still keep the properties as a hedge against inflation. 

I don’t understand your logic here.  They are all paid for already.

I think he is referring to a HELOC, but ultimately it is a way to avoid or defer capital gains taxes as the interest rate on the HELOC would be lower than your capital gains tax. You're getting the equity, 80-90% per property per loan, upfront and trading the capital gains for interest which is deductible.

 I kinda get that.  Trading capital gains expense which is 15% for interest expense which is currently around 8.5% The part that I don’t quite get is WHY?  Im not looking to expand the portfolio.  I’m looking to retire so I can travel, fish, drink wine, and generally have less worry and responsibility.   If I turn the units over to PM and borrow against them,  what would I do with the money?  Beating 8.5% would be pretty hard on a regular basis. I guess I’ve had this Dave Ramsey mindset for a long time which is why we are debt free.  Also,  wouldn’t it make more sense to borrow against my primary residence?  Lower rates and mortgage deduction if I itemize (which I typically don’t).  Just so I’m clear…. Borrow the money and invest however I choose…..  turn over to PM….  Let PM and accountants deal with all the work…..  let the rentals pay for themselves over again over time.  

I'm not referring to a HELOC, since you normally don't get those on investment properties - I'm talking about straight up mortgages on the property. Read up on equity harvesting here and elsewhere, but yes you get the general idea in your last paragraph - cash out, let the PMs deal with the properties, rinse and repeat every 15 (or 20, or 30) years. Yes, you have to open up a little bit from the Dave Ramsey mindset which works great for people on the edge but not very well for investors or those with money.

Even at 8.5%, as long as everything gets paid for it's largely irrelevant. If rates fall significantly, refinance. Now if you don't need or want the extra income, then you can just leave thing as is, but then there's also little compelling reason to sell and take the tax hit. 

What extra income? I must be missing something because I don’t see how this equity harvesting scheme is supposed to add income in his pocket. He’s currently NET $112k on $1.5M assets because he has no mortgages. This is income he is counting on NOW. Mortgage them all and the income that he’s currently living on goes away - traded for a lump sum of cash. So then divide that lump sum over the 15 years of the mortgage hold period and it’s a NET LOSS compared to what he’s doing now. 

Heres a per unit look at it:

$125k equity per unit 

$100k cash out (80% LTV)

$12k annual loan payment on $100k  at 8.5% (there goes all his rental income) 

So then let’s look at his cash windfall. Divide the $100k cash out over 15 year proposed mortgage = $6666/year. This is less than his current return. 

I think equity harvesting only works if you can find another investment that produces a higher return than the borrowing rate. This was doable back when rates were 3-4%. At 8.5% not really possible.  I’m no expert so please show me I’m wrong because I’m in a very similar situation and I just don’t see it. 

As for 1031’s…

1031s are almost impossible to pull off, even if you’re simply trying to leverage into a higher value single property. Most people who do this are not worried about the keeping the income they’re currently making. But try pulling off a 1031 AND keeping the income that you’re getting on the current property. Almost impossible because typically as property values go up with a larger property the RELATIVE rent you can charge goes down. For example…I can charge $2700/month for my paid off $400k property. But can I charge double that if I leverage into an $800k property? If so I’ve never seen it. Add in the new $400k mortgage you think I’m still gonna my to be able to make that $2700/month? I don’t think so… 1031’s work for people who still are earning their living elsewhere and it’s purely an equity leverage up decision. 

[Jason Bohling]

@David Charles Edwards based on your post and your responses, it sounds like you’re just done with real estate. And that’s OK. You’ve played the game and you’ve made your money and now it’s time to enjoy it.

All the responses I read so far seem to be ways for you to continue to stay in the real estate game which are gonna require you on one level or another to continue ‘working’ essentially, when it seems your goal is a worry-free, stress-free retirement. Even just turning it over to property management, you’re still gonna have to manage the property manager, you’re still gonna get updates when units are seriously thrashed and having the stress that brings. Property management will only reduce the time, effort and headaches you put into it; not eliminate it.

Given the situation you’ve described, I think selling it all at once and placing the profits into an immediate annuity sounds like a good idea. You said your income level would stay about the same, and in order for you to get that current return available on that annuity, it would require you to put it all in at once, meaning selling everything at once (you can’t put some in now, then put some in later, increasing the annuity each time), paying the taxes and the depreciation recapture. Once interest rates start going down the amount you would get for that annuity is also going to start going down. So if you’re gonna do it, NOW is the time to do it.

You and your wife would be getting a guaranteed income stream for the rest of your lives, which is not only putting money in your pocket, It’s also giving you a substantial amount of peace of mind in that you’re gonna get that money regardless, you have nothing left to manage and you have ZERO legal liability to worry about, freeing up a lot of mental space to just focus on fishing, relaxing, and doing just whatever you and your wife wanna do.

You’ve spent many years in the game, built your portfolio, paid it off and reached retirement. Go with whatever type of retirement you want. Good luck to you and congratulations!!!