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.

[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!

[David Charles Edwards]

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!

 Thanks for the feedback!  So we got a fairly serious offer from Pace Morby a couple years ago.  There was an all cash offer which would have cost me around $400k in capital gains.  They also made a seller finance offer which initially looked better but in the end,  didn't really save all that much money in capital gains  (like $60k) AND keep in mind,  state capital gains are due in the year of the sale and any depreciation recapture is due in the year of the sale.  For those reasons,  we decided to either keep the units until death and pass them along or sell them individually over a 4-6 year period (which saves some in capital gains as well).  The primary residence thing every 2 years isn't really an option.  With 15 units, it would take too long.  One point to keep in mind, we are either gonna be IN or OUT.  There is no middle ground with rental property.  Owning 2 or 3 is the same headache as owning 15.  Thanks again for the brainstorming.

[Karen Chow]

What about selling them all as contract for deeds? Then you can collect monthly checks and not deal with clogged toilets.

[David Charles Edwards]

Quote from @Karen Chow:

What about selling them all as contract for deeds? Then you can collect monthly checks and not deal with clogged toilets.

 I'm not familiar with "contract for deeds" or how that would be different from just turning over to a management company?

[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.

[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.

[Lynn McGeein]

My husband fought property management hard, but was angry at the time we spent self-managing as things always seemed to break down when we're on vacation. It quickly reached the point where we sold all but one, which I just wouldn't sell. Then he realized a few years later, by us still having that one, what an opportunity we missed out on just by him being an idiot about not letting me hire management. He then agreed to invest again, with management this time, to where we're sort of 50-50 split between passive and investment property. There have been some headaches, recently a break-in at a turnover & we had to go down and hire our own contractor because they were stating ridiculous numbers to fix it, some HOA issues. But mostly it's been so much easier, almost 15 years now under management. They keep us at mostly current rents, where we probably wouldn't raise that much without their guidance, so likely pays for itself. To us, it's worth the 8% of rents and the extra costs in repairs, and they still cash flow well even with the extra expense. Our goal is now to leave to the kids at the stepped-up basis. May be worth trying a good property management company for a year or two before deciding to sell or not, especially if your kids have expressed interest in keeping them like ours has.

[Michael Smythe]

So PMC charges 8%+, compare that to capital gains and what your kids could inherit with a stepped up basis.

[Adam Bartomeo]

I don't think that $1.5m will make it very far, even with the annuities. I want to see $1m passive coming in per year.

[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. 

[Basit Siddiqi]

If you can net a 6% return on $1,500,000, that is about $90,000 / annual return.

You mention having a healthy IRA, what is the balance of this and how much do you plan to take out?

Social security, I would have to imagine that is about $30,000 per spouse(atleast).

You are likely guaranteed $150,000 just between the social security and annual return on the 1.5 million not factoring in the IRA withdrawal.

I think that is a healthy balance to retire on.
Maybe, you can't be extravegant but a very respectable life.

Congrats!

[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.

[Theresa Harris]

Congrats on early retirement. I would slowly sell the properties off.  Assuming they are all similarly priced, you'd be selling them at about $100K each.  How much appreciation have they seen?  Look at the capital gains (ie profit after expenses of buying and selling) and as your income will go down after you retire, how many can you sell at a time without jumping up a tax bracket?  then start selling the ones that have upcoming major repairs in the next 5-10 years or the ones that are a biggest pain to deal with/make the least amount of money from rent.

[Theresa Harris]

Quote from @Adam Bartomeo:

I don't think that $1.5m will make it very far, even with the annuities. I want to see $1m passive coming in per year.

 Are you saying you'd want $1M per year in passive income to live?

[David Charles Edwards]

Quote from @Theresa Harris:

Congrats on early retirement. I would slowly sell the properties off.  Assuming they are all similarly priced, you'd be selling them at about $100K each.  How much appreciation have they seen?  Look at the capital gains (ie profit after expenses of buying and selling) and as your income will go down after you retire, how many can you sell at a time without jumping up a tax bracket?  then start selling the ones that have upcoming major repairs in the next 5-10 years or the ones that are a biggest pain to deal with/make the least amount of money from rent.

I'm looking at capital gain of 60-75k per unit.  Of course much of that will be depreciation recapture.  My estimates are that I would NET $100k per property after taxes and commissions.

My income will basically stay the same.  The idea being rental income would be replaced by annuity income. I would try to limit the number of sales in a given year to minimize capital gains and depreciation recapture.  Here is some basic projections.

$112k is current passive NET income off all 15 properties
$85k  projected income if I turn over to a management company (8% off the top plus doulbe repair budget)
$96k  projected income from 1.5 million in lifetime annuities
$87k  projected income from 1.5 million in lifetime annuities with spouse added

All the units are at the same complex but were acquired over 20 years so i would cherry pick the newest units first since deprecation recapture is taxed at a higher rate than capital gains.  

[Theresa Harris]

Quote from @David Charles Edwards:

Quote from @Theresa Harris:

Congrats on early retirement. I would slowly sell the properties off.  Assuming they are all similarly priced, you'd be selling them at about $100K each.  How much appreciation have they seen?  Look at the capital gains (ie profit after expenses of buying and selling) and as your income will go down after you retire, how many can you sell at a time without jumping up a tax bracket?  then start selling the ones that have upcoming major repairs in the next 5-10 years or the ones that are a biggest pain to deal with/make the least amount of money from rent.

I'm looking at capital gain of 60-75k per unit.  Of course much of that will be depreciation recapture.  My estimates are that I would NET $100k per property after taxes and commissions.

My income will basically stay the same.  The idea being rental income would be replaced by annuity income. I would try to limit the number of sales in a given year to minimize capital gains and depreciation recapture.  Here is some basic projections.

$112k is current passive NET income off all 15 properties
$85k  projected income if I turn over to a management company (8% off the top plus doulbe repair budget)
$96k  projected income from 1.5 million in lifetime annuities
$87k  projected income from 1.5 million in lifetime annuities with spouse added

All the units are at the same complex but were acquired over 20 years so i would cherry pick the newest units first since deprecation recapture is taxed at a higher rate than capital gains.  

 I'd slowly sell them if they are all in one complex.  Then do what you want with the money.  You know best what your lifestyle is and what you need to support it, so do the math assuming you and your wife will live to be 100 ...so you don't run out of money.  Biggest expenses are housing (and once your house is paid off those costs go down) and cars (again how often do you buy a new (or new to you) car. In the US, you also have medical and I have no idea how much that is (I'm in Canada).

[JD Martin]

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.

 The logic is that you pay 7% interest, minus the tax benefit and appreciation, instead of 15-20% capital gains tax not to mention your depreciation recapture. Let's say theoretically they appreciate 3% annually in value. The tax savings is probably worth at least a point, maybe a little more. That makes your effective tax rate 2-3%, which should be offset by your rent increases. Thus, you pay no taxes, get to access the equity locked in the property, and maintain ownership of the property such that 15 years from now you can do it all over again. This is called equity harvesting. Using your numbers, if you did one a year let's just say, instead of net income of 85k after turning it over to a PM, you'd have net income of about 160k but only paying tax on 85k of it. Then if you don't need all that money to live, take what you harvest and put it somewhere else. 

Do what wealthy people do. They don't sell income producing assets unless they can replace it with a greater earner; they borrow against the asset at low rates and have it both ways - access to cash without paying taxes and interest deductions.

[David Charles Edwards]

Quote from @JD Martin:

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.

 The logic is that you pay 7% interest, minus the tax benefit and appreciation, instead of 15-20% capital gains tax not to mention your depreciation recapture. Let's say theoretically they appreciate 3% annually in value. The tax savings is probably worth at least a point, maybe a little more. That makes your effective tax rate 2-3%, which should be offset by your rent increases. Thus, you pay no taxes, get to access the equity locked in the property, and maintain ownership of the property such that 15 years from now you can do it all over again. This is called equity harvesting. Using your numbers, if you did one a year let's just say, instead of net income of 85k after turning it over to a PM, you'd have net income of about 160k but only paying tax on 85k of it. Then if you don't need all that money to live, take what you harvest and put it somewhere else. 

Do what wealthy people do. They don't sell income producing assets unless they can replace it with a greater earner; they borrow against the asset at low rates and have it both ways - access to cash without paying taxes and interest deductions.

I'm gonna study up on equity harvesting to see if I can understand it. I can get an equity line tomorrow from my banker for 80%LTV, only closing costs would be $160 appraisal fee per unit and attorney fee but the rate is prime which is currently around 8.5%. Borrowing money going into a rate reduction environment kinda freaks me out. Especially in this electrion year. We've been debt free for a long time and our credit hovers in the mid 800's. Don't really need the money for anything particular.

[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.

[Adam Bartomeo]

@Theresa Harris What else would I do with it? Certainly, I do not need $1m of passive income to die... LOL

[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.  

[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. 

[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.

[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. 

[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.