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.

[David Charles Edwards]

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. 

 My math matches yours.  Noone has shown me anything that proves the "equity harvesting" theory would work in this rate environment so I'm sort of back to 3 choices.  

1. Status quo

2.  turn over to PM

3. sell them all and move into fixed income.

I'm just not sold on the 1031 angle.  seems riskier than what I'm doing now and lots of fees.

[JD Martin]

Quote from @Bryan H.:

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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. 

Holy cow. Just because you don't understand it doesn't make it any less of a viable strategy. Nobody said there wasn't a cost to accessing the equity - even the OP understands there's a cost. What he was suggesting - selling everything and paying the capital gains - wipes out a significant part of the value of investing in RE. If his only interest was not being involved any more, that's easy - just find a good PM, pay the cost of the PM and leave everything else as is. Of course, paying the PM is going to reduce his annual income depending on the cost of the manager. What I presented - and BTW, it's not my idea but one that's used by wealthy people & corporations all over the world - allows him to access the equity he's accumulated in the properties in lump sums which more than offsets the cost of the PM, and continue to own the asset such that it can be continued in virtual perpetuity. And you are also confused, because the point doesn't have to be that the equity you access has to be redeployed at a cost exceeding that of accessing the equity - if that were the case, you would have to maintain a j-o-b or similar since accessing any of your investment assets for non-interest earning activities (such as buying groceries) would always be a loser. You don't always have to reinvest money that you've earned in your life - that's why it's called "harvesting", not "replanting". You are consuming part of the bounty. Since you're not immortal, that's probably OK. 

You are mistaking gross possible income with strategy. Of course the maximum possible income is going to be managing properties yourself that have no mortgages. The question is at what point do you want to repurchase your time? The OP is thinking of selling because he's tired of self-managing, but also wants to maximize his proceeds if he does sell rather than pay the hefty capital gains taxes and the depreciation recapture. So he can either mortgage what he's got now, let's say at the 8.5% rate, get a tax break on that interest and associated property costs such that his effective tax rate is maybe 5-6%, or he can sell everything, pay 20% capital gains tax, then put the money into some ordinary income bracket and pay 25% or more taxes on the interest in perpetuity. Would you rather pay 5% tax or 25% tax? 

[JD Martin]

Quote from @David Charles Edwards:

 My math matches yours.  Noone has shown me anything that proves the "equity harvesting" theory would work in this rate environment so I'm sort of back to 3 choices.  

1. Status quo

2.  turn over to PM

3. sell them all and move into fixed income.

I'm just not sold on the 1031 angle.  seems riskier than what I'm doing now and lots of feesI

 If you are asking/expecting that there's a way you can access $1.5 million in capital gains without any cost, the answer is no. The only question then is if you'd rather pay 20% LTCG plus ordinary income tax on your reinvested proceeds or 5% effective rate on maintaining your investments while harvesting the equity you've accumulated. BTW, it's not a "theory" but simple math and what the truly wealthy do all over the world. The higher the delta between your cost to operate and your ability to generate income, the wealthier you will be. There's no such thing as "no cost" to anything since at a base level you're going to pay taxes. Avoiding paying higher taxes than necessary is a huge part of both generating wealth and holding on to that wealth, plain and simple. 

[David Charles Edwards]

Quote from @JD Martin:

Quote from @David Charles Edwards:

 My math matches yours.  Noone has shown me anything that proves the "equity harvesting" theory would work in this rate environment so I'm sort of back to 3 choices.  

1. Status quo

2.  turn over to PM

3. sell them all and move into fixed income.

I'm just not sold on the 1031 angle.  seems riskier than what I'm doing now and lots of feesI

 If you are asking/expecting that there's a way you can access $1.5 million in capital gains without any cost, the answer is no. The only question then is if you'd rather pay 20% LTCG plus ordinary income tax on your reinvested proceeds or 5% effective rate on maintaining your investments while harvesting the equity you've accumulated. BTW, it's not a "theory" but simple math and what the truly wealthy do all over the world. The higher the delta between your cost to operate and your ability to generate income, the wealthier you will be. There's no such thing as "no cost" to anything since at a base level you're going to pay taxes. Avoiding paying higher taxes than necessary is a huge part of both generating wealth and holding on to that wealth, plain and simple. 

 Ok,  I get it a little better now.  You're not saying it's a better investment strategy.  You're just saying it has the potential to be less costly way to access the equity other than paying capital gains?  I wonder how the IRS and Obamacare would feel about my properties losing money year over year?

[JD Martin]

Quote from @David Charles Edwards:

Quote from @JD Martin:

Quote from @David Charles Edwards:

 My math matches yours.  Noone has shown me anything that proves the "equity harvesting" theory would work in this rate environment so I'm sort of back to 3 choices.  

1. Status quo

2.  turn over to PM

3. sell them all and move into fixed income.

I'm just not sold on the 1031 angle.  seems riskier than what I'm doing now and lots of feesI

 If you are asking/expecting that there's a way you can access $1.5 million in capital gains without any cost, the answer is no. The only question then is if you'd rather pay 20% LTCG plus ordinary income tax on your reinvested proceeds or 5% effective rate on maintaining your investments while harvesting the equity you've accumulated. BTW, it's not a "theory" but simple math and what the truly wealthy do all over the world. The higher the delta between your cost to operate and your ability to generate income, the wealthier you will be. There's no such thing as "no cost" to anything since at a base level you're going to pay taxes. Avoiding paying higher taxes than necessary is a huge part of both generating wealth and holding on to that wealth, plain and simple. 

 Ok,  I get it a little better now.  You're not saying it's a better investment strategy.  You're just saying it has the potential to be less costly way to access the equity other than paying capital gains?  I wonder how the IRS and Obamacare would feel about my properties losing money year over year?

Exactly. You can't do anything "cheaper" than what you're doing now, so the only question is how much you want to pay for your freedom. 

The IRS won't care. The tax code is written specifically to be maximally favorable to real estate. A large percentage of investment RE owners pay little to no tax on the money they're earning in RE. For better or worse - in other words, I make no judgement on the wisdom or strategy of Congress in structuring incentives this way - our government has decided that RE and a couple of other business strategies should be the lowest-taxed enterprises that can be attempted. If you have little to no taxable income, you will qualify for credit through the ACA. Your asset ownership isn't part of the equation. 

There are a lot of people who would consider all of this unfair, and maybe it is. But that's for someone else to figure out. In the meantime, I see nothing unseemly with working within the tax code exactly as it is written. One of the tradeoffs in the tax code with regards to RE is that it's meant to discourage disposing of assets; that's why the 1031 is in there, depreciation recapture, LTCG, etc. The tax code wants to reward those who hold on to it "forever" and penalize (or at least claw back some of the benefits) those who exit. That's just part of understanding what it is when you get into it. Sometimes it might make sense to just pay the penalties and walk away, but while $1.5 million isn't chicken feed it isn't "live off the principal till I die" either. To me, I would do it when the appreciation was so great that the tax penalty didn't matter, I was close enough to the end that I couldn't possibly outlive the principal plus anything generated, many of the tax benefits had expired (depreciation, for example), and that my heirs had no interest or intention of running the 'empire' when I was gone. 

[Amit M.]

@JD Martin if he leverages his properties how will he replace their income?

[JD Martin]

Quote from @Amit M.:

@JD Martin if he leverages his properties how will he replace their income?

 If he does one per year essentially all he is doing is getting his income forwarded from each property as 100k net not reinvested is about a 7% return not including tax benefits or additional appreciation. Assuming his property is hitting the "1%" rule, the cost to him is maybe a percent or two assuming he didn't reinvest any capital he pulled. 

[Amit M.]

I’d think one would be tempted to reinvest the $100k cash to help offset the “lost” rental income from that unit’s new mortgage. Using the $100k to pay off that mortgage would only be a temporary solution. So how does the mid to end game work with this scenario of serially taking on new debts?

[JD Martin]

Quote from @Amit M.:

I’d think one would be tempted to reinvest the $100k cash to help offset the “lost” rental income from that unit’s new mortgage. Using the $100k to pay off that mortgage would only be a temporary solution. So how does the mid to end game work with this scenario of serially taking on new debts?

It depends on your own personal goals. Let me post up a real simpleton example. Using some basic OP numbers and some assumptions:
Each property worth $125k
Gross monthly rent $1250, or $15k per year
Insurance & tax $2500 per year
Net rent $12,500 per year
Loan to value 80% ($100k each property)
PI+PM expenses = $12,500 per year, so each 15 year mortgage zeros one condo

Assuming no rent growth, no appreciation and no reinvestment of money harvested:

So you can see using these simple numbers after 15 years you've brought in the exact same amount of money, but you had an additional $1.15 million in tax deductions over that time, averaging about $77k annually in deductions which saves you about $20k per year (avg) in taxes, or $300k in 15 years. You can also see in the first 8 years the annual income was higher than with just rents alone. The OP is 55, so after 15 years not only is he 70, but he's also at the point where he now is drawing from his IRAs and SS. Now if he has no need for the money, then he can leave it where it is if he likes. Or let's say he only needs/wants $225k per year to be comfortable - well, he can take the difference and invest in whatever. The whole point is that it allows him to access the equity in the property without selling the property and taking the big hit on taxes. There's also the time value on money, and if we calculated reinvesting the money pulled from the properties the difference would be larger. You can see there's a point of leveling out - whatever the appraised value of Condo #1 is in year 16, you cash it out based on that number, and that ends up being (more or less) your new annual income, or you could reverse the strategy, let each property get paid off and end up with 15 paid off properties again. 

[Amit M.]

Yeah this approach can work with rentals in the 1% range. But I think for CA properties in the 0.5% this wouldn’t work so well. 

[JD Martin]

Quote from @Amit M.:

Yeah this approach can work with rentals in the 1% range. But I think for CA properties in the 0.5% this wouldn’t work so well. 

The strategy has to be adjusted for your own particular circumstance and interest rates relative to rent are a big factor. In a very low interest rate environment you can unlock some pretty massive amounts of equity and still cover costs. In a higher rate scenario it becomes somewhat riskier and harder to do. Not any different really from BRRRRR (I add the 5th R for "reserves"); sometimes and some houses it is difficult to make it work but you can usually make adjustments that will pencil, such as leaving some equity behind.

[David Charles Edwards]

Quote from @JD Martin:

Quote from @Amit M.:

Yeah this approach can work with rentals in the 1% range. But I think for CA properties in the 0.5% this wouldn’t work so well. 

The strategy has to be adjusted for your own particular circumstance and interest rates relative to rent are a big factor. In a very low interest rate environment you can unlock some pretty massive amounts of equity and still cover costs. In a higher rate scenario it becomes somewhat riskier and harder to do. Not any different really from BRRRRR (I add the 5th R for "reserves"); sometimes and some houses it is difficult to make it work but you can usually make adjustments that will pencil, such as leaving some equity behind.

Your “simpleton” example figures are pretty close.  I wonder if this could be intentionally structured to show little to no MAGI on our taxes.  I believe this is the figure used to calculate Obamacare rates.  I’m going to be 55 next year so I’m still looking at 10 years of Obamacare.  Our premiums are always pretty high due to our income.

[Bryan H.]

Quote from @David Charles Edwards:

Quote from @JD Martin:

Quote from @David Charles Edwards:

 My math matches yours.  Noone has shown me anything that proves the "equity harvesting" theory would work in this rate environment so I'm sort of back to 3 choices.  

1. Status quo

2.  turn over to PM

3. sell them all and move into fixed income.

I'm just not sold on the 1031 angle.  seems riskier than what I'm doing now and lots of feesI

 If you are asking/expecting that there's a way you can access $1.5 million in capital gains without any cost, the answer is no. The only question then is if you'd rather pay 20% LTCG plus ordinary income tax on your reinvested proceeds or 5% effective rate on maintaining your investments while harvesting the equity you've accumulated. BTW, it's not a "theory" but simple math and what the truly wealthy do all over the world. The higher the delta between your cost to operate and your ability to generate income, the wealthier you will be. There's no such thing as "no cost" to anything since at a base level you're going to pay taxes. Avoiding paying higher taxes than necessary is a huge part of both generating wealth and holding on to that wealth, plain and simple. 

 Ok,  I get it a little better now.  You're not saying it's a better investment strategy.  You're just saying it has the potential to be less costly way to access the equity other than paying capital gains?  I wonder how the IRS and Obamacare would feel about my properties losing money year over year?

Yet accessing the equity is not your goal! The goal is simply to be able to drink wine and fish. Hence hiring a PM is a singular independent solution. Yes, there’s a cost to that (as with any other approach) other than what you’re currently doing. 

But @JD Martin idea of taking out all the mortgages at 8.5% to pay for the PM? It doesn’t mathematically add up to me in this scenario with these numbers, but I fully admit I may STILL be missing something. And I am here to learn, because I’m facing a very similar scenario, age 57, equity tied up in all paid off properties. At current interest rates I feel stuck. 

JD yes I realize you didn’t invent the concept of equity harvesting. But despite the “harvesting” name, every example I’ve ever seen or heard about does involve earning a better total return elsewhere than the borrowing rate. 

[David Charles Edwards]

Yet accessing the equity is not your goal! The goal is simply to be able to drink wine and fish. Hence hiring a PM is a singular independent solution. Yes, there’s a cost to that (as with any other approach) other than what you’re currently doing. 

You are absolutely right in this regard!  I graduated from ECU in 1992, started a small business that has been open to the public in the same location for 32 years while slowly and methodically built this small RE retirement portfolio and with our last one set to graduate next year,  I'm ready to retire and relax.  Life is so incredibly short. 

[Bryan H.]

Quote from @David Charles Edwards:

Yet accessing the equity is not your goal! The goal is simply to be able to drink wine and fish. Hence hiring a PM is a singular independent solution. Yes, there’s a cost to that (as with any other approach) other than what you’re currently doing. 

You are absolutely right in this regard!  I graduated from ECU in 1992, started a small business that has been open to the public in the same location for 32 years while slowly and methodically built this small RE retirement portfolio and with our last one set to graduate next year,  I'm ready to retire and relax.  Life is so incredibly short. 

We may have been at the same parties! I graduated JMU in 1990 and we did many weekend road trips down to ECU to visit friends and vary our strict party routine…

[David Charles Edwards]

Quote from @Bryan H.:

Quote from @David Charles Edwards:

Yet accessing the equity is not your goal! The goal is simply to be able to drink wine and fish. Hence hiring a PM is a singular independent solution. Yes, there’s a cost to that (as with any other approach) other than what you’re currently doing. 

You are absolutely right in this regard!  I graduated from ECU in 1992, started a small business that has been open to the public in the same location for 32 years while slowly and methodically built this small RE retirement portfolio and with our last one set to graduate next year,  I'm ready to retire and relax.  Life is so incredibly short. 

We may have been at the same parties! I graduated JMU in 1990 and we did many weekend road trips down to ECU to visit friends and vary our strict party routine…

 Late 80's and early 90's was ECU's "heyday" as a party school.  After winning the #1 Party school in the country one year,  we were suspiciously absent from the list the follow year.  They printed a disclaimer at the bottom that read "Sorry ECU, we don't rank professionals".  It was a crazy time.  Random headlining bands would just show up unannounced and play at local clubs.  Halloween parties were legendary, Tuition was less than $500, and we won the peach bowl the year I graduated.  It was a glorious time and I have no idea how I survived much less graduated.  It's still a fun school but since everything in life is about money now,  the academics are exceptionally good now.  #1 medical school in the state for primary care and our dental school is top notch.  Tuition is expensive now at $25k per year.

[Steve Vaughan]

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.

We transitioned out of landlording and into being the bank on the larger buildings slowly. 

We began selling 1 to 2 smalls directly to first time buyers in 2017.  We still sell at least 1 per year this way, recently with seller financing since mortgage rates are so high. Part of our why is to give 1st time home buyers a hand up with a square deal.  All the commission savings are passed to them with concessions or price reduction. 

The larger apts we acquired by 1031-ing smalls into them essentially. You could do this, especially if you have a few that are vacant at the same time.  We ended up selling the bigs to out of area syndications on contracts/ seller-financing in '22.

I'd get with a tax pro that specializes in RE.  We didn't have to recapture depreciation all at once. My state doesn't have income tax, but verify how installment sales are treated in yours.  Probably not as harsh as you think.  

Bottom line for us was a tax-efficient exit plan takes time.  We don't acquire them all in 1 year.  Don't exit too many in 1 year either.  

I'm with you on the asset protection.  We started by having the kids cars in their own name the minute they turned 18. Don't want some attorney easily pulling your easy to see RE assets up if little Johnny gets in a wreck. Kids driving is our biggest risk. 

AP on the others was natural because we always held commercial assets in LLCs from day 1. The LLCs own no RE at all anymore (yeah!) but the contracts are through them and drip in through their banks.  Allowed us to exchange our getting very expensive umbrella insurance policy for contract service fees essentially and come out a little ahead. 

Our main risk is inflation since our contract rates are fixed.  We've laddered our balloon dates to happen every 2 to 3 years up to ten and will invest in REITs, ETFs and broad index funds as waterfalls hit and valuations appear attractive.   No annuities for us. And no rush with risk-free rates above inflation now. 

[Jay Hinrichs]

Quote from @Steve Vaughan:

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.

We transitioned out of landlording and into being the bank on the larger buildings slowly. 

We began selling 1 to 2 smalls directly to first time buyers in 2017.  We still sell at least 1 per year this way, recently with seller financing since mortgage rates are so high. Part of our why is to give 1st time home buyers a hand up with a square deal.  All the commission savings are passed to them with concessions or price reduction. 

The larger apts we acquired by 1031-ing smalls into them essentially.  We ended up selling the bigs to out of area syndications on contracts/ seller-financing in '22.

I'd get with a tax pro that specializes in RE.  We didn't have to recapture depreciation all at once. My state doesn't have income tax, but verify how installment sales are treated in yours.  Probably not as harsh as you think.  

Bottom line for us was a tax-efficient exit plan takes time.  We don't acquire them all in 1 year.  Don't exit too many in 1 year either.  

I'm with you on the asset protection.  We started by having the kids cars in their own name the minute they turned 18. Don't want some attorney easily pulling your (especially) easy to see RE assets up if little Johnny gets in a wreck.

AP on the others was natural because we always held commercial assets inLLCss from day 1. The LLCs own no RE at all anymore (yeah!) but the contracts are through them and drip in through multiple banks.  Allowed us to exchange our getting very expensive umbrella insurance policy for contract service fees essentially. 

Our main risk is inflation since our contract rates are fixed.  We've laddered our balloon dates to happen every 2 to 3 years up to ten and will invest in REITs, ETFs and broad index funds as waterfalls hit and valuations appear attractive.   No annuities for us. 

Steve you probably thought of this but in your state you can be the bank without a license and with your very deep knowledge making new origination's for investors could be a very nice play that will keep you engaged somewhat mentally and returns should be 12% easily and for you extremely safe. No tax protection you would pay fed.. Just a thought ..

[David Charles Edwards]

We began selling 1 to 2 smalls directly to first time buyers in 2017.  We still sell at least 1 per year this way, recently with seller financing since mortgage rates are so high. Part of our why is to give 1st time home buyers a hand up with a square deal.  All the commission savings are passed to them with concessions or price reduction. 

 How are you selling units wihtout a realtor and finding these 1st time homebuyers?

[Gino Barbaro]

@David Charles Edwards

Congrats on long terms! I like the fixer Jay Decima model, where he sells some of his assets on seller financing, avoiding the big cap gains hit, and creates mailbox money.

That would be a conversation with a qualified financial planner.

All the best

Gino

[Steve Vaughan]

Quote from @David Charles Edwards:

We began selling 1 to 2 smalls directly to first time buyers in 2017.  We still sell at least 1 per year this way, recently with seller financing since mortgage rates are so high. Part of our why is to give 1st time home buyers a hand up with a square deal.  All the commission savings are passed to them with concessions or price reduction. 

 How are you selling units wihtout a realtor and finding these 1st time homebuyers?

1 sell to my renters or FSBO with CL and Zillow.

Or slow exit with lease options.
 
My CL or Zillow sale posting, if  I need it, says no investors until x date like HUD does.  

[Andrew Lax]

Just my $.02... 

I am selling my 15 SFH portfolio as well ... About the same age..

Have your accountant run the cap gain numbers before you make a decision..

My properties average around 13% of sale price .. Most purchased around 100k and now worth +400k ... 

[David Charles Edwards]

Quote from @Andrew Lax:

Just my $.02... 

I am selling my 15 SFH portfolio as well ... About the same age..

Have your accountant run the cap gain numbers before you make a decision..

My properties average around 13% of sale price .. Most purchased around 100k and now worth +400k ... 

 Mine were mostly purchased between $35-$45k and now worth $125-$135 although we just had huge reevaluations from the county so they will likely go up a decent amount over the next few years.

I had a offer of $125k a unit 2 years ago but the capital gains were gonna be close to $400k calcuated by the accountant.  Seller financing saved around $80k but all the state depreciation recapture was due up front.  The net proceeds wouldn't have carried us through retirement so I turned it down.

[Amit M.]

@David Charles Edwards 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?

Besides working out the numbers, IMO a big part of your decision should be based on how desirable these assets will be to keep in the future. Otherwise I’d lean towards a simpler is better solution to minimize headaches. 

[JD Martin]

Quote from @Bryan H.:

Quote from @David Charles Edwards:

Quote from @JD Martin:

Quote from @David Charles Edwards:

 My math matches yours.  Noone has shown me anything that proves the "equity harvesting" theory would work in this rate environment so I'm sort of back to 3 choices.  

1. Status quo

2.  turn over to PM

3. sell them all and move into fixed income.

I'm just not sold on the 1031 angle.  seems riskier than what I'm doing now and lots of feesI

 If you are asking/expecting that there's a way you can access $1.5 million in capital gains without any cost, the answer is no. The only question then is if you'd rather pay 20% LTCG plus ordinary income tax on your reinvested proceeds or 5% effective rate on maintaining your investments while harvesting the equity you've accumulated. BTW, it's not a "theory" but simple math and what the truly wealthy do all over the world. The higher the delta between your cost to operate and your ability to generate income, the wealthier you will be. There's no such thing as "no cost" to anything since at a base level you're going to pay taxes. Avoiding paying higher taxes than necessary is a huge part of both generating wealth and holding on to that wealth, plain and simple. 

 Ok,  I get it a little better now.  You're not saying it's a better investment strategy.  You're just saying it has the potential to be less costly way to access the equity other than paying capital gains?  I wonder how the IRS and Obamacare would feel about my properties losing money year over year?

Yet accessing the equity is not your goal! The goal is simply to be able to drink wine and fish. Hence hiring a PM is a singular independent solution. Yes, there’s a cost to that (as with any other approach) other than what you’re currently doing. 

But @JD Martin idea of taking out all the mortgages at 8.5% to pay for the PM? It doesn’t mathematically add up to me in this scenario with these numbers, but I fully admit I may STILL be missing something. And I am here to learn, because I’m facing a very similar scenario, age 57, equity tied up in all paid off properties. At current interest rates I feel stuck. 

JD yes I realize you didn’t invent the concept of equity harvesting. But despite the “harvesting” name, every example I’ve ever seen or heard about does involve earning a better total return elsewhere than the borrowing rate. 

I'm not suggesting harvesting the equity to pay for the PM. Out of 15 paid for rentals the portfolio can easily absorb that cost. What matters more is how much income the OP wants access to and under what timeline. The original suggestion presented two problems: how to not deal with the rentals any more and how to access the cash while minimizing the costs. I'm just presenting a solution to the latter, as the former is simple. And my solution doesn't have to be the only one; as my buddy @Steve Vaughan mentions above, he acts as the bank with owner financing. That's another strategy, with it's own pros and cons. There's no perfect answer, only a range of solutions that one has to balance the positives and negatives.