mid life property portfolio evaluation

[Mike Savage]

So after a recent call w our amazing accountant he said something that hit me hard. he said after 40 years w his clients he's observed that its easy to get into real estate investing and much harder to exit real estate investing. In our case i'm very concerned w high transaction costs if we sell. for our smallest property he did some quick calculations and came up with approx. $150k hit on a $550k sale price. Currently We own 3 doors. 2 SFH plus a condo all in Multnomah County. We have been debating selling or holding on to them for years. All 3 properties are cash flowing at a low single digit rate but have nice appreciation and 10 years left on loan. I manage all properties myself plus I'm HOA president at the 5 unit condo. Some situational pressures are a somewhat wobbly rental market due to economic conditions (Nike/Intel layoffs). we've had some vacancies in the past few years. that never happened in 20 years of renting. rent prices have not been keeping up with increase in property taxes which diminishes our cash flow. Tenant laws making it much more complicated to be a property owner in Multnomah county. I Would love to hear what others are thinking these days. Looking for an intelligent strategy for moving forward. Feeling a bit stuck.

[Greg Scott]

I would have said what your CPA said differently.  I would have said "Why would you ever want to exit real estate?"

Yes, when you exit real estate, you can face a big tax bill.  If your goal is to move from management-intensive real estate to laissez-faire real estate, there are plenty of ways to invest in real estate passively and avoid the large capital gains.

Your CPA should also have reminded you that if you die owning real estate, your heirs inherit the property at a stepped-up basis. Why do you think so many wealthy families own real estate?  It is a great estate planning tool.

[Michael Diossa]

You’re facing high transaction costs if you sell your properties and some challenges with management and market conditions. Here’s a simplified approach:

1. Calculate Costs: Determine the net gain from selling each property after costs. Consider if the returns from selling are worth it. Also is there is a way to defer Capital gains.
2. Market Conditions: Look into local rental market trends and economic outlook to decide if things might improve or get worse.
3. Management Burden: Assess if managing these properties is too much work and if it’s affecting your cash flow.Alternatives: Consider refinancing to reduce costs or a 1031 exchange to defer taxes and keep investing.

Consult with a financial advisor for personalized advice for sure.

[Mike Savage]

@Greg Scott

Thx for your quick response. We trust our accountant 1000% for past 27 years. we have in fact spoken many times about step up and that has been my strategy for building generational wealth. I think its terrific but here are some additional details. Our advisor thinks we should exit soon as we have some major cap ex costs coming up. (New roof, paint, etc) and proceeds even if we paid capital gains taxes could pay down other

properties debt including adjustable HELOCS which would double our annual income but of course we would lose a door. 1 property is currently vacant and I anticipate at least $10k to refresh including new gutters. New interior paint. New carpet and assorted repairs.

we are hoping to spend more time in Asia the next two years and i am not impressed w PM here due to high costs and low quality considerations. Also we are aging and not feeling great physically working on houses. We would love more passive housing like a multi or part ownership but seems everyone is looking for those type of investments. Maybe we can find a mentor or local agent who specializes in our scenario.

[Dave Foster]

@Mike Savage. As much as we all would love a consistent real estate market it unfortunately doesn't work like that. Municipally law, rents, and appreciation all factor in to the things that make up a market.  You've had a great run with your appreciation to date.  But it sounds like there are other factors making you rethink your long term goals with these properties.  That's fine.  Nothing wrong with being tired of toilets trash and tenants as they say.  

But you can shape your portfolio to become more passive or cash flow efficient or less exposed to local laws without having to pay the high costs of exit.  1031 exchanges allow you to move from any type of real estate anywhere in the country to any other type anywhere in the country.  If you want better returns and better local laws then look at some of the more landlord friendly markets in the midwest.  1031 into a vacation rental you can get some use of yourself.  Or move into some of the more passive ways of real estate investing.  The 1031 allows you do that and keep the tax indefinitely deferred.  

And don't forget the other component of real estate investing you lose in an exit - depreciation.  You've identified the other components of appreciation, cash flow, and amortization of the loans.  Depreciation also is a huge benefit that you can keep going as long as you are investing in real estate.

There's always ways to make your life easier without paying those pesky taxes.

[Gino Barbaro]

@Mike Savage

It's harder to exit after so many years because when you've done it for a while it can become very lucrative, and you can build a nice cash flowing business. If I want to exit tomorrow, I package up my portfolio and sell. I'm going to get slammed with a nice tax bill, but I will also make a ton of money.

Every time you look to buy an asset, you should have an exit, whether it is a sale or a flip or a refi. I would look into the market and see if it is conducive to owning long term. I'm not a fan of markets where laws are difficult for landlords. The business is hard enough without difficult laws.

I would sell a property if I had a better opportunity to roll the equity into, or if I saw some type of shift in the market that I did not like.

[Ashish Acharya]

@Mike Savage
If selling everything feels too costly, a staggered exit strategy (selling financing) could help reduce the tax impact.

You're at a key point with your real estate portfolio, considering market challenges and rising costs. One option is to refinance to improve cash flow while holding on to the properties and benefiting from long-term appreciation. You could also consider selling one property, like the condo, to reduce management burdens and free up capital for reinvestment or debt reduction. Exploring more landlord-friendly markets or outsourcing to a property manager could ease your load.

[Mike Savage]

Quote from @Ashish Acharya:

@Mike Savage
If selling everything feels too costly, a staggered exit strategy (selling financing) could help reduce the tax impact.

You're at a key point with your real estate portfolio, considering market challenges and rising costs. One option is to refinance to improve cash flow while holding on to the properties and benefiting from long-term appreciation. You could also consider selling one property, like the condo, to reduce management burdens and free up capital for reinvestment or debt reduction. Exploring more landlord-friendly markets or outsourcing to a property manager could ease your load.

ok. thank you all for your response. some additional details below.  we have a primary fixed loan plus an adjustable heloc. I anticipate rent $3000/month. our advisor suggests selling one of our 3 rentals to pay off high interest adjustable debt which will free up cash flow due to our high interest adjustable HELOCs  he also thinks it may be ok to sell even if we pay capital gains which I mentioned before estimated transaction costs close to $150k OUCH> which would leave us with a approx net of $350k. Advisor has calculated we are currently only getting low single digit yield due to high taxes, adjustable rates and we will need a roof in 2-5 years.  House is approx 1300 sq. ft.Note that we've owned the property for 24 years and we lived in the house for the first 4 years. My legacy plan has been to leave all rental property to heir after death so they can take advantage of step up in cost basis. just not sure we can or want to deal with the headaches for what we hope is another 30 yrs. above ground!  FWIW i manage our 3 rentals plus our primary myself and i'm average skill.

property 01

CONVENTIONAL MORTGAGE

5.375 fixed

original loan amount $ 173,750.00

monthly payment $ 972.95

balance $ 76,047.67

maturity date APR. 2041

estimated equity $ 509,380.61

estimated maximum sale price$ 615,000.00

prop taxes $ 6,741.79

purchased feb. 2004 refinanced MAR. 2011

property 01 Portland Oregon

HELOC

current rate  8.5

original 4.0

original amount $ 40,000.00

payment $ 211.75

balance $ 29,571.72

maturity  SEP. 2034

[Mike Savage]

Quote from @Dave Foster:

@Mike Savage. As much as we all would love a consistent real estate market it unfortunately doesn't work like that. Municipally law, rents, and appreciation all factor in to the things that make up a market.  You've had a great run with your appreciation to date.  But it sounds like there are other factors making you rethink your long term goals with these properties.  That's fine.  Nothing wrong with being tired of toilets trash and tenants as they say.  

But you can shape your portfolio to become more passive or cash flow efficient or less exposed to local laws without having to pay the high costs of exit.  1031 exchanges allow you to move from any type of real estate anywhere in the country to any other type anywhere in the country.  If you want better returns and better local laws then look at some of the more landlord friendly markets in the midwest.  1031 into a vacation rental you can get some use of yourself.  Or move into some of the more passive ways of real estate investing.  The 1031 allows you do that and keep the tax indefinitely deferred.  

And don't forget the other component of real estate investing you lose in an exit - depreciation.  You've identified the other components of appreciation, cash flow, and amortization of the loans.  Depreciation also is a huge benefit that you can keep going as long as you are investing in real estate.

There's always ways to make your life easier without paying those pesky taxes.

hi Dave, yes our accountant has indeed mentioned a possible 1031 into a vacation type property and said we could even use it for up to 2 weeks a year and then write off the travel costs to get there as part of yearly maintenance in IRS code.  i guess the question is can we still get or exceed the approx $10k /year cash flow after expenses that our Portland rental is bringing in plus continue nice appreciation.  some concerns are  high insurance costs if it was a beach property and resale/vacancy concern if in a remote area.  But honestly we want to spend more time traveling out of the country the next 2 years.  As far as we know we cannot 1031 into another country?

one other idea i've been thinking about is selling the Portland rental and 1031 into a property near my mom on the east coast who is looking for a single level home.  She would then rent it from us as she could easily rent out her existing house which would more than cover the rent.   

[Mike Savage]

Quote from @Greg Scott:

I would have said what your CPA said differently.  I would have said "Why would you ever want to exit real estate?"

Yes, when you exit real estate, you can face a big tax bill.  If your goal is to move from management-intensive real estate to laissez-faire real estate, there are plenty of ways to invest in real estate passively and avoid the large capital gains.

Your CPA should also have reminded you that if you die owning real estate, your heirs inherit the property at a stepped-up basis. Why do you think so many wealthy families own real estate?  It is a great estate planning tool.

 so what suggestions might you have for more passive investments?  we are looking to spend more time overseas so 1031 into some kind of managed property ?

[Greg Scott]

Quote from @Mike Savage:

 so what suggestions might you have for more passive investments?  we are looking to spend more time overseas so 1031 into some kind of managed property ?

 Single family or 100+ unit apartments with professional management, Triple net leases, syndications.  There are probably more.

[Dave Foster]

@Mike Savage, Two things hit me from your reply to my post.

1. The idea of moving to a vacation property and wondering about cash flow to replace your OR rental.

2. Your desire to travel out of country.

You cannot do a 1031 exchange from the US to non-US property. But a vacation property would work. replacing $10K a year of Net income (around a 2% ROI) is not going to be hard at all. But there is that item #2!!!

The problem I see my clients get into with vacation rental purchases when the intent is to get something they can enjoy as well is that many times they get tired of going to that one spot.  Or end up just not going to that one spot.  And then they lose that huge benefit of free tax writeoff vacations.

Since you want to travel out of the country I'd maybe recommend a more passive approach like @Greg Scott said. There aren't a lot of syndications out there that would accept your level of investment in a 1031 exchange. And for a NNN commercial it's on the low side as well (not to mention that lending rates have killed the commercial market when heavy leverage is needed).

Delaware Statutory Trusts are probably going to be your best bet given your specific parameters. They allow you to fully defer all the tax in a 1031 exchange. The normal return would generally be quite a bit more than you're making now. You still get the IRR components of continuing amortization of your loan, depreciation, and appreciation of the DST asset. But most important, they are completely passive. And do not tie you to a single domestic location for your vacations. You can travel anywhere in the world using cash flow from that asset.

[Michael Smythe]

@Mike Savage only you can make the decision that is best for you, but here are some thought-provoking (hopefully) questions:

How many rentals does your Accountant own?

What is your Accountant basing their advice on?
-Have learned the hard way to NOT blindly trust ANY professional! Even they, "don't know what they don't know"!

You've got assets you want to pass on to heirs, but do you have a business to pass on to them?
Assets alone don't do much for generational wealth - how many heirs just sell the assets they inherit?

Why haven't you built a business?

Yes, no PMC can manage your properties like you, but why do they have to?

Compared to your last 3 years of average NET portfolio income, what percentage would be acceptable to you if a PMC handled +90% of the business?
- all you would do is "manage the manager", which you could do from anywhere you have internet access.

[Natalie Bender]

Hello @Mike Savage, I would agree with Dave Foster. A portfolio of DSTs may be a good fit in your situation. One thing to keep in mind, DSTs are typically held for 7-10 years, after which you can 1031 exchange into a vacation rental, more DSTs, any like kind property or cash out. You have options. Here is a blog post that may speak to you. 

Shoot me an email if you want to talk more. I also lived in Asia for 5 years, managed my CA and TX properties from there (not easy). If you haven't been there yet you are in for a real treat!!! 
 

https://www.biggerpockets.com/member-blogs/7993/48729-are-your-rental-properties-weighing-you-down

[John Morgan]

I’d 1031 them into something more passive. Keep your RE in the family and let your kids inherit it all tax free.

[Mike Savage]

sorry what are DST's?

[Natalie Bender]

DSTs (Delaware Statutory Trusts) are as close to passive real estate investing as you can get while still holding real estate and having most of the same tax benefits.

DSTs function as investment vehicles that hold ownership of income-generating properties, granting investors fractional ownership in various types of commercial real estate such as apartments, self-storage facilities, build-for-rent properties, and NNN (triple net lease) properties. Opting for a DST allows investors to spread their investments across multiple high-quality properties, benefiting from the advantages of a 1031 exchange to defer capital gains tax. Additionally, this structure eliminates the need for active management, as the real estate assets within the DST are managed by the sponsoring entity.

As an investor your level of activity would include collecting monthly distributions, receiving  quarterly reports on investment, file taxes annually and 1031 exchange your investment every 7-10 years (sometimes shorter depending on the market). DSTs are considered real estate securities and are offered to accredited investors only.

Due to the passive nature DSTs are not meant for every investor and it is important to seek education to see if a DST is best suitable for you. Shoot me an email or DM and I can go into more details.

[Lee Singleton]

@Natalie Bender great explanation of DSTs. 

Mike,

If you want to move from actively investing in real estate and defer the tax consequences, looking at DSTs is an excellent option. Your accountant might be interested in learning more about DSTs, too.  

[John McKee]

forget the DST's and pay the taxes. Put your money into mortgage notes earning 10-14%. Your increased yields will offset your taxes in a short amount of time. A DST traps you for a long time and you have to pay commissions and fees on lousy yields of 5%. Maybe you keep the condo since it's the easiest one to manage for your heirs, but then sell off the other two.

[Denver McClure]

Not going to dive too much further into DSTs, but I will say they are a great tool if used properly.

Work with an Investment Advisor over a broker/dealer if you are interested. B/Ds are usually paid via commissions for selling the DST, but if you go through an RIA, most DST providers pass along a "gross-up bonus" directly to the investor since they no longer have to pay the B/D a commission. We typically see these bonuses between 5.5-6.5% of your initial equity investment. Plus an advisor must act as a fiduciary to you, and aid in the discovery and due diligence to help put the right options in front of you.

[Natalie Bender]

BDs and Registered Reps are also registered with FINRA and must act as a fiduciary to their clients. We also complete due diligence and provide education to clients based upon their specific investment objectives. 

[Mike Savage]

Quote from @Lee Singleton:

@Natalie Bender great explanation of DSTs. 

Mike,

If you want to move from actively investing in real estate and defer the tax consequences, looking at DSTs is an excellent option. Your accountant might be interested in learning more about DSTs, too.  

thx for the heads up. I will talk to both our accountant and advisor next week. Both are qualified but not heavily investing in income properties. FTR. we bought our starter home and kept it then traded up. We've now done that 3 times and also bought a small live/work condo as well. I had planned to be a buy hold forever investor but reevaluating our plan. We would like to go and live over seas again and not crzy about hiring PM. so DST might be interesting option for next 2-5 years we may be away.

[Mike Savage]

Quote from @Ashish Acharya:

@Mike Savage
If selling everything feels too costly, a staggered exit strategy (selling financing) could help reduce the tax impact.

You're at a key point with your real estate portfolio, considering market challenges and rising costs. One option is to refinance to improve cash flow while holding on to the properties and benefiting from long-term appreciation. You could also consider selling one property, like the condo, to reduce management burdens and free up capital for reinvestment or debt reduction. Exploring more landlord-friendly markets or outsourcing to a property manager could ease your load.

our advisor would like us to sell any one of our three rentals but especially the lowest performing cash flow property.  currently low single digit.  then take those proceeds and pay off loan debt especially our adjustable HELOCS that have been skyrocketing.  He thinks that if we sold a property even if we had to pay top capital gains state and federal that it would be worth it as it would double our income due to improved cash flow rather than the majority of our loan payment going towards interest.  he has been advising most of his Portland clients to sell due to huge property tax increases and headwinds for property owners due to the increase in tenants rights ie. having to pay a tenant to vacate even if you are moving back into property.  I am really not exited about paying capital gains at all.  wondering if there is a time where we just give in or is that the wrong mindset.  

[Mike Savage]

Quote from @Denver McClure:

Not going to dive too much further into DSTs, but I will say they are a great tool if used properly.

Work with an Investment Advisor over a broker/dealer if you are interested. B/Ds are usually paid via commissions for selling the DST, but if you go through an RIA, most DST providers pass along a "gross-up bonus" directly to the investor since they no longer have to pay the B/D a commission. We typically see these bonuses between 5.5-6.5% of your initial equity investment. Plus an advisor must act as a fiduciary to you, and aid in the discovery and due diligence to help put the right options in front of you.

 very interesting.  will read up and educate myself.  thank you.

[Mike Savage]

Quote from @John McKee:

forget the DST's and pay the taxes. Put your money into mortgage notes earning 10-14%. Your increased yields will offset your taxes in a short amount of time. A DST traps you for a long time and you have to pay commissions and fees on lousy yields of 5%. Maybe you keep the condo since it's the easiest one to manage for your heirs, but then sell off the other two.

 very interesting.  i know nothing about notes and wonder how long the increased yields would take to offset capital gains taxes.  let's pretend it's an estimated $150k in transaction costs (state, federal, repairs, agents fees ..from our accountant) to sell our 1st prop worth between $550-$600k  our accountant told us that would likely take a very long time to recoup and honestly I don't know where i would put the proceeds to maximize returns.  Bottom line is we have moved from an appreciation model that we did very well over past 20 years to a cash flow model.  our appreciation was great when we had w2 income but now we are looking for cash flow income and not as concerned w appreciation.  in fact the market is a bit down in 2024 but i know better to worry about that for long.  quality properties here are still selling quickly and for over asking if you market and stage them properly.  we are in great school district w low crime and highly desirable mid century aesthetic.  i also if rates drop a bit i think buyers will be coming back around.  and worse case is if we don't get a number we like we would continue to rent the properties.  phew.

[Mike Savage]

Quote from @Natalie Bender:

Hello @Mike Savage, I would agree with Dave Foster. A portfolio of DSTs may be a good fit in your situation. One thing to keep in mind, DSTs are typically held for 7-10 years, after which you can 1031 exchange into a vacation rental, more DSTs, any like kind property or cash out. You have options. Here is a blog post that may speak to you. 

Shoot me an email if you want to talk more. I also lived in Asia for 5 years, managed my CA and TX properties from there (not easy). If you haven't been there yet you are in for a real treat!!! 
 

https://www.biggerpockets.com/member-blogs/7993/48729-are-your-rental-properties-weighing-you-down

interesting and timely article. I will reach out to see if any local Portland investors have experience in DST's