Selling real estate counter productive to building wealth?

Question

Although I've made massive equity gains from my real estate portfolio of single family homes, in just a short period of time, it seems to me that too much of the proceeds go to transaction costs when selling. I have not sold yet and there's only one house I expect to sell just to get out of the HOA, because I know it's a long term risk. But between transaction costs, taxes, etc. it seems nearly half the proceeds go to the government or the realtors. Even with a 10-31 exchange you're still paying a lot of your leveraged gains worth in fees.

Seems to me cash out refinance is the way to go, keeping more money in my pocket, and readjusting the cash flow of existing property to fit a specific income threshold over time to minimize income taxes in retirement (Right now my taxable income is in the low to mid six figures but in retirement I plan on keeping my realized investment income low so I am free of capital gains taxes).

Plus this way I can always come back to the Seattle area and move into one of my rentals if my retirement destination (Florida) doesn't work out.

Anyways, anyone else avoid selling for this reason? If I sold my houses right now I would owe nearly 200K in taxes, fees, etc. That's a huge bite out of my gains where I took all the risk, did all the heavy lifting and everyone else still benefits as much as I do from it...The welfare mooches to the over paid realtors involved.

Jake Thomas · Answer

Refinancing is one option but isn't the goal to eventually own several paid off cash flowing rentals? Do you want debt in retirement? Will you keep refinancing every 10 years as your properties appreciate more? I can't comment on what the government takes as we ALL deal with that when selling an investment property. However, not all Realtors are overpaid, I got my license for this exact reason and there are several others on here that did the same. If paying 6% commission is to much spend the couple thousand it takes to get the license and do it yourself. You will save half of those costs going forward.

Russell Brazil · Answer

One thing to keep in mind with a cash out refinance is that when you do go to sell down the line, you are still liable for all the capital gaines taxes and depreciation recapture...and so you might end up then owning money after selling the property.

Larry Flanagan · Answer

The simple fact is equity does not convert to cash dollar for dollar.  Equity is good for over-inflating owner's egos, but thats about it.  Its best to not even think of it as yours in the first place.  On my financial statements I typically discount real estate market values by 10% to get a closer approximation of true net worth.

Jason Burns · Answer

Quit complaining and go get your license, problem solved.

Justin Fox · Answer

I think most people don't want to spend the time to advertise, show and figure out how to fill out purchase agreements and all that crap.  So they're paying a premium for their ignorance and possible time value.

I will agree though, all the realtors I've met with haven't been that informed or helpful.  One even tried to get me to purchase a HUD foreclosure as OO but just rent it anyway, that "everyone does it".  But in reality, I live in an average area with average realtors.  Not much more can be done than List, Show and Sign.  In my area it seems like a part-time mom gig that pays for the vacations.

Jack B. · Answer

Actually I plan to just pay the $500 fee that gets me the sign, an MLS listing, flyers, virtual tour, lock box, contract help, etc. Everything but a realtor. It just sucks to pay 3% buyers agent commission for an antiquated and an inflated commission model, and the 6% when two agents are involved is ridiculous, 6% of the price of the house can be 20-30% of the equity.

The same 6% commission of an era long gone, though houses have skyrocketed in value. For what? To unlock a door and fill out the same cookie cutter contract with a new address for each offer? Each of the 6 realtors I've worked with had nothing more than a high school diploma. It is in fact the lowest barrier to entry licensed profession in the country, not a ton of PhD's or MBA's working as realtors for a reason.

A few hours of training and one exam and bam, you can get paid 30K for unlocking the door to a house and filling out a cookie cutter contract. Sorry, not exactly a highly skilled profession that justifies that kind of pay, regardless of what realtors want to believe about their profession. Other professions require a tremendous amount of education and skill to make big money. It's one step above being a property manager, who once again takes a 10% cut off the top, which is almost half of your monthly profit, with little risk or skin in the game.

As a Software Engineer I can tell you that renting property is so easy it's a joke. I post an add with pictures and description, people come ask questions, I read a few basic laws, I unlock the door, I fill out a cookie cutter lease.  Not a ton of realtors or leasing agents that are going to take a 90 hour course and take one exam and build the next Facebook...So yeah, I stand by my comments. Realtors are grossly overpaid.

Zach Quick · Answer

@Jack B.  I think often times people are too harsh on realtors.  I'm not one(not a realtor either), and if you think you will get the highest and best price for the $500 then go that route.

Just like any profession there are good and bad one's. Don't think it's fair to criticize the entire profession.  You also have to remember that you are probably more educated than 95% of home sellers strictly because you are involved with rentals.

Jake Thomas · Answer

Well not all realtors are created equal, I have far more than a high school diploma but no one has ever asked me to prove my credentials to list their house. Sometimes the flat fee service works well if the seller is familiar with the process but my average clients wouldn't know where to begin with listing their house. Most of my listings are people who have no idea and need the help or they might under price their house severely. There is a place for Realtors and being one and making it my new career in the last couple months I have to stick up for them (even though lots of them are worthless).

Selling real estate counter productive to building wealth?

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