Wondering if it is time to sell?

Question

I have two rentals. Both are homes that I previously lived in so I enjoy a low interest rate. One is in Ponte Vedra Beach with high HOA fees so the income is not particularly high. I have paid off 2/3 of the mortgage so most of my money is in the home. Getting encouragement from my wife to sell to pay off debts and take pressure off of family $. Two finished college, two in high school. I'm scared to death to relinquish what I feel is a key to our financial future. Only have about 100K in retirement. I am 54 years old.

Ralph R. · Answer

Warren Halstrom At 55 I moved to alaska I had a dog 3 bags of belongings and a 3 month job. I also had an underwater house that rented about 100 dollars a month below the payment. I've been here 10 years. Check my profile to see what I have today. Here's my .02 worth. You are not making any money on a 2/3 paid for rental that doesn't cash flow. You will not build true wealth on cash flow either. Sell the rental and reinvest it somehow. Equity in a house is a double edge sword. It provides security but it limits opportunity. 2/3 equity in a house is a little like stuffing money in a mattress. The longer it's there the less you can buy with it. At 55 you need to utalize every opportunity. You said something in your post that scares me. The first step is to learn to live within your means. Since you are talking about selling to help with household finances that tells me you want to sell to pay the bills. Selling in this case won't help. Get those bills paid, learn to live below your means so you can sell and reinvest your money. If you just sell it and spend the money in a couple years you will be right back where you are today. Remember if you want a different result you need to change what you are doing. This type of change takes a long time and is not easy to make. Also you need to be aware that while real estate is a very powerful way to build wealth it's also very very slow. I would recommend reading kiyosaki's book rich dad poor dad. It should help. RR

Ralph R. · Answer

@Warren Halstrom there are many thoughts on paying off rentals or using leverage (keeping a mortgage on the rental). Myself and many others on this site believe that staying leveraged is the way to go. Some say pay them off. If I own one free and clear house worth $100,000 likely nobody can take it away from me. It's very safe. BUT. I will only own that one house and only ever reap the benifits of having one property worth $100,000. If the tenant leaves I have no income. If property values go up great, I have ONE property that increases in value. If I am netting $500 dollars a month after expenses it will take 200 months or over 16 years to recover my investment. That's a 6% interest rate. Another way to look at it is the tenant is slowly paying you your own money back. You bought the house for him. My retirement fund has averaged 6% over the last 10 years and I don't have to do anything to get that. If I take the same $100,000 and put 25% down payment on 4 house I now control 4 properties worth $400,000. ( I also have $300,000 of debt) Let's say I net $150 a month each after all bills are paid. I'm now getting $600 a month. (7% interest 1% more than if it were paid for) PLUS The tenant is paying the principal down as well. So this time the tenant is buying the house for me, instead of me buying the house for him. In this scenario I now have 4 houses If a tenant leaves I still have 3 paying me rent. Vacancy hurts you way less here. Also if property values go up I now have 4 houses raising in value instead of just one. All from the same initial investment of $100,000. The trick is figuring out how much leverage you are comfortable with and what goals you have. You don't have to buy 4 propetties you could buy only 2 or 3. Safer but it pays you less. Some people like lots of leverage. Some want less. In my view (assuming you had been investing a good portion of your life) as you approach retirement you would want less leverage. In my case I didn't have a lot of houses at 55. In fact I had nothing. I have used leverage to grow my portfolio to a fair size. At 63 I'm still using leverage but am growing more conservative about it. I believe the larger more successful investors use lots of leverage but I can't prove it. It is also critical that you buy the right properties. Many, perhaps most will not work in a leveraged situation. Also remember real estate while very powerful is also a very slow way to build wealth RR

Jack Bobeck · Answer

What are your goals? Do you want to own real estate or sell and roll around in cash? Become the banker for other deals?Real Estate goes in cycles, no harm in selling now and holding cash, waiting for the next down turn, or becoming a bank for others to invest your money in properties and take 1st position. Lots of options when you have cash available. What about some homes for students in Tallahassee? Find some people looking to get out and see if you can take over their property now or get creative with financing. All depends on your goals. If you know you will need more than 100k for retirement, do you have the number you need? What are you going to do to get to that number? One more thing, if your goals are not large enough to scare you, you need new goals.

Warren Halstrom · Answer

Hi Ralph,Thank you for your response. Your advice is sound. I have been able to read several good books on the subject like the one you've mentioned and "The Richest Man in Babylon". If I did sell, should I pay off the mortgage on the other rental?