Advice on how to proceed

Santa Barbara, California
General Real Estate Investing
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Advice on how to proceed

Derek Hagglof
Member since 2023 · 3 posts · 0 votes

Advice on retirement with rentals

Ok, this could be kind of long...

I'm trying to scale back a bit and simplify my life. I'm 53 and have a few properties but need a little help deciding what's next. I currently own and run a wedding venue and vacation rental on the central coast of California. It's a historic property on 10 acres that we've owned for about 10 years. Since buying it in 2014 we have put a significant amount of work into it and we have gained quite a bit of equity with the market going up. We're thinking of possibly selling soon as our son will be off to college next year. My question is this: Should we sell and pay the taxes (probably about $900k according to my CPA) and take the rest and pay off 2 other properties and live off the rents/ invest the rest in index funds or something similar. I realize its a huge tax hit but I'm not super excited about owning more properties with maintenance, Etc. I’ve been very hands on and can do most repairs and maintenance but thinking about making it easier moving forward. I’d like to keep the other 2 rental properties.

Here's the numbers, maybe you guys can give me some good advice.

Property 1: Wedding venue/ Vacation rental. we also live onsite in a small cottage. Property is worth probably $4.5-5 million. Mortgage is $700k. Interest rate is 5.75% fixed

Property 2: 2 single family homes on 1 lot in Hawaii. Monthly rents are $6100 combined. Mortgage is $409k @ 4.75% fixed. Property value is approx. $1.4 mil.

Property 3: 2 cabins on 1 lot in Lake Tahoe. Monthly rents are approx $4500 combined. Rents vary because 1 house is a vacation rental. Mortgage is $430k @ 3.125% fixed. Property value is approx. $900k

If we sell, we would need to buy another primary residence. I like the idea of selling the wedding venue, paying the tax and walking away with a chunk of money to pay off the other rentals. If we sell for $4.5 mil. after broker fees and the mortgage we could walk away with about $3.5 mil. If we pay the tax (approx $900k) we then have $2.65 mil. We could then pay off the two rental property mortgages ($839k) and then have $1.8 mil. If we bought a new primary with cash at say $1 mil we could still have money to put into index funds or something.

I realize it's leaving money on the table by not leveraging all of the sale into more rentals but being in California it's pretty tough to pencil out rental returns to have good cash flow. I could go out of state to buy but not really excited about that. It also doesn't really simplify my life if I exchange into more rentals. Any thoughts appreciated

Thanks..

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  • Joe HomsBusiness Member
    Flipper · Mission Viejo, CA · Member since 2014 · 2k+ posts · 1k+ votes
    2y

    @Derek Hagglof don't sell anything.  Borrow money on Property #1 (tax free) and use that to buy another home for yourself if you wish to slow down.  Hire a property manager for all your properties and let the renters pay off your mortgages.  You may never get the opportunity to get those loans and those interest rates ever again.  The minute you pay off those mortgages then your equity sits there earning 0% a year.  Why would you do that?  Keep all your tax write offs.

    Good Investing...

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  • Derek Hagglof
    OP
    Member since 2023 · 3 posts · 0 votes
    2y

    Thanks Joe! Not a bad idea, I could look for a property manager but most likely it would be a live on site type of thing. There’s a lot of moving parts here and quite a bit of maintenance. Insurance has gotten crazy with all the fires in California. Our policy just quadrupled. 
    thanks for responding!

    Derek

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  • Bradley BuxtonBusiness Member
    Real Estate Agent · NV · Member since 2023 · 1k+ posts · 719 votes
    2y

    @Derek Hagglof

    How much income does the wedding venue produce? Knowing the monthly income and expenses and ease of management might help you decide on what to sell. Depending on your goals, keeping the wedding venue and continually letting it appreciate while increasing the cash flow of that property if you moved and rented the cottage. From an outsider's perspective, the Hawaii property seems like the hardest to manage mainly because of the distance, and might be the best one to sell but without seeing the numbers it's hard to tell. The Tahoe house appears to be the best cash-flowing. I'm in the Lake Tahoe Reno market and we work with CA residents looking to 1031 out of state and still be close by many of our clients would love to have that type of property in Tahoe. I was living in SLO for a long time and made the move to Tahoe, Nevada mainly for the tax benefits. No state income tax and low property taxes and landlord friendly. Might be valuable to save on taxes if you can move. 


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  • Derek Hagglof
    OP
    Member since 2023 · 3 posts · 0 votes
    2y

    So, if I pay off the rentals and I’m collecting all the rent with no debt service isn’t that equity working for me? 

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  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    2y

    I think debt is good if your goal is to scale and grow your wealth.

    if you will own your personal residence and as a result just be responsible for real estate taxes, insurance and upkeep, your living costs will potentially be low and you don't need much leverage or a bunch of properties to support your lifestyle.

    If I were you, I would sell the wedding business since it likely is time comsuming since its an actual business.

    I would not pay off the two other properties since the rate is low. If you decide to pay one off, pay off the 4.75% rate one. I would not pay off the 3.125% since you can likely make more money than that in the market.

    [email protected]917-280-8544
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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    2y

    @Derek Hagglof,  The lost income from a $900K tax hit immediately will haunt you for years in opportunity cost.  Simply by itself $900K paid to the govt means an annual loss of $50K - $70k that could be going to your pocket each year - even if using a passive 1031 model.

    While paying off the debt on your other properties might seem like it would generate more income for you it's kind of a red herring. Because when you pay the debt off you are losing the amortization of those loans by your tenants. Your ROI is actually decreased!!!

    A good compromise would be to 1031 into a passive 1031 complaint product (whether bricks and mortar or something like a DST). but manage the debt so it becomes non-recourse to you. Or is concentrated on fewer properties with some properties becoming debt-free.

    Paying off debt hurts your financial performance but lessens risk.

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