Continue to hold or are there better options?

Question

Hi there,I’ve been reading various posts on this site and like the honest opinions that exist here. Too many real estate sites are fluff with no numbers or sense to back up opinions. I’m looking for some strategic advice but I don’t know anyone locally that thinks like the people on this board.I have four houses, three rentals plus primary. 3/2 1050sq’ owe $75k worth $240k rent is $1025 improved rent would be $1200 3/2.5 1090sq’ owe $80k worth $270k rent is $1025 improved rent would be $1450 3/2.5 2400sq’ owe $190k worth $455k rent is $1950 5/3 3500sq’ owe $160 worth $550k primaryI live in the west and values are sliding so numbers are guesses but I tend to be conservative.If I had to guess our 'real skin' in all this is probably about $25k. It was all bought with a HELOC on our original house that we’ve since sold and paid off that HELOC with the appreciation during the crazy run up around 2004/5 and moved along. We never bought outside our current market because I didn’t like buying what I didn’t know and heard too many stories of long distance problems with bad property managers. Heck, I’ve had bad experiences here with property managers.I live in a market where buying rentals no longer makes any sense. You have to put virtually half down in order for anything to pencil. My rents are a little low for the market but the houses have long time tenants and dated interiors. If any move out I’ll need to make some improvements to get market rates, about $4500 per unit for the cheaper two. The larger rental is classic dated house in fabulous neighborhood. Most surrounding houses are worth $200k more if brought up to date. My wife and I started buying houses with no real strategy. I stopped buying in 2004 when rentals no longer made sense here. When the market turned down we didn’t have the cash to get into the market and as everyone knows, lenders weren’t lending. We have the cash to pay off one of the cheaper rentals. We could sell the primary and move to the larger rental but I’m not sure the long term consequences if we move out and want to 1031 that house at some point in the future. It is already a 1031 from another house we had in a sketchy area.Even if improved the return on the total equity for the cheaper two houses seems too low. Do you think the improved rent is a good return on the values or could do better in a different market (again long distance makes me nervous)? Not sure where the values will be in a year given the current trends. I’m pessimistic so probably not the greatest real estate investor. At this point we’ve owned them so long there is too much depreciation and gain to just sell. I know that you don’t avoid profit just to not pay taxes but I think the taxes are more than I can stomach.Looking back I don’t know if there’s a clear question here. I retire in less than two years. I wish the properties could be more passive than they are ( I manage them due to past poor experience with property manager). I see some big expenses on the horizon. Roofs, siding and a large deck needing repairs on the bigger rental. We are not real estate pros, just two folks that ended up with some houses. Your thoughts are greatly appreciated. Thanks.

Dave Foster · Answer

@Perry R., I'm seeing all the signs saying "get out of Dodge". Your area is softening. Expenses looming, retirement (and the need for certainty) approaching, and you're having to actively manage. Probably the biggest red flag is that even with improved rents I'm only seeing a gross noi of 5.4% on asset value and after allowances, expenses, and costs to upgrade it's probably well south of that.I like your thinking. It's time to 1031 into less debt, higher cash return and either a different class/location more passive property. Appreciation is a fun play but it's a "someday play". And not usually a good one for retirement. Some of your options carry a lot of validity:1. paying off one of the rentals before 1031ing it would let you buy your next asset in cash which takes away leverage risk in retirement.2. The idea of moving into one of the rentals is also not a bad one. Although you will not be able to completely eliminate the tax. But you will mitigate it and of course it will stay deferred as long as you own it.One big question would be, "Where do you want to retire". Put on your dreaming cap. A cobbled together option I can imagine for you (and one I've used for myself) if you're wanting to exit the game would be to 1. Sell the primary and pay off some or all of the rentals. You'd be left with $50K or more ish to look at another primary and the sale would be tax free.2. Once the rentals are free and clear then 1031 them into passive cash flowing 1031 compliant properties - either properties you buy with good management in place, or full or fractional NNN properties with strong commercial leases in place guaranteed by national tenants. You should be able to turn the free cash and deferred tax into $60 - $80K net of all expenses annually without banking on the back end and still getting depreciation the rest of the way. 3. A variation is to 1031 one of the properties into a really nice investment property that will become your primary later. By 1031ing it first you get out of those potential headaches of repairs and you can buy your future retirement home wherever you want it to be and whatever you want it to be. You just need to use it for rental for a year or two which would coincide perfectly with your retirement timeline.

Nathan Gesner · Answer

There are a lot of factors to consider. I would simply say this: everything has a season. If you feel the market is wrong for investing, don't invest. Continue to save and posture for the next opportunity. I personally feel the market has peaked and things are about to change in the next year or two. You mention some big expenses coming up soon so maybe you should focus on saving up for those. If a great opportunity comes along, you'll have cash to jump on it. If not, work on improving what you've got.