All Forum Posts by: David Charles Edwards

Quote from @JD Martin:

Quote from @David Charles Edwards:

Quote from @JD Martin:

Quote from @David Charles Edwards:

Quote from @Benjamin Aaker:

Are you possibly undervaluing your properties? You are in North Carolina and have 15 worth 100k each? That seems pretty low, though I don't know the market.
I know you said all in or all out, but what about getting a full service property manager so you don't have all the headaches of being a landlord? This would satisfy your annuity need, though would be variable of course.

 Retail on these condos is around $125k ea.  I'm looking at roughly $100k net after commissions and capital gains.

We may turn over to a property management company but it costs 8% off the double and probably double the repair budget since you use their guys.  Here are the options we've considered.

1.  Keep until we die and let the kids inherit on a step up basis. headache but built in inflation protection, property appreciation, and tax benefits.  This is the smart thing to do but I've been doing this 25 years and I'm tired of worrying about this crap when I'm off shore trying to catch flounder. 

2.  Keep the units but turn over to a management company 8% off the top plus roughly double my normal repair budget.  relieves some of the headache.  reduces net income to roughly the same as a lifetime annuity.

3.  Sell them all over a period of 4-6 years. Put the money into fixed income vehicles of various sorts and walk away and spend more time drinking wine and catching fish.  Much less inflation protection. Big capital gains expense

4.  seller finance I explored this in depth a couple years ago but it didn't really save that much in capital gains and all the state taxes are due in year one and all the depreciation recapture is due up front. not enough of an upside.

5.  Primary residence shell game this might work for the first few units but would take too long for all of them and the hassle of changing addresses every two years to fake my primary residence for the IRS sounds like a hassle.

6. Borrow against one property every year on a 15 year note and put them all under property management, or borrow against all 15 all at once. Aim to cash in 80% LTV on each property every year, and in 15 years you will have the first one free and clear again and can do it all over. Just make sure the rents cover the PM+Note+Maint/cap expenses. Then you get to access all your capital, pay no capital gains, and still keep the properties as a hedge against inflation. 

I don’t understand your logic here.  They are all paid for already.

 The logic is that you pay 7% interest, minus the tax benefit and appreciation, instead of 15-20% capital gains tax not to mention your depreciation recapture. Let's say theoretically they appreciate 3% annually in value. The tax savings is probably worth at least a point, maybe a little more. That makes your effective tax rate 2-3%, which should be offset by your rent increases. Thus, you pay no taxes, get to access the equity locked in the property, and maintain ownership of the property such that 15 years from now you can do it all over again. This is called equity harvesting. Using your numbers, if you did one a year let's just say, instead of net income of 85k after turning it over to a PM, you'd have net income of about 160k but only paying tax on 85k of it. Then if you don't need all that money to live, take what you harvest and put it somewhere else. 

Do what wealthy people do. They don't sell income producing assets unless they can replace it with a greater earner; they borrow against the asset at low rates and have it both ways - access to cash without paying taxes and interest deductions.

I'm gonna study up on equity harvesting to see if I can understand it. I can get an equity line tomorrow from my banker for 80%LTV, only closing costs would be $160 appraisal fee per unit and attorney fee but the rate is prime which is currently around 8.5%. Borrowing money going into a rate reduction environment kinda freaks me out. Especially in this electrion year. We've been debt free for a long time and our credit hovers in the mid 800's. Don't really need the money for anything particular.

Quote from @Theresa Harris:

Congrats on early retirement. I would slowly sell the properties off.  Assuming they are all similarly priced, you'd be selling them at about $100K each.  How much appreciation have they seen?  Look at the capital gains (ie profit after expenses of buying and selling) and as your income will go down after you retire, how many can you sell at a time without jumping up a tax bracket?  then start selling the ones that have upcoming major repairs in the next 5-10 years or the ones that are a biggest pain to deal with/make the least amount of money from rent.

I'm looking at capital gain of 60-75k per unit.  Of course much of that will be depreciation recapture.  My estimates are that I would NET $100k per property after taxes and commissions.

My income will basically stay the same.  The idea being rental income would be replaced by annuity income. I would try to limit the number of sales in a given year to minimize capital gains and depreciation recapture.  Here is some basic projections.

$112k is current passive NET income off all 15 properties
$85k  projected income if I turn over to a management company (8% off the top plus doulbe repair budget)
$96k  projected income from 1.5 million in lifetime annuities
$87k  projected income from 1.5 million in lifetime annuities with spouse added

All the units are at the same complex but were acquired over 20 years so i would cherry pick the newest units first since deprecation recapture is taxed at a higher rate than capital gains.  

Quote from @JD Martin:

Quote from @David Charles Edwards:

Quote from @Benjamin Aaker:

Are you possibly undervaluing your properties? You are in North Carolina and have 15 worth 100k each? That seems pretty low, though I don't know the market.
I know you said all in or all out, but what about getting a full service property manager so you don't have all the headaches of being a landlord? This would satisfy your annuity need, though would be variable of course.

 Retail on these condos is around $125k ea.  I'm looking at roughly $100k net after commissions and capital gains.

We may turn over to a property management company but it costs 8% off the double and probably double the repair budget since you use their guys.  Here are the options we've considered.

1.  Keep until we die and let the kids inherit on a step up basis. headache but built in inflation protection, property appreciation, and tax benefits.  This is the smart thing to do but I've been doing this 25 years and I'm tired of worrying about this crap when I'm off shore trying to catch flounder. 

2.  Keep the units but turn over to a management company 8% off the top plus roughly double my normal repair budget.  relieves some of the headache.  reduces net income to roughly the same as a lifetime annuity.

3.  Sell them all over a period of 4-6 years. Put the money into fixed income vehicles of various sorts and walk away and spend more time drinking wine and catching fish.  Much less inflation protection. Big capital gains expense

4.  seller finance I explored this in depth a couple years ago but it didn't really save that much in capital gains and all the state taxes are due in year one and all the depreciation recapture is due up front. not enough of an upside.

5.  Primary residence shell game this might work for the first few units but would take too long for all of them and the hassle of changing addresses every two years to fake my primary residence for the IRS sounds like a hassle.

6. Borrow against one property every year on a 15 year note and put them all under property management, or borrow against all 15 all at once. Aim to cash in 80% LTV on each property every year, and in 15 years you will have the first one free and clear again and can do it all over. Just make sure the rents cover the PM+Note+Maint/cap expenses. Then you get to access all your capital, pay no capital gains, and still keep the properties as a hedge against inflation. 

I don’t understand your logic here.  They are all paid for already.

Quote from @Benjamin Aaker:

Are you possibly undervaluing your properties? You are in North Carolina and have 15 worth 100k each? That seems pretty low, though I don't know the market.
I know you said all in or all out, but what about getting a full service property manager so you don't have all the headaches of being a landlord? This would satisfy your annuity need, though would be variable of course.

 Retail on these condos is around $125k ea.  I'm looking at roughly $100k net after commissions and capital gains.

We may turn over to a property management company but it costs 8% off the double and probably double the repair budget since you use their guys.  Here are the options we've considered.

1.  Keep until we die and let the kids inherit on a step up basis. headache but built in inflation protection, property appreciation, and tax benefits.  This is the smart thing to do but I've been doing this 25 years and I'm tired of worrying about this crap when I'm off shore trying to catch flounder. 

2.  Keep the units but turn over to a management company 8% off the top plus roughly double my normal repair budget.  relieves some of the headache.  reduces net income to roughly the same as a lifetime annuity.

3.  Sell them all over a period of 4-6 years. Put the money into fixed income vehicles of various sorts and walk away and spend more time drinking wine and catching fish.  Much less inflation protection. Big capital gains expense

4.  seller finance I explored this in depth a couple years ago but it didn't really save that much in capital gains and all the state taxes are due in year one and all the depreciation recapture is due up front. not enough of an upside.

5.  Primary residence shell game this might work for the first few units but would take too long for all of them and the hassle of changing addresses every two years to fake my primary residence for the IRS sounds like a hassle.

Quote from @Karen Chow:

What about selling them all as contract for deeds? Then you can collect monthly checks and not deal with clogged toilets.

 I'm not familiar with "contract for deeds" or how that would be different from just turning over to a management company?

Quote from @Sergio A. Chucaralao:

Quote from @David Charles Edwards:

I'll be 55 this and our last one graduates high school and will go off to college this year. My wife and I a debt free and own 15 rental properties worth around 1.5 million (net after sale taxes). We also have healthy IRA's and will both qualify for social security in the future.

After being a landlord for nearly 25 years,  I'm thinking about selling it all and moving the money into immediate income annuites or some other fix income vehicle so we can travel and live a less stressful lifestyle.

There doesn't seem to be an easy way to avoid capital gains and I realize many of these fixed income investments don't hedge against inflation.  Just wondering if anyone else has thought of doing this and what some pathways might be.

 First of all congratulations on that early retirement. This is just me brainstorming ideas based on the scenario you wrote. This is not advise I'm not CPA, this is just something for you to think about. If it is necessary for you to get all the funds from the sales at once then it doesn't seem like you have another option than paying capital gains. But if this is not the case one option would be to seller finance that way you can have control of how much income you are getting every year. The other option would be if there is a possibility for you to sell your primary residence and every two years move to one of the property and gradually sell each property once you get that tax exempt which is $250 thousand if single or $500 thousand is married. I wish you the best luck with this good problem that you have whatever you decide to do make sure you consult a professional to assist you with the transaction. Happy retirement!

 Thanks for the feedback!  So we got a fairly serious offer from Pace Morby a couple years ago.  There was an all cash offer which would have cost me around $400k in capital gains.  They also made a seller finance offer which initially looked better but in the end,  didn't really save all that much money in capital gains  (like $60k) AND keep in mind,  state capital gains are due in the year of the sale and any depreciation recapture is due in the year of the sale.  For those reasons,  we decided to either keep the units until death and pass them along or sell them individually over a 4-6 year period (which saves some in capital gains as well).  The primary residence thing every 2 years isn't really an option.  With 15 units, it would take too long.  One point to keep in mind, we are either gonna be IN or OUT.  There is no middle ground with rental property.  Owning 2 or 3 is the same headache as owning 15.  Thanks again for the brainstorming.

I'll be 55 this and our last one graduates high school and will go off to college this year. My wife and I a debt free and own 15 rental properties worth around 1.5 million (net after sale taxes). We also have healthy IRA's and will both qualify for social security in the future.

After being a landlord for nearly 25 years,  I'm thinking about selling it all and moving the money into immediate income annuites or some other fix income vehicle so we can travel and live a less stressful lifestyle.

There doesn't seem to be an easy way to avoid capital gains and I realize many of these fixed income investments don't hedge against inflation.  Just wondering if anyone else has thought of doing this and what some pathways might be.