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I've been playing the RE Investor game for a bit, kind of fell into it when I inherited a property... long story.
Anyway, the markets these are in are on the tail end of super hot (starting to see inventory build a little, prices are flattening). I've been toying with the idea of flushing them out and selling 1/2 this year and 1/2 in the first couple months of next year to dodge much of the capital gains.
1. I'm really tired of being a SFH landlord, but not tired enough to pay 8-10% for some yokel to manage it (unless they want the repair bills too).
2. I've got 2 kids that are over 18, and was going to gift each of them one property to either continue to manage or sell (working with my CPA to find the best way to do this).
3. If there is a crash coming, having a ton of cash on hand to capitalize on price inversions could be fun.
Or I could just buy a big ass boat and go fishing.
The other thought I've had is trying some crazy move of consolidating all the properties into a REIT and selling those shares out to MMJ companies that need a place to invest, or selling everything and starting an REIT to buy some multi-family units.
I know there are a few regular contributors that have built some RE stock and rented - has anyone made the jump from residential to commercial?
Commercial real estate is very different than residential. Frankly the level of competition from other investors that can afford to do things with commercial development and management deals that no individual could ever hope to do is a HUGE reason to stay far away from such things; it is not just "swimming with the sharks" it is more like jumping into a tank of piranhas or big vat of acid -- worst case scenario your bones are picked clean...
As far as "reason to liquidate" I personally did that years ago. My motivation was driven by many factors including the lessons from professors far smarter than me who've done the analysis of stocks vs rental properties. The thing that even they admit is that there are ways to use leverage to buy real estate that would otherwise be impossible with cash deals. The "magic" of using some smarts to buy distressed properties and repair / renovate them to reap better rents and quick appreciate is real BUT it is offset by the downsides of over improving the property, the carrying costs of having to continue to put money back into the properties, pay property taxes, deal with periods of vacancy, and the overall lack of "passive income" that is promised but never really achieved even with "professional property management".
The fact is residential real estate rental returns cannot outstrip the overall rise in income / wage growth indefinitely. For every period that such thing do happen and landlords look like they're making out like bandits there are EVENTUALLY periods where other developers try to add units to get a piece of that pie and thus force down returns. Even in areas that are "fully built out" the pressure eventually forces employers to relocate and that results in reduced demand. I've seen this these happen over and over. In some areas the "run up" happens very quickly and the pressure for things to slow takes a long time while in other areas there are catastrophic shifts that drive prices down drastically.
The practical result of that is experienced property owners absolutely have to consider the market for selling their units when they are highly valued AND deciding to either diversify or re-enter the market when prices fall. Sadly the transaction costs of buying and selling real estate are substantial. Even if one has access to the tools of real estate transaction by earning a license and paying for MLS membership the fact is folks on the other side of the deal need to be compensated and that eats up profits...
Honestly I would worry LESS ABOUT A CRASH than the fact that there are inevitable cycles of expansion and retrenchment. Trying to time both perfectly is impossible. Instead simply calculate an honest rate for your total likely return should you sell some properties at current fair valuations -- if that rate is far above what other alternatives might be the likelihood that this is a good time to "take some profits" should not be ignored!
You certainly can talk to advisors about ways to try to help your kids become "real estate investors" through the "gift" of properties but you could also set up other ways for them to benefit from desire to help them take an equity stake in some specific properties. Of course there are simple ways to help kids too -- a nice sized portfolio of other kinds of stocks, REITs, limited partnerships, index funds or other financial assets that will have none of the headaches of owning individual residential property and can be a whole lot more flexible! If you want to talk to advisors about how you could also structure things to benefit grandkids (who might not yet be the picture...) there are plenty of strategies to do that. The fact is the "really rich" have long favored this approach and the reasons are simple -- it is far more efficient than trying to "gift" any specific real estate to the next generation(s).
If you don't have enough staff to where you can run the company rather than the properties you aren't big enough for a REIT to be worth it. I do commercial and have a mid sized portfolio. Commercial the big difference is that it is entirely rent based values. There is no fallback of selling to an emotional buyer who will overpay like there are with houses. If you get $1000 a month in rent the value is pretty easy to tell. Tenant management is typically easier though but there are fewer tenants around so leasing is more involved. There are also more moving parts to a deal such as build out.
In regards to tax planning you don't want to split the properties if you think they are above the estate tax cap, you want to form a limited partnership and give your kids shares over time tax free and the rest when you die. Why? Limited partnership shares are eligible for marketability and limited partnership deductions for estate tax valuation since they aren't as easy to sell as a whole property. After the estate closes they can sell what they like.
Calling a crash is a tough thing and the question is whether such a crash will effect your income and if not is it really damaging your values? Might refinance and pull equity out for a round of buying that preserves your cash generation.
No idea how big your portfolio is but you may consider hiring an assistant to do the things you want them to do that you dislike doing. Landlord employees don't have to be licensed.
I'm in the same situation as the OP. Have a portfolio of SFH's in a resort area and after 38 years of ownership/maintenance and managing the properties … I'm worn out. The market values have skyrocketed, but tenant issues with recently legalized recreational and grow operations MJ use have me at m wit's end. Between the mold issue from the grow operations and behaviors of the legalized substance abusers, the houses aren't worth the headaches to me anymore. My property insurance specifically excludes any damage or accident/injury incident claims related to mold issues or MJ in any form. As I read my renewal insurance policy, if there's even a trip/fall type claim and the injured party was under the influence of MJ … no matter in what form it was taken into their system … the insurance will not cover a claim against me.
So I'm cashing out.
I don't want the risks of a mold infestation due to the grow operation moisture/temperature, nor the risk of a party under the influence tripping down a stairway or over a slightly raised irregular surface on the patio or in the yard. I've already had to evict tenants over grow operations and have damaged floor coverings and drywall replaced. Even though specified in their leases as prohibited activity, the state has legalized such activity and tenants just think that the law overrides the specifics of their lease conditions.
What to do with the proceeds? I'm doing REIT 1031 exchanges into mid-size apartment buildings, professionally managed. That and some C-store lease packaged REIT's, professionally managed. I'm seeking that "passive" income check every month from the REIT's.
I defer the taxes on the sale of my SFH's, so that my capital remains at work for me instead of receiving only the post-tax reduced amount from the sale. My family situation is clouded, am not concerned about leaving a legacy to my estranged children. They've already married into far greater wealth than I will ever accumulate and have careers that pay them far more than I've ever earned. They've made it profoundly clear that any money I could leave them would be a mere pittance compared to their situations. I'm completely free from concerns about leaving them any legacy. It's heading to charitable causes of interest to me which may appreciate the contributions when I'm done needing the income/assets.
Commercial real estate is very different than residential. Frankly the level of competition from other investors that can afford to do things with commercial development and management deals that no individual could ever hope to do is a HUGE reason to stay far away from such things; it is not just "swimming with the sharks" it is more like jumping into a tank of piranhas or big vat of acid -- worst case scenario your bones are picked clean...
As far as "reason to liquidate" I personally did that years ago. My motivation was driven by many factors including the lessons from professors far smarter than me who've done the analysis of stocks vs rental properties. The thing that even they admit is that there are ways to use leverage to buy real estate that would otherwise be impossible with cash deals. The "magic" of using some smarts to buy distressed properties and repair / renovate them to reap better rents and quick appreciate is real BUT it is offset by the downsides of over improving the property, the carrying costs of having to continue to put money back into the properties, pay property taxes, deal with periods of vacancy, and the overall lack of "passive income" that is promised but never really achieved even with "professional property management".
The fact is residential real estate rental returns cannot outstrip the overall rise in income / wage growth indefinitely. For every period that such thing do happen and landlords look like they're making out like bandits there are EVENTUALLY periods where other developers try to add units to get a piece of that pie and thus force down returns. Even in areas that are "fully built out" the pressure eventually forces employers to relocate and that results in reduced demand. I've seen this these happen over and over. In some areas the "run up" happens very quickly and the pressure for things to slow takes a long time while in other areas there are catastrophic shifts that drive prices down drastically.
The practical result of that is experienced property owners absolutely have to consider the market for selling their units when they are highly valued AND deciding to either diversify or re-enter the market when prices fall. Sadly the transaction costs of buying and selling real estate are substantial. Even if one has access to the tools of real estate transaction by earning a license and paying for MLS membership the fact is folks on the other side of the deal need to be compensated and that eats up profits...
Honestly I would worry LESS ABOUT A CRASH than the fact that there are inevitable cycles of expansion and retrenchment. Trying to time both perfectly is impossible. Instead simply calculate an honest rate for your total likely return should you sell some properties at current fair valuations -- if that rate is far above what other alternatives might be the likelihood that this is a good time to "take some profits" should not be ignored!
You certainly can talk to advisors about ways to try to help your kids become "real estate investors" through the "gift" of properties but you could also set up other ways for them to benefit from desire to help them take an equity stake in some specific properties. Of course there are simple ways to help kids too -- a nice sized portfolio of other kinds of stocks, REITs, limited partnerships, index funds or other financial assets that will have none of the headaches of owning individual residential property and can be a whole lot more flexible! If you want to talk to advisors about how you could also structure things to benefit grandkids (who might not yet be the picture...) there are plenty of strategies to do that. The fact is the "really rich" have long favored this approach and the reasons are simple -- it is far more efficient than trying to "gift" any specific real estate to the next generation(s).
Great feedback, and kind of dovetails into where I think I'm headed with this. I'm not really worried about a crash. Even if values fell 25%, I'd still come out ahead (aside from lost sweat equity), but the gains I've had on a few of them (thank you Apple!!) far outstrip traditional investments. Truthfully, I got lucky in 2008-2009 and bought a couple of townhomes right before Apple announced the location of their Austin facility and RE values skyrocketed in that area.
I do have a license, so I can mitigate some of the costs, and may have another investor that would be willing to take a few of these off my hands.
Working on the tax angle for the kids - thankfully, no grandkids yet!
perhaps I didn't make myself clear, jackalope48 …
I'm in the same situation as the OP. Have a portfolio of SFH's in a resort area and after 38 years of ownership/maintenance and managing the properties … I'm worn out. The market values have skyrocketed, but tenant issues with recently legalized recreational and grow operations MJ use have me at m wit's end. Between the mold issue from the grow operations and behaviors of the legalized substance abusers, the houses aren't worth the headaches to me anymore. My property insurance specifically excludes any damage or accident/injury incident claims related to mold issues or MJ in any form. As I read my renewal insurance policy, if there's even a trip/fall type claim and the injured party was under the influence of MJ … no matter in what form it was taken into their system … the insurance will not cover a claim against me.
So I'm cashing out.
I don't want the risks of a mold infestation due to the grow operation moisture/temperature, nor the risk of a party under the influence tripping down a stairway or over a slightly raised irregular surface on the patio or in the yard. I've already had to evict tenants over grow operations and have damaged floor coverings and drywall replaced. Even though specified in their leases as prohibited activity, the state has legalized such activity and tenants just think that the law overrides the specifics of their lease conditions.
What to do with the proceeds? I'm doing REIT 1031 exchanges into mid-size apartment buildings, professionally managed. That and some C-store lease packaged REIT's, professionally managed. I'm seeking that "passive" income check every month from the REIT's.
I defer the taxes on the sale of my SFH's, so that my capital remains at work for me instead of receiving only the post-tax reduced amount from the sale. My family situation is clouded, am not concerned about leaving a legacy to my estranged children. They've already married into far greater wealth than I will ever accumulate and have careers that pay them far more than I've ever earned. They've made it profoundly clear that any money I could leave them would be a mere pittance compared to their situations. I'm completely free from concerns about leaving them any legacy. It's heading to charitable causes of interest to me which may appreciate the contributions when I'm done needing the income/assets.
Glad I don't have all of these issues, but I am in the same boat, where I'm just tired of it. The 1031 angle was interesting, but I'm leaning more towards just buying a really nice fishing boat and calling it a day.
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