Exit strategy

11 Replies

So...I just started REI in late 2014 and have 3 "C" properties that cash flow well, but are in "OK" areas of my town. I have a few landlord friends in town who own 13 and 18 properties....they are in their mid-50s. They are trying to sell their properties due to headaches and just getting out of the business.

I looked at all those properties and most have a lot of deferred maintenance AND they wanted retail prices for them. (Every landlord thinks their property is worth their weight in gold! :)

But...my real question is....I'm 41, and I would like to have 8-10 properties....in the next 5 years or so.....but what's the best exit strategy when the time comes?

I expect to retire around 55 to 58 and I'm OK to maintain the properties now...but what is life changes and REI exit is needed?

What's the best way to properly "plan" for an exit?  Maintain the homes well? Buy in "B" neighborhoods (there are only a handful where I live and inventory sucks.)

Is it best to have a portfolio sale or sell off individually?  

Truly...I love REI now and my tenants are pretty low maintenance, but the properties I have currently are definitely properties that only other landlords would want....so I'm trying to plan accordingly and if I need to pivot a little to other type properties, I much rather do that now than later.

From tax point of view you may consider:
1) seller financing - you will spread income and taxes over years
2) 1031 exchange - selling rentals and buying Realestate investment instruments

I've often wondered the same thing, @Kevin Nichols . Whose gonna buy this old 10-unit when I want out? Or the old 7-plex next to it?  Should it be a package deal? Where to find another me when the  time comes?  I've never worked with a realtor so I haven't even considered listing any part of my portfolio. I buy and assign with different companies so nobody knows me and I like it that way.  I'm about your age and have been landlording since '02. Getting the same feeling - a little tired but still ok.  Don't wanna still be turning units in my 50's I don't think.  How to get out someday?  Not sell on a contract to some boot whose gonna ask me questions for years and wreck what I built.  Get out!  

I was surprised to find out my commercial store renter may have an interest in one of the 10-unit mixed-use buildings.  Surprised again we have a multi-investor at our meetup that's still young and hungry at heart. 2 possibles in as many days.  As I started talking about it with folks, things were turning up.  

With a larger portfolio, (or any portfolio for that matter) there has to be some timing to it.  I may be ready for change in say, 4 years, but what if I think we may be peaking or close to it  price-wise in the next year or two?  I don't always find a new property deal when I want it, so I suppose you can't always just sell when you want either.  

I'm selling a little triplex soon and it's weird. Selling at all when I've been buying so long is difficult.  I'll sell a couple houses next year into the froth and see how that goes.  Get into it gradually, but bring the subject of selling off some larger holdings to people with interest.  I bet it will all work out in the end if folks know you got 'em!   

Can someone explain to me why older people want to sell the properties they worked so hard to pay off? 

It seems to me what they really want is to cash out and unload all the deferred maintenance onto someone who doesn't know any better. If the properties are doing well, why not just hand them off to a property manager and continue to live off the cash flow?

@Carlos O. - I would consider handing mine off to a good property manager that gives a rip if I could find one. There are none in my area.  On the podcasts  even the big guys had to fire two or three terrible ones before they found a good one.  Brandon is still working with his 2nd one.  She's still wasting time and money at turnover.  For 3 weeks a unit sits idle and untouched from the move-out? No thanks. 

The good news is the PMs here do give me a steady stream of motivated sellers as the poor owners throw up there hands.   My plan B is to exchange into one larger complex so I could grow my own on-site mgr.  We're not all trying to sell a dump to the greenies.

Originally posted by @Carlos O. :

Can someone explain to me why older people want to sell the properties they worked so hard to pay off? 

It seems to me what they really want is to cash out and unload all the deferred maintenance onto someone who doesn't know any better. If the properties are doing well, why not just hand them off to a property manager and continue to live off the cash flow?

You can't take the money with you when you die. Have to cash out sometime.

@Kevin Nichols :

I'm not as far along as you yet... though making progress.  Also, I'm a hands-off investor, so I find property managers and strictly stick to managing the managers.

My goal is to hand off my properties to my kids at some point, preferably through seller financing so that they can get a good deal, I can quit running "the business" to have truly passive income streams, and they can have "passive" income to free up their own lifestyle options.

That makes it a win-win in my book. If I find a better option along the way, I may take it.  But I'm not too worried about the retirement exit strategy.

@Steve Perkins Perhaps your kids don't want rental properties or they move to other parts of the country?

@Steve Vaughan From what I see, all my older friend landlords have a very difficult time selling their properties.  The 2 friends I know who are selling out haven't sold any...and I think it's due to deferred maintenance and overpriced properties.

The properties I have so far are "C" properties and will never grow in value. But I know that I'll need to keep maintenance up..so when the time comes, I can get what I paid.

@James Wise Correct....at some point, everybody wants their cash back out and be able to move on to their next chapter in life. I see landlords sell because they want to travel more in retirement or sell because they need the money for loved ones medical bills. The reasons vary. 

I just want to be ready for my "exit." REI is not my main source of income and is only a very small slice of my overall portfolio. If I can keep control and plan my exit (15-18 years from now), that will keep me happy. :)

@Carlos O. I live in a 50,000 population town south of Charlotte, NC. There are a handful of PMs in my town and none are really good. I don't know if I would trust my assets with any of them...especially if I were traveling during retirement and couldn't keep an eye on the properties. What happens if you go through a whole year of bad PM and tenants and you have to drop $100K in rehab to get them to a point they were sell-able?

thanks for staring the discussion Kevin. If you live in one of the properties for 2 of the last 5 years you can avoid capital gains on 225k 500k if you are married- in income on the sale of that house. 

Here's a question for the group, I have not been able to find if this strategy will work on a commercial/ residential property such as a 5 or 6 unit building. 

There is also the 1031 exchange option that would put you owning a different property. 

Look at a Delaware Statutory Trust (DST) as part of a 1031

Good way to exit management but still maintain cash flow and defer taxes.

Just a thought if your choosing the PM route, chose like you would your dentist or doctor.  What I'm saying here is a retiring person should at some point change doctors and dentists as they get older.  Pick from those that are younger so they are still in the business when you're not.  Grin
PMs, doctors and dentists are all so people specific.
Also if you're keeping your property, what is the average age?  And are you a deferred maintenance type landlord ie deferring mess and spend my artificial cash flow now?  Will your kids want it if it's managed and not a new career (pain) for them?  Will your kids be willing to be the PM interface if you are not as mentally capable?
I tend to keep mine in better shape than my own house but I'm not so dependent on the cash flow.  And my kids are willing to take over when I can't.  One's getting in the rental business the other not yet.

When trying to sell a rental property think how you would want to buy it!?!  There are mainly two ways to think about it. There are going to be turn key investors that want a property that cash flows from day one with little effort form them, then there are the investors that want to force aprreciate the propty by fixing it up raising rents etc... Both ways the property needs to have a realistic selling price which most do not. For the fix-it investor they are going to want to see a seeling price that is low enough for them to make money after the repairs.

Either way the selling/purchasing price needs to be in line with market and at a price where the numbers will work for the investors. Most people selling are trying to get top dollar which is understood but not realistic with investors buying. Investors "tend" to be smarter about purchasing properties and won't ( or shouldn't) overpay for the property.

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