Should I keep my rental property?

Question

I've own a triplex for about 15 yrs. It is fully paid off (for one year now) and it's worth close to $300-350K. My rent total is 30K per year.

Recently, I put 10K into roof repairs and I'll have to replace a kitchen soon. The other units are getting a bit shabby as well. I recently filed my taxes and discovered that because my personal income is over 150K per year, I'm not able to deduct a lot of my expenses (which were about 12K in improvements last year). I question how much I'm really benefiting from ownership, especially since costs come directly out of my pocket and I have to manage the property and repairs. The property is 100 yrs old and requires regular upkeep. Each year I'm replacing carpet, buying washers, replacing hot water tanks, repairing the porch, etc. Some years are low cost but others are painful.

I'm turning 57 soon and have about 1.8M saved for retirement, not including this property or a vacation condo I also own (not a rental). I'd kind of like to retire at 60 or 61.  I can't tell if it makes sense for me to hold onto this property since the return is good. Or, just sell it and invest the profit. I don't mean to turn this into a retirement discussion. I'm mostly wondering if it's helping me at all with my tax burden and if it's really worth it.

William Collins · Answer

@Paul Bernthal At 15 years you are well down the path of realizing all the depreciation on the property you can.  I would recommend considering using 1031 to sell it and buy into a more passive form of real estate- like syndication.  Sounds like you want the time and mental space back that this property occupies in your life.

Dave Foster · Answer

@Paul Bernthal, A 100 year old property will always be an anchor waiting to fall.  The property returns good but one large cap ex would drop that significantly.  You're right at the time of life (and you've done an incredible job of putting together your retirement nest egg) when some repositioning is called for.  I really like @William Collins comment on reclaiming time and mental space in your life.

Some of the options that our clients in the same position are doing (from most active to least active) using the 1031 exchange to keep their tax deferral:

1. moving from higher cap ex exposure to newer construction where cap ex is a few years off.

2. Purchasing more properties using cheap fixed debt as a hedge against inflation and a way to gain more depreciable basis.

3. Making the move into NNN commercial where there's still some active role but not much and the leases are longer.

4. Purchasing DSTS again to get the additional depreciation and to become totally passive investors yet still deferring tax.

5. Purchasing a really nice vacation rental near where they want to retire.  So that in a couple of years they can move in and convert it to their primary residence and continue to defer indefinitely.  And even if they sell under the right circumstances, turn some of the deferred gain into tax free money.

Theresa Harris · Answer

Stop putting in carpet and do vinyl plank. You can replace pieces if needed, but it wears better.

Talk to an accountant, but if you can deduct the repairs in the year they are done, you should be able to deduct them when you sell.

You sound like you are done with it, so sell it while the market is good.  You can use the money to buy another rental-something newer and in better shape or do something else with the money.

Paul Moore · Answer

Hey @Paul B.  Welcome to BP.  I’m your age and after decades of investing in real estate, and based on your comments, I’d personally advise you consider the passive investor route.  I don’t directly manage any properties now and don’t ever plan to again.  If you find a great syndicator, you could possibly invest that $2mm+ to generate a full-time income.

A few great resources for passive investing include @Brian Burke’s book The Hands-Off Investor as well as a membership site called The Real Estate Crowdfunding Review.  Good luck!

Brandon Rush · Answer

Hey Paul,

Here are two ideas:

Sell the property:Other than for the cashflow, it sounds like you are not too interested in holding the property. You could sell the property and 1031 the funds into a more passive investment such as a syndication, REIT, or other passive investment vehicle. You could also 1031 into a larger turnkey property that does not require any maintenance and turn over management to a property management company. You would probably make the same, if not more, cashflow with less effort. With the market where it is now, its a great time to sell.

Refinance & Repair:You could refinance the property and use the cash to take care of of the major capex items coming in the near future. After the rehab, maybe think about handing the management off to a property manager to free up some of your time.

Bill Hampton · Answer

Paul,

You could try seller financing, also known as an installment sale, to spread your capital gains out over several years.

Definitely speak with your accountant about options to reduce your capital gains.

Good luck.

Andy Madden · Answer

Paul, I see this is your first post - welcome! I just sent you a private message with an idea that might be a good solution for you.

Paul B. · Answer

Thanks everyone for your advice. A big part of me wants to cash out, pay off my vacation property, and/or use proceeds to fully pay off my primary residence. That means capital gains and given that I paid 165K for the property, it would likely be sizeable. It would be great if I could find an option that still provides a financial return but requires little effort on my part.  I'm intrigued by 1031 into a syndication. I know next to nothing about that, but I will investigate with my financial advisor.

1031 into a new property sounds difficult because the market for multifamily properties in Pittsburgh is extremely competitive right now and there's not a lot of inventory. And, most properties are quite old like mine.  I might look into a refinance and get the cash to make significant improvements to the property. Right now the rents are low because the units are shabby. If they were fixed up I could easily get 40-40K rent per year. But, I have long term lower income tenants that I would have to kick out, and that's very hard to swallow.

Should I keep my rental property?

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