Should I transition to Multifamily at age 65??

Question

Hey Folks,

I have a couple of super clean Class A SFR's I have owned for about ten years in Northern California; the larger one 5/3 actually cash flows about $1,000 per month and the smaller one 3/2.5 only does about $350 per month. The good part is that the loans are low interest at 3.125% and the pay-down is almost $1,000 per month each. (These two homes are super clean 2012 builds with granite counters and hardwood with tile roof's)

More recently I have purchased three nifty and clean Townhome style rentals out of state that don't cash flow a dime. (I purchased hoping for price appreciation and don't see that happening anytime soon).

**I just retired at 65 and would like to improve cash flow for retirement!My question;

Option 1)

I can sell the smaller CA SFR; (about 275K equity) sell one of the out of state Townhomes; (about 125K equity) for a total of 400K equity and build a brand new 12-plex; cost is about $1,600,000 (25% down/$400,000) and cash flow North of $5,000 per month. (That cash-flow added to Social Security and pension in the future would be really nice!)

Option 2)

Pay-off the larger out of state Townhome and cash-flow $1,840 per month then slowly peel away the other two out of state Townhomes to acquire more cash when needed...

***My take; I personally don't like retirement; (was forced at age 65) in good health and building the new out of state 12-plex seems "exciting & adventurous" but am concerned that if I don't get tenants right away will be burning up savings covering the $10,000 per month mortgage. (I plan on offering first year incentives to get it filled up right away which is needed for final financing)

The other issue; not sure how I'll feel in 5-years at age 70, 71, 72...dealing with twelve tenants and all the issues and turnovers.  I would want to hold the property until 72-75 (8-10 years) to capitalize on costs.  One last thing to consider is the initial cost in the area is about $216 per sq ft and 7,400 sq ft total about 1.6 Million.  The concern is the "Reversion to the Mean" where used prices are around $172 per sq ft in today's dollars. (So the difference of $44 per sq ft would be a loss of about $300K add in depreciation recapture costs and could be all for nothing...all things considered)

Thanks all for the input!

Greatly appreciated!!!! :)

John Morgan · Answer

@Bruce Schussler

I get the boredom thing and the reason I got into real estate myself as a pilot for AA. lol. I’d keep your properties due to the low interest rate. Don’t mess with that unless you think you can get a much better return. I’d go for the quad and keep the headaches to a minimum. It’ll be a much easier exit plan when the time comes. I’m more into SFR myself due to very low turnovers and easier to sell.

Dave Foster · Answer

@Bruce Schussler, I agree with @Bill B.. You ultimately want to align your investment strategies with your future goals and financial tolerance to these potential circumstances.  As others have said, this could be less a business decision and more of an emotional decision - that's dangerous.

If you decide to sell your property or multiple properties, you could do a 1031 exchange like Bill had mentioned, but if you're concerned about managing a bunch of properties, you could do what we call a consolidation exchange, where you sell multiple smaller investment properties and 1031 into a larger investment property. This would allow you to defer all of the capital gains tax and depreciation recapture and reinvest it into a larger property that you can solely focus on.

I know you don't feel like your two properties that cash flow are doing great.  But in real terms, you are generating almost $4K a month in real income before any tax incentives.  That's a very nice retirement supplement.   There's also a very costly rookie tax that hits every new builder.  You don't want that to derail your retirement before it really gets going.  Be  cautious and protect yourself as you expand and grow.

Colleen F. · Answer

@Bruce Schussler The people who will live in a 12 unit will not be the same people who are living in your single family and possibly the townhouses. Not sure you will find the turnover and apartments the same so I would maybe look for something existing in line with your current holdings.

Marcus Auerbach · Answer

Find something else to do! Real estate is not meant to be bought and sold like stocks. It's called buy & hold for a reason!! Keeping holding what you have and let time, inflation, appreciation do its thing. See what needs to be done to improve income on those town homes. And beyond that, there are plenty of ways how to get yourself busy with a business venture that does not require you betting the farm!!!

Have you looked into buying or starting a small biz? You have a life's worth of experience and you have time; leverage what you have!

Bill B. · Answer

Sounds like boredom, not a good financial decision. You’re going to drop at least $100k in taxes and depreciation recapture unless this 12 plex is already built and you can 1031 exchange.

Do you have any multi family experience? Are you ready for 12x the vacancies, repair requests, late pays and so on? Are your kids excited about owning a 12plex “in the boonies?”

They can inherit and then sell tax free if you don’t think they want to be landlords  if they do the homes will obviously be easier to run and to split between heirs  (what if one wants to sell and one wants to keep it?)

If you don’t plan to leave California they’re going to keep grabbing taxes on your “tax free state” investment

I get it  real estate investing is boring, super boring  I want so bad to sell one/some of my SFR but what would I get out of paying $10’s of thousands in selling costs and investing in something I’ve never done like multifamily? Or in an area I know nothing about?

One vote for stay the course and continue doing as well as you are

Yuhao Fan · Answer

As a developer with 1200 units built, I give you my opinion.

I think you are doing financially very well so if I were you I'd be cautious making any big changes. you're not thinking about retiring now but what about in 10 years? comparing with the single-family, managing multifamily is much more intensive.

in SoCal where I develop the hard cost is $200-300/ sf so the 12 units you plan to build must be in another state. have you identified a good general contractor and the property management company?

When doing underwriting for development you need to put an extra 20% for contingency if this is your first time developing to account for unexpected. I see too many first time developer got taken advantage of by the general contractor.

if I were at your age, I'd be happy keeping things the way it is or buying a few smaller multi families near where you live instead of us starting to develop new projects.

best luck to your endeavors

Bruce Schussler · Answer

Great input everyone...

We're doing fine financially...just want to capitalize on doing even better.

Just retired mandatorily as a major airline pilot at age 65 and yep...you guessed it. Getting bored!

There's a second-hand 20 year-old 4-plex I may look into as it is much less ambitious and an easier sell down the road if desired.  It may need a new roof in a few years but already has tenants and cash flows about $1,000 per month.

That may be good middle ground!

Thanks again!

Henry Lazerow · Answer

Just buy some class A 4 units. Easy to manage and actually cashflow with normal leverage rates unlike SFR.

Patricia Steiner · Answer

Why mess with what's a home run?!!!  Rock on.  The age thing isn't a factor in any of this so don't own it.

Kerlous Tadres · Answer

Hey @Bruce Schussler, Option 2 is the safer retirement move because it turns your equity into reliable monthly cash flow without betting on a new build lease-up. I’d only do Option 1 if you have enough reserves to cover months of payments and vacancy, so you’re not risking your savings if it takes time to fill.

Should I transition to Multifamily at age 65??

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