Price Increases limiting returns - time to do something else?

Question

I think we've had some success which has been a combination of hard work and some fortuitous timing.

We own 6 rentals, about to become 8 (already own the 2 others but they are coming online in next 2-4 months).

1 of these is owned under a Self Directed IRA.

They are nice properties that we've taken a lot of pride in, and we've been able to generally speaking find the kinds of tenants that I think will lend to our places keeping up over time.

We've been fortunate to build approaching $900k in equity over the last 3.5 years.  Not anywhere close to all of that is 'accessible' at any given time...  Based on current financing options, anyways.

I feel like in some respects I am enjoying aspects of all this - it is incredibly rewarding taking a dumpy/distressed property to where people say wow.  That said, sometimes personally I feel that I could use a change of pace.

The prices that we are seeing are inflated compared to past expectations.  The same house we might buy for 30-40k seems to now be commanding more in the 70-85k range here in the Des Moines market.  It almost becomes not worth it anymore.

I've thought about moving over to the timber industry, getting back into corporate world (I am/was an engineer), among other things.

I'd love to hear from people that have successfully transitioned into making their real estate portfolio a pure passive investment.  How did you do it?

What did you do after?

Did you miss it?  Did you go back?

Dave Foster · Answer

@Jim Goebel, You're talking about what I call "defensive investing".  You're at the point in the market where you feel that there are no deals that meet your paramters like @Eugene Kemp is finding as well.  This is your indicator that the cycle is doing what it always does.  The biggest problem with large unrealized real estate gains is that to realize them and get yourself totally out of the line of fire you have a significant tax event.  That's why the 1031 exchange should at least be factored in your strategic thinking and proformas.

Holding tight is always an option.  If you have enough margin and confidence in the properties you own now then just hold and wait.  the market will bring deals back to you.  Meanwhile the worst thing is not to not have any deals to make.  The worst thing will happen when you make the wrong deal.  I sense that this path causes some restlessness in your soul.  But it's safe and tax advantaged as there is no gain recognition.

Or you can change your investing parameters and do something like move into longer term horizon development.  Buy some land in the path of progress and develop it or wait to develop it.  If your engineer skills lend to the civil side that could a way to scratch your itch a little on both sides.  You can 1031 into this kind of thing.  However, if you truly develop and sell or build and sell you'll pay tax at that point.  So the 1031 delays but doesn't necessarily continue the tax deferral.  Going into timber could also be an option for you and that too can be mitigated with a 1031.  @Jay Hinrichs is the guy who's been there and done that with timber.

Holding pattern real estate could be key at this point in the cycle.  These could be passive fractional investments in leases held by publically traded companies with the leases guaranteed by the national credit tenant.  Nothing sexy about these at all except that they're about as bullet proof as you can get in this market. You won't get the double digit passive returns promised by many. But they qualify for tax deferral and continued tax advantaged treatment.  And the 4% - 8% plus depreciation that you do get feels pretty secure with no effort and you can go be an engineer again - Or play one on TV!

Jim Goebel · Answer

@Dave Foster that is some really great food for thought.  It sounds like you're suggesting the possibility of liquidating / exchanging some assets as an option.  We are good on the margin and confidence side in this macro market here.  It's solid - not going to crazy appreciate but the cash flow isn't going anywhere and our time horizon is longer than what the next cycle brings, even if it was 10+ years.

I may be reaching out to Jay as I'd like to learn more about the development side.  We have a deal (option) on some land that might give us an entry point into the timber industry and that is something that has been of high interest to me.

Great stuff and thanks.

Eugene Kemp · Answer

This is a tough question, and very individual as to the solution. Sounds like you have done well, but may be too young to "retire" and just keep up with your properties as an activity. I agree that prices have gotten stupid, and we don't seem to see any deals worth pursuing lately, and there also is a glut of people bidding things up if the deal is worth considering. For the time being, we are sitting tight and enjoying some travel and golf, but always open to looking at the right property. That's how I deal with it! :-)