Many owners of rental properties have realized significant equity appreciation during the recent real estate boom and are asking themselves “Is it now time to sell?” Based on our interaction with hundreds of rental property owners, here are the top 8 reasons that can trigger a desire to sell rental properties now.
1. Older owners
Let’s face it, many of us will reach a point in life when we shift our focus from accumulating wealth to enjoying our wealth. Many older rental property owners with portfolios of highly appreciated properties are seeking ways to convert their equity into income that can be used to finance a more carefree lifestyle including vacations, more time with grandkids, and opportunities to indulge in satisfying hobbies. Relative to younger investors, older investors are less likely to continue rental property ownership for the next 10-year appreciation cycle and, instead, harvest at least some of their accumulated wealth and enjoy their golden years. If you are approaching retirement and still have a large portfolio of rental properties that is diverting your time from more pleasurable pursuits, you may be more inclined to free-up cash from some of your holdings to enjoy the good life and start seriously working on your bucket list.
2. Higher income with different investments
During the most recent 10-year cycle, most rental properties have appreciated much faster than rents. Expenses have also risen resulting in relatively low rates of net cash as a percentage of appreciated property value. In the San Francisco Bay area where our main office is located, we often see average net cash flow at no more than 1-2% of total property value. The sale of appreciated properties via a 1031 Exchange to defer taxes followed by reinvestment of proceeds into a replacement property alternative such as a Delaware Statutory Trust (DST) or other higher income producing properties can often result in a marked increase in net cash flow. Income from reinvested proceeds can also be partially to mostly sheltered from taxes through depreciation and tax write-offs thereby allowing investors to put most of the cash in their pockets rather than giving it to Uncle Sam.
3. Desire to shift into a hassle-free lifestyle
Directly owning rental properties comes with many burdens and risks that can unexpectedly generate high degrees of stress and anxiety. Tenant evictions, lawsuits, repairs, maintenance, property inspections, etc. are among many of the burdens that a landlord may face that can contribute to having an “enough is enough” moment coupled with a realization that life may be growing too short to deal with all the hassles. Fortunately, there are many lower stress, hassle free real estate options that can not only largely eliminate management burdens – but also often increase net cash flow. Since being recognized by the IRS in 2004 as a “like-kind” 1031 Exchange option, Delaware Statutory Trust (DST) structured properties have realized many billions of dollars from investors seeking real estate investments where day-to-day management headaches are no longer their responsibility and where they can receive steady monthly “mail-box” income. Multifamily DSTs have performed most favorably over the past real estate cycle, allowing investors to realize not only reliable hassle-free cash flow, but also, in many cases, equity appreciation through rental income increases.
Note that DSTs, like all real estate, have risks and that past performance is no guarantee of future results.
4. Rent control
Soaring property prices which have put smiles on the faces of many landlords have also unleashed an avalanche of protesters supporting tough rent control measures. The proposed laws may significantly impact rental property values and make life for landlords much more difficult. In mid-July of this year, the California Democratic Party endorsed Proposition 10, which would repeal the Costa-Hawkins Act that currently prevents California cities from capping rents on housing built after 1995. The initiative would also allow cities to limit price increases on rentals when they become vacant and increase costs of removing tenants. Rent control measure are already in place in five California cities causing a growing number of landlords to sell before controls further impact their already meager returns. Many of our California investors are selling now and reinvesting in properties in more landlord friendly states.
5. Expensive repairs
As properties age, the likelihood of more expensive repairs significantly increases. Issues with roofs, foundations, termites, dry rot, air conditioning systems, clogged plumbing, etc. can wipe out a good portion of realized gains and lead to many headaches that could quickly take the fun out of owning rental properties. Owners of especially older properties are well advised to invest in comprehensive property inspections to determine if high repair bills are looming – and consider both the cost and hassle of addressing discovered problems versus selling now.
The escalating costs of living in urban areas and dealing with growing traffic congestion, crime, and reduced quality of life are driving many landlords to consider moving to more attractive areas away from their rental properties. Many landlords who are involved in some degree of managing and maintaining their properties will consider selling if they no longer live nearby. Unless you have a very competent, reliable, and honest manager, becoming a remote landlord can lead to greater aggravation, loss of income, lack of control, and unplanned trips to tend to your remote rental properties. If you are planning to move, you should also consider selling your nearby rental properties.
7. Changing lifestyle
Health problems, loss of a loved one, divorce, etc. can trigger a desire to change one’s lifestyle and reduce burdens associated with owning rental properties. Many aging landlords may experience a “wake-up” call because of learning of a potential health issue that may be an early warning of more serious issues ahead.
8. Kids don’t want it/don’t need it
Many rental property owners invest years building real estate portfolios with a plan to transfer their properties to their children when they pass. Some landlords are shocked to discover that their children have little/no interest in managing properties and would much prefer to inherit money than real estate. We also meet with children who have inherited income properties and see many examples of siblings fighting with each other over how to deal with the properties. If you have children with little interest in managing properties, it may make sense that you take steps to sell now while you can control the outcome and then convert the properties you own into other real estate assets that may be more attractive to your heirs. DSTs are an option that many investors find appealing to solve estate planning issues. Since the DSTs are fully managed, heirs do not need to deal with day-to-day responsibilities. Most importantly, the ownership of the properties is held in the form of beneficial shares which allow heirs to more easily go their separate ways while still retaining personal options to cash out, reinvest, complete a new 1031 Exchange, etc.
First Guardian Group specializes in assisting rental property owners to sell and reinvest into income producing properties that minimize the hassles commonly associated with property ownership. Our firm has worked with over 5,000 income property owners over our 16-year history and assisted many of our clients to achieve improved cash flow and peace of mind. Please contact us for a property evaluation, help with the sale of your income property, 1031 Exchanges, and to find attractive hassle-free income properties.