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.
BIO : Paul Getty
Paul Getty is a licensed real estate broker in the state of California and Texas and has been directly involved in commercial transactions totaling over $2 billion on assets throughout the United States. His experience spans all major asset classes including retail, office, multifamily, and student and senior housing.Paul Getty’s transaction experience includes buy and sell side representation, sourcing and structuring of debt and equity, work-outs, and asset and property management. He has worked closely with nationally prominent real estate brokerage and investment organizations including Marcus Millichap, CB Richard Ellis, JP Morgan, and Morgan Stanley among others on the firm’s numerous transactions.Paul Getty also maintains a broad network of active buyers and sellers of commercial real estate including lenders, institutions, family office managers, and high net worth individuals.
Prior to founding First Guardian Group/FGG1031,Paul Getty was a founder and CEO of Venture Navigation, a boutique investment banking firm specializing in structuring equity investments made by institutions and high net worth individuals. He possesses over 25 years of comprehensive worldwide business management experience in environments ranging from early phase start-ups to multi-billion dollar corporations. His track record includes participation in IPOs and successful M&A activity that has resulted in investor returns of over $700M.
Paul Getty holds an MBA in Finance from the University of Michigan, graduating with honors, and a Bachelor’s Degree in Chemistry from Wayne State University. He is a member of Institute of Real Estate Management (IREM), a Certified Property Manager Candidate (CPM), and a member of the US Green Building Council.Paul Getty holds Series 22, 62, and 63 securities licenses and is a registered representative with LightPath Capital Inc, member FINRA /SIPC .
Paul Getty is a noted speaker, author, and actively lectures on investments and sales and management related topics. He is author of The 12 Magic Slides ,Regulation A+: How the JOBS Act Creates Opportunities for Entrepreneurs and Investors , and Tax Deferral Strategies Utilizing the Delaware Statutory Trust (DST), available on Amazon and other retail outlets.
This material is not intended as tax or legal advice so please do speak with your attorney and CPA prior to considering an investment. This material contains information that has been obtained from sources believed to be reliable. However, FGG1031, First Guardian Group, LightPath Capital, Inc., and their representatives do not guarantee the accuracy and validity of the information herein. Investors should perform their own investigations before considering any investment. There are material risks associated with investing in real estate, Delaware Statutory Trust (DST) and 1031 Exchange properties. These include, but are not limited to, tenant vacancies, declining market values, potential loss of entire investment principal.
Past performance is not a guarantee of future results: potential cash flow, potential returns, and potential appreciation are not guaranteed in any way and adverse tax consequences can take effect. The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities. All financed real estate investments have a potential for foreclosure. Delaware Statutory Trust (DST) investments are commonly offered through private placement offerings and are illiquid securities. There is no secondary market for these investments. Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions. Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits.
IRC Section 1031, IRC Section 1033, and IRC Section 721 are complex tax codes; therefore, you should consult your tax and legal professional for details regarding your situation. Securities offered through registered representatives of LightPath Capital, Inc. Member FINRA / SIPC. FGG1031, First Guardian Group, and LightPath Capital, Inc. are separate entities.
DST 1031 properties are only available to accredited investors (generally described as having a net worth of over one million dollars exclusive of primary residence) and accredited entities only (generally described as an entity owned entirely by accredited individuals and/or an entity with gross assets of greater than five million dollars). If you are unsure if you are an accredited investor and/or an accredited entity, please verify with your CPA and Attorney prior to considering an investment. You may be required to verify your status as an accredited investor.