A question came up at our Local REI meeting that I would like to ask the group:

What is the best way to cash out of the rental business?

Thanks for your feedback.

MMIT,

My recent extreme health trial has moved exit strategy to the top of my mind.

I have always talked about selling everything and 1031 it into farmland. No toilets or roofs, just dirt and rent from a farmer.

Holding property a long time means huge depreciation recapture meaning I pay the govt about 34-40% of the sale.

Been 1031ing 2 or 3 smalls into one nice home. Reduces the number to manage.

Also, anything new has been going into my Roth401k, giving me tax free income...so the income is worth 40% more than a regular rental. Amd my heirs can enjoy the income tax free.

Have dozens of single family, some multi-use, and some apartments...Here's 4 exit strategies I've considered:

Die with it. Manage it til I can't or don't want to. Then pass management to kids if they want it or to property manager if they don't.

Keep all til bout 60. Sell one or two a year to gain a little extra change and reduce workload over the course of a couple of decades.

Sell in three or four sets over the course a few years via owner financing to a younger investor.

1031 into combination of triple net commercial and farmland.

Do a "For Sale BY Owner" and carry back the first mortgage. You can not receive more than 29% as a down payment so this will be an installment sale. Have a 10 year Pre-Payment Penalty. This way when you sell, you won't have to pay the Long Term Capital Gains Tax, State Tax, Depreciation Recapture and Affordable Care Tax all at once. Since loan mortgages are mostly interest the first 10 years, you will pay mostly "income tax" and not all of the other taxes. So you will earn "TOP INSTEREST" on the bulk of the sale for years. Only the down payment will you have to pay out lots of taxes on...

You are saving the 6% brokers commission and are earning interest on taxes not paid yet....best of both worlds.

Like Brad said, so whatever you can to avoid paying taxes. Not sure if the current administration will allow the stepped up basis rules stand. 1031 may also be on the way out. Strike while the iron is hot.

My thought is to train up my own manager (kid, family member, trusted friend/spouse of trusted friend) and pay them. That way the sweet cashflow keeps coming in, and I'm out of the day-to-day. I'm not a large operation, but it would be a lot for anyone who is not me to take over at the drop of a hat if I got knocked out of commission. Yes, we have auto-drafts (ACH), but that still have to be initiated, etc. Our procedures are a bit different too than most publicly available PM companies do, with lock box showing, online apps & screening, the 2-minute in home inspection, etc. Stuff that has us making more money than many "professional" managers would ever be able to make.

I'm no longer focusing on residential: all commercial. Not retail space: workshops, storage units, nightly rentals. Much easier to manage. Less hassle, more rent, higher $ value, longer depreciation (but less recapture as a result). The one exception is the nightly rental. That's a new ball game for me. More details on that later...

I intend to die with it and hope my heir can still get the stepped up basis, which is looking a little shaky right now.

I've been doing 1031s and have reduced my numbers that way. If I sell, the assorted governments take the money I get away from me, so selling is not very attractive.

Right now, a 1031 is still possible and there are things to 1031 into that aren't houses.

GKARL (PA) - Did your client think managing multis was more trouble than SFH's? I don't have any multis, so I don't know how to compare. I would think if you had enough units in a multi, it could make economic sense to be able to afford a property manager, but I don't know.

SID (MO) - What do you mean for "nightly rentals" -- airbnb type units, hotel/motels, etc? I'm trying to explore any ideas.

Age, health and other interests,

will be deciding factors on when to hang your Hats.

Die broke and let the last check to the Undertaker

bounce.

Don't worry about what ya do with the loot,

until ya have the loot.

Most here are circling.

MMIT,

For what it's worth, over the years I have watched several LLs in our local association hold their rentals too long.

They got sick, cancer, broken hip, the usual old age stuff...and could not keep up their properties. Rentals sat empty for months or years, fell into disrepair.

The heirs inherited junk, huge liability not income producing assets, sold them cheap as handyman specials just to get rid of them.

Food for thought.

Another thought...

Short version: to sell to a occupant and hold back a mortgage requires a mortgage brokers' license.

Safest to sell this way to investors only.

PS Plus the seller has to pay all the taxes from the sale in the year of the sale...before bringing in very many payments.

..., anything new has been going into my Roth401k, giving me tax free income...

I've been asking the same questions. The only thing I've figured out so far is that I'm going to be out of day-to-day operations in the next 3-5 years and I don't want to pay out the wazoo on taxes. Here are some options I have been considering.

One of my son's is interested so I may sell some to him and carry the notes. I'll be paying the taxes but if it does come to pass that we loose the stepped up basis then there is less benefit over the long haul.

I've been looking at DST's and may 1031 part into something in the fractional ownership where there is a management company. I've got a lot of learning to do in this space before I'm comfortable putting a big chunk of money here.

I will probably donate some to the church to offset some tax. I need to have a discussion with the CPA but I believe you get to claim the full market value as a donation, not the book value.

I may speculate in land buying property that our city should expand into in the next decade or so. Like Brad, I'd target leasing for farming/ranching to have some income until the appreciation happens. I doubt the income would be comparable to rentals but it would be a place to park money that likely doesn't go down in value.

As a last resort I will hire a management company to take over the day to day.

I want to get big enough to hire a full time management company, or simply sell and put the money with a money manager and live off of it.

At a 4% withdraw every $1m is $40k a year. Opening and looking at statements is very easy...

Nicole and others,

How to do Roth as a LL?

Call Mike Todd of IRA Innovations 615-794-8961. He is a long time supporter of MrLL and was a presenter at Convention.

He helped me set up a SOLO401kRoth. Solo as in self-employed.

It has a VERY high contribution limit so you can grow the account rapidly from your own contributions.

Knowledge is power and profit. Mike has that knowledge.

Use a DST, NNN or invest in OGM - each being all hands off investing.