Author Topic: Should I Sell My Empire?  (Read 7057 times)

jonk

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Should I Sell My Empire?
« on: October 26, 2013, 09:01:17 AM »
Last year we decided to downsize and simplify, and basically start over.  We moved from Birmingham, AL to Clearwater, FL.  I love it.  I would have done it sooner, but most of my income comes from 10 rental properties I own in Birmingham.

I underestimated the downside of being an absentee landlord.  In the 15 months since we moved I have had two evictions and one tenant passed away (in the unit).  I had already decided before we moved that as I experienced turnover I would move the vacant unit to a property management company.  I knew there would be a cost of doing so (10% of monthly rent plus a tenant placement fee of 1/2 month's rent).  What I did not anticipate was the difficulty the management company is having getting my units occupied.  I have turned over two properties to them so far.  There have been considerable costs to upgrading these properties to the management company's standards.  In addition, because the two properties I have turned over are in fringe areas, most of the tenant pool do not meet the qualifications to rent from the management company.  I turned over the first unit in April, and it was just rented in October.  I turned the second unit over in June and it is still vacant.  To rent the first unit, I had to reduce the rent by $100.  After accounting for the 10% management fee, I will be bringing in $165/month LESS on this one unit than I had been earning.

I am tempted to sell everything and be done with it.  I am never moving back to Alabama so I can't see the situation improving.  But selling these properties would take a lot of time, and I am not sure I can match their return with a comparable investment.  Frankly, the cap rate on these lower income properties is ridiculously good, even at the lower rent the management company is getting... but only if they can keep the units occupied 85% of the time (I use a 15% vacancy rate in my cash flow projections based on past experience, but I don't know if that is going to hold with this new company handling things).

What should I do?  There's quality of life issues - I've had to travel to Birmingham a number of times, though I hope that would decrease as the management company takes over.  If I sell, I don't know where I would find a comparable return on my investment.




chasesfish

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Re: Should I Sell My Empire?
« Reply #1 on: October 26, 2013, 09:06:14 AM »
How much can you get if you sold all the rentals less commissions, expenses, ect, and what are your annual living expenses?

I'd be tempted to try another management company, put all of your units under their management, and try to get the fee down from 10 to 8%.

2527

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Re: Should I Sell My Empire?
« Reply #2 on: October 26, 2013, 09:11:26 AM »
My dad had two rentals 2.5 hours from home and they were a pain (they were far away, the places were low end and needed mechanical care, and the clients were low end and needed care) and he eventually sold them even though they were profitable.  Could you get a very small efficiency kind of place to live and go to Birmingham for a few days or a week every so often to take care of business?  Sometimes it seems like when you hire a mgt company, you just get a new problem to deal with. 

2527

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Re: Should I Sell My Empire?
« Reply #3 on: October 26, 2013, 09:16:24 AM »
Also, what is your age?  Most people sell there rental properties at a certain age.  If you are getting near that age anyhow, maybe it is time to sell.

jonk

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Re: Should I Sell My Empire?
« Reply #4 on: October 26, 2013, 09:46:38 AM »
I am 36.  Our average personal expenses have been around $22,000 per year since 2010, but that has dropped some since the move to Florida.  Income:  @$13,000/year from a Bene IRA, @$40,000/year from side projects I do.  Net Rental Income after expenses is close to $35,000/year (only 2 of the properties have mortgages).  My partner works but the income is minimal and I don't include that in my budgeting.

I do not want to depend on the side income, so just to cover current expenses I would need the proceeds from my properties to cash flow $13,000/year minimum after taxes (but would expect much more than that).

If I were to sell everything, less expenses, a conservative estimate would be that I net $525,000.  It would probably take 2 years to unload everything as I would want to honor current leases.

I've had no luck finding a better management company.  I have one other property managed by a different company, but they only handle higher end real estate and won't touch most of my properties (incidentally, that company has been awesome, as they have kept one tenant for almost 4 years even with annual rent increases).  10% seems to be the standard commission in the Birmingham area.

curler

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Re: Should I Sell My Empire?
« Reply #5 on: October 26, 2013, 10:12:13 AM »
Any chance that your high end management company could make a referral to someone better than you have?  Otherwise, I think your only option is to be more hands on in the tenant recruitment process.

2527

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Re: Should I Sell My Empire?
« Reply #6 on: October 26, 2013, 10:14:13 AM »
Wow, you have really done great!  To get that kind of net cash flow rate is really good, and  to own that much real estate mostly without mortgages at 36 is really good, too.  How did you do it?

FinancialIndependenceTime

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Re: Should I Sell My Empire?
« Reply #7 on: October 26, 2013, 09:31:39 PM »
I would start talking to a different property management company immediately. Don't just settle for any property management company. Make them work for you! Let them know that you have 10 properties and that you will be easing them into the company as the leases on each one is up. Make a contract with them to decrease their management fee from 10% to 9% then to 8% as you turnover your properties to their services. I never pay any fees for a management company to find a tenant (You should put that into the contract too).

Let your current management company know that if they are not going to put someone in your properties ASAP you will be looking for a new company. Bottom line is...a property sitting idle is costing you $$.

StarryC

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Re: Should I Sell My Empire?
« Reply #8 on: October 27, 2013, 10:23:39 AM »
Would it be feasible/ economically viable to hire one employee to act as a rental management company for you? 
I see 2 ways to do it.  If you have a reliable long term tenant that has some handy-man skills (perhaps in each property if they are multi-family) you could offer 1/2 rent or no rent to serve as the manager of that property or group of properties.  I'm not sure how you'd manage this tax-wise, but I know it can be done. 

If not, you might be able to hire someone as a part time employee- 10-20 hours a week.  Perhaps with a monthly salary.  Preferably they could fix minor issues, evaluate larger issues to determine whether to call a plumber/electrician etc, make appointments with potential tenants, show the apartments and do whatever else.  You could maintain some management (post listings, review applications, approve repairs) or give that person more authority, depending on how much you pay and how comfortable you are with them. 

chasesfish

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Re: Should I Sell My Empire?
« Reply #9 on: October 27, 2013, 10:48:14 AM »
I really find it hard to believe that there are only a couple of management companies in Birmingham.  Do you know other investors in the market that manage their own properties, you may be able to cut them a deal to manage yours.

Jwesleym

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Re: Should I Sell My Empire?
« Reply #10 on: October 27, 2013, 11:24:58 AM »

If I were to sell everything, less expenses, a conservative estimate would be that I net $525,000.  It would probably take 2 years to unload everything as I would want to honor current leases.


Leases should have no bearing on selling the units, in fact a rental property full of tenants is a huge selling point.  You would do well to sell with all units occupied with paying tenants. No one wants to buy a rental property with no tenants, it is more work for the buyer, and looks like they are getting a place that won't attract renters.

SunshineGirl

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Re: Should I Sell My Empire?
« Reply #11 on: October 27, 2013, 12:27:26 PM »
How is the real estate/landlord market where you live now? Maybe it would make sense to do 1031 exchanges on some of the properties.

Otherwise, I might ditch the management company and find an awesome handyman who can not only maintain the properties but show the properties and perhaps collect rent, although there's no reason tenants couldn't mail a check to you. You could do the advertising and screening yourself to maintain control over the tenants you get, but also give the handyman bonuses for finding good tenants and filling units. The type of person I would look for would be retired military. This could also be a person you could prime to sell the properties to - someone who wants to get into the business but might not have large downpayments.

You just have to find the perfect person. Easier said than done!

If I were in your situation, I think I would sell some of the properties in the worse areas and hold onto the ones in the best neighborhoods that you always have an easy time renting. Maybe look to replicate your success closer to where you live.

Riceman

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Re: Should I Sell My Empire?
« Reply #12 on: October 27, 2013, 10:56:51 PM »
6.6% is an great return for fixed income. But you seem to have enough assets and cash flow that you don't need to rely on fixed income, and investments with mostly equities will approximate that return with zero effort.  If I were in your shoes, I would liquidate the empire, move it to a 70/30 stock bond allocation, and, if it struck my fancy, slowly rebuild the empire where you currently live.

arebelspy

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Re: Should I Sell My Empire?
« Reply #13 on: October 28, 2013, 12:02:14 AM »
Test the water - there are plenty of investors that would love to take the whole portfolio off of you, especially if you'd be willing to carry paper on it (which would get you, most likely, a much better return than liquidating and investing in something else, and it spreads out and likely lowers the tax hit).  See what you can get, and then decide if it's worth it.
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BuzzardsBay

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Re: Should I Sell My Empire?
« Reply #14 on: October 28, 2013, 06:45:27 AM »
I have a question - if you lived in Florida, didn't own the properties, and had the cash instead, would you go out and buy ten rental properties in Alabama?  I think that will give you your answer.

arebelspy

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Re: Should I Sell My Empire?
« Reply #15 on: October 28, 2013, 06:09:32 PM »
I have a question - if you lived in Florida, didn't own the properties, and had the cash instead, would you go out and buy ten rental properties in Alabama?  I think that will give you your answer.

If only it were that simple. 

It's hard to get rid of something with such a good return, despite the frustrations.
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Devils Advocate

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Re: Should I Sell My Empire?
« Reply #16 on: October 28, 2013, 07:55:47 PM »
I agree arebelspy to a point. However I am at the point in my life and career where the money isn't that important. I have the ability to take the risk but not the willingness or the need anymore. The hassles and frustrations are simply not worth the money anymore.
DA
« Last Edit: October 28, 2013, 07:57:28 PM by Devils Advocate »

BuzzardsBay

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Re: Should I Sell My Empire?
« Reply #17 on: October 29, 2013, 11:09:53 AM »
But it is that simple.  Life is too short to be a long distance landlord.  I don't think the return is worth the annoyance.  Just sell, invest the proceeds and move one.

arebelspy

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Re: Should I Sell My Empire?
« Reply #18 on: October 30, 2013, 11:24:17 AM »
I don't think the return is worth the annoyance.

And I'm the opposite.  Being able to take 8-10 years off my working career (FIREing with a 6-8% SWR instead of 3%) makes the small frustrations worth it to me.  How many frustrations would I have working those extra many years?

It'll be a personal decision in the end.

It is definitely more effort and work, I just feel the small amount of work over the next 20 years more than makes up for a half dozen+ years less of full time work.  YMMV.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.