Author Topic: How to retire with enough cashflow  (Read 4576 times)

mooreprop

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How to retire with enough cashflow
« on: August 18, 2013, 07:16:08 AM »
I am new to the forum, but have been impressed with the knowledge base represented.  I have been a full-time teacher with real estate investments for over 20 years.  I initially purchased real estate with a 10 year plan to buy 20 properties and pay down as much as possible on the mortgages, so that after 10 years I could sell half and pay-off the mortgages.  I would then have enough cashflow to live on indefinitely.  Unfortunately, during that time my state changed their property tax laws which caused my real estate taxes to triple.  These were low end rentals and this caused them to become break even investments at best and negative cashflow if you had a mortgage.  My husband and I were forced to sell at the same time most other similar investors were doing the same thing.  Luckily, we figured it out sooner than most and were able to sell rather than lose them to foreclosure as most in our area did.

Next, we took our albeit reduced equity and invested via a tax deferred exchange into medium price rentals that better cashflow since their taxes were not as affected by the change.  This was 2007 so you probably know what happened next.  Houses that we purchased lost 30 percent of their value.  I am not looking for a pity party though.  The good news is that the rents have held constant or increased due to all the foreclosed homeowners needing a place to live. 

At this point I have $1,650,000 of property ($215,000 of that is my personal residence)  with $885,197 in mortgages and cannot seem to get more than about $18,000 in cashflow. The rest is paying mortgages and other expenses for the properties.  The mortgages do not pay-off until 2023.   I would like to quit teaching now.   I need $35000 to support my family's lifestyle.  (about $50,000 before taxes i guess)  The only way I can figure out to do this is to take out bigger mortgages or sell some of the houses to support myself until my apartment complex mortgage (with $3725 monthly payment) is eliminated.  If I quit my job, I am not sure whether I would be able to get loans as easily or at all.  I am reluctant to rely on rentals since it seems the government keeps screwing me over, but if I sold everything I would only net about $365,000 after realtor commissions and capital gains taxes.   What would you do in my shoes?

*I am eligible to begin receiving a teacher's pension of $1300 per month in 2021 if they remain solvent.

daverobev

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Re: How to retire with enough cashflow
« Reply #1 on: August 18, 2013, 07:27:27 AM »
Can you sell off slowly to reduce that cap gains bill?

Can you restructure some to longer terms, to improve cashflow? And/or get a better rate?

Not sure how the US (I assume?) works but I think others were saying that, for $35k, you're pretty much not taxed. Not sure what your tax bracket is now, but if you quit, next year it'll be less - sell something and your cap gains will be less, right?

Do you have anything in a tax shelter? Because if after you retire you're untaxed *anyway* you might as well pull that stuff out to restructure.

Or just snowball them - find the smallest mortgage and throw everything at it for a while til it's gone.

Apart from that... numbers are what the numbers are, if your NW is $400k *investable* if you sold everything, that's $16k a year. If you're currently getting $18k you're doing ok I think! Just about right, in fact. Unless I messed up my maths.

lentilman

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Re: How to retire with enough cashflow
« Reply #2 on: August 18, 2013, 07:41:42 AM »
Regarding taxes - you might even be able to swing a negative federal tax rate:
http://www.mrmoneymustache.com/2012/06/04/the-lovely-low-taxes-of-early-retirement/

Another Reader

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Re: How to retire with enough cashflow
« Reply #3 on: August 18, 2013, 08:07:01 AM »
As a fellow investor with multiple properties, I understand some of the problems you face.

How much unused, accrued depreciation and operating losses do you have?  With those numbers, I would expect you to have a significant amount.  With that little net income it would be difficult to use it all.  That could reduce your taxes if you sell some of the properties.  Your tax situation is complicated and you likely need a CPA that works with real estate investors to figure out the ramifications of the alternatives.

You have another problem, and that is you are nearing the end of the depreciation window for some of these properties.  The 1031's did not extend the depreciation period.  That will compound your tax problem, as you will lose significant deductible expenses.

What's the apartment building?  How much debt on that property?  What's the NOI on that property alone?  Would that be "enough?"

My guess is you have not been able to refinance to lower rates.  If that's the case, are any of your loans eligible for HARP?

Without more information, I cannot tell you what I would do in your shoes.  I can tell you I would look at deploying the equity to better investments or restructuring the ones I have, so I think you are moving in the right direction.



lentilman

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Re: How to retire with enough cashflow
« Reply #4 on: August 18, 2013, 12:24:02 PM »
In the first post you said "The rest is paying mortgages and other expenses for the properties.".

Is there any way to squeeze the "other expenses" for cash flow?  Perhaps do the job of the current property manager or lawn care or routine maintenance? 

arebelspy

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Re: How to retire with enough cashflow
« Reply #5 on: August 18, 2013, 12:34:20 PM »
Quote
At this point I have $1,650,000 of property ($215,000 of that is my personal residence)  with $885,197 in mortgages

Okay, so about 800k in equity (significantly less when you pay cap gains and depreciation recapture).

So selling is out.

How about refi'ing half of them to the hilt, using that to pay off the other half?  That should keep your overall annual return the exact same, just push some of what is accruing as principal paydown into cash flow via the extra paid off properties (the higher mortgages won't offset that in a 1-1 ratio, so you should come out ahead cash flow-wise).

We'd need more specific numbers to flesh it out, but that should be doable, in principal.

Another option is doing cash out refi's every few years to gain the 35k you need (completely tax free - taking a loan isn't income) until 2023, only a decade, when they're paid off (though that payoff will push out some due to the extra mortgage debt from those refis).

Either one of those has the potential to get you there now.
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.

Another Reader

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Re: How to retire with enough cashflow
« Reply #6 on: August 18, 2013, 01:15:52 PM »
I'm not convinced that selling is not appropriate for one or more of the properties, if the OP has a lot of unused accrued depreciation.  Restructuring the portfolio by tax efficiently trimming the biggest problems might be one way of making this work.  The OP also has properties that cannot be depreciated beyond a few more years, adding a bit of a wrinkle to defining what to sell. 

Refinancing may not be a good option here, especially if the OP is beyond the 10 loan limit.  The only attractive option for me over the last few years has been HARP.  If the OP has HARP-eligible loans, that could help her cash flow problem.  Interest rates for her last round of purchases in 2007 were not very favorable compared to current rates.  The loans appear to have 15 year terms.  A much lower interest rate and a longer term could improve the cash flow now.  The portfolio could be adjusted over time if values go up and selling opportunities appear.  I refinanced a number of HARP-eligible properties and when the sales market improves I will sell and pay off the mortgages on the long term holds.

Cash out refi's on rentals are tough.  Over the mortgaged property limit - probably tougher, although I haven't tried.  After retirement refi's are extremely difficult right now - underwriters want to see reliable monthly income that is sufficient to meet current coverage requirements.  I was instructed by two different mortgage lenders never to put "retired" as your employment on any loan application. 

Specific "what I would do in your shoes" comments would need the actual numbers, of course.

AlexK

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Re: How to retire with enough cashflow
« Reply #7 on: August 18, 2013, 02:12:19 PM »
What if you were to sell your primary residence and move into the most depreciated rental for two years, sell it tax free, repeat? Use the tax-free profits to live off of or pay down mortgages, invest in stocks, etc.

Another Reader

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Re: How to retire with enough cashflow
« Reply #8 on: August 18, 2013, 03:19:18 PM »
The rules changed, I believe over 10 years ago.  You can no longer move into a rental for two years and then sell it as your primary residence, wiping out the income tax due.  It was a good tax avoidance strategy, while it lasted....

arebelspy

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Re: How to retire with enough cashflow
« Reply #9 on: August 18, 2013, 05:47:09 PM »
I'm not convinced that selling is not appropriate for one or more of the properties, if the OP has a lot of unused accrued depreciation.

It's possible.  The 800k in equity that can be cashed out as 350k is scary to me, so I was looking at other routes to go.

I agree with your refi'ing after ER being tough, but refing half now to the hilt and making the other half free and clear should free up cash flow.

mooreprop, can you provide more numbers (just name them property A, B, C.. and let us know the FMV, mortgage amount, rent amounts, and debt service on each) to work with?  More details is better (i.e. amount of depreciation, amount of capital gains on each, expenses for each, etc.), but if we at least get the 4 things I mentioned, we can run a few numbers.
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.

honobob

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Re: How to retire with enough cashflow
« Reply #10 on: August 18, 2013, 06:52:47 PM »
The rules changed, I believe over 10 years ago.  You can no longer move into a rental for two years and then sell it as your primary residence, wiping out the income tax due.  It was a good tax avoidance strategy, while it lasted....
You can still do a proportional avoidance.  She could always do a 1031 to a potential primary residence after one year of rental.  Rinse, repeat.