From the time he was young, he started buying old houses to rent. He had a good feel for what would be a good buy and what he should pay considering the future rents. By the time he was about 60, he had a total of over 50 houses in his stable. When he retired as a multimillionaire, he sold them and invested the proceeds in a half dozen U.S. post office buildings. These were triple-net leases, so he didn't have to do any maintenance or make monthly rent collections.
He used 1031 exchanges, which meant that he didn’t pay any capital gains taxes on the house sales as long as the proceeds went into the post office buildings. His gross income was very high, but his taxable income tax was extraordinarily low because he had huge amounts of depreciation and other deductions from the rentals. When he died his estate benefited from the markup of the cost basis to the values on the day he died.
That said, many of us couldn't live with the emotional strain caused by his tenants when he was renting houses. Steve had the kind of personality that would accommodate the many problems. Though soft hearted with friends, he gave renters the impression that he had ice water in his veins and would evict his own mother if she didn't pay the rent. And he could roll with the punches. For example, he wasn't particularly bothered when he had to evict one couple, entered the empty house, and found that the carpets were all covered with dog excrement. Not only that, but the renters had removed the kitchen cabinet doors to use as steppingstones around the house to avoid stepping in the mess. The odor from the urine and excrement was so bad that he had to remove the flooring and dry wall throughout the house. To Steve, this was just part of the business, not something to get emotional about.
A similar problem occurred when our friend Judy rented her old house. These renters always paid the rent on time. One day she went over to check on the house. She noticed that all of the windows were covered so she couldn’t see in. No one answered, so she opened the door. Inside was a marijuana farm with an array of daylight bulbs hanging from the ceiling and an automatic sprinkler system which had caused mildew and moss to form all over the walls and floors. She called the police who removed the plants, but she had to have both the flooring and dry wall removed just as Steve did. Unlike Steve, her real-estate investment career had an unhappy ending.
Similarly, a neighbor got an extended work assignment in a remote location and decided to rent his house to what turned out to be a tenant from hell. After a while the tenant stopped paying rent. Before being evicted, the tenant stole the plumbing, light fixtures and kitchen cabinets.
With one exception, my own real estate ventures were mediocre at best. They were partnerships, most of which were selected by my financial manager from places all over the country. This, of course, meant that I had to file a number of state tax returns in addition to my federal tax return. The taxes were so complex that I needed a tax accountant to help.
One of my adviser’s choices was a commercial rental with IBM as tenant and hence a reliable payer. He said they would be there for the long-term. Well they weren't, and the building sat vacant for a number of years before our partnership became insolvent. It was in that period that I learned that the initials of IBM stood for “I've Been Moved.”
Most professional advisers at least have your best interests at stake. Real-estate agents may not and can easily mislead buyers buyers about real estate. Agents are motivated to get the sale. Some people inherit a home or move to another city and may decide to keep the property as an investment. Others attend free seminars on how to get rich on real estate. What most of these people fail to appreciate is that real estate isn’t liquid. You may not be able to sell when you want unless you are willing to accept a distressed price.
Real estate is really not liquid when in a partnership. Partnerships that aren't publicly traded are virtually impossible to sell when you want. The sale comes only when the general partner decides to do so. So although I got a check once a year for my share of the rentals less costs, I couldn't get my principal back for years — and years. Now after what is approaching 40 years, I still have one of these partnerships and haven’t convinced the general partner to sell. I suspect that he has other motives that fit his life’s plan, wears rose colored glasses, and makes a reasonable income from maintaining the property — which he would lose if the property were to sell. This investment is a real sticky situation for me.
My longtime friend Howard had a situation similar to mine with a real-estate partnership. Then in his 90s, he wanted to get rid of it so his executor and survivors wouldn't have to cope with it. He couldn't find a buyer, so he thought he would give it away to a charity and at least get a tax deduction. He found only one charity that would take it, but they wanted an appraisal first. Getting an appraisal on an apartment building is costly by itself, but a partnership that holds properties in different states is a nightmare — and the costs of the appraisals aren't shared by the other partners. The appraisal cost so much that it virtually wiped out his tax reduction from the gift.
People like our friend Steve have an estate-tax problem which is especially severe in Washington where we live. His heirs had to find a way to get enough money to pay the federal and state estate taxes. Fortunately for Steve’s heirs, post offices aren't too difficult to sell if you are a member of the group that’s in this business. For others, it’s a liquidity problem. And Steve’s son is an accountant.
Many people buy time shares for vacation properties. It doesn’t take long for them to understand the relentless and ever-increasing annual charges for home-owner-association dues and property taxes. Then there is an occasional assessment. To add to the misery, the owners have to make reservations a year in advance to use their own unit. Time shares are extraordinarily difficult to sell. Sometimes people can find firms that will purchase these for pennies on the dollar.
It’s really important to take these things into consideration when looking at “investment” properties, particularly if you are in retirement and may have only a few years to live ahead of you. To avoid other states’ income taxes and probate, it’s good to own out-of-state properties in the name of a trust. Of course, you can leave them to heirs, but it’s important to know whether the heirs feel the liabilities are worth the use.
Reverse mortgages can be a blessing (as heavily advertised on TV) or a curse for the elderly . Those fixed payments that you considered adequate when you were 60 might be worth only half as much in purchasing power at 80 and only one-third as much at 90. On the other hand, health insurance, a primary expense for retirees, could cost twice as much at 80 and three times as much at 90. Perhaps even more serious, is what will happen if you must move to somewhere else before you die. Read a reverse mortgage contract very carefully .
I have come to the conclusion that one of the best ways to own real estate with the least hassle is to buy real-estate investment trusts (REITs). These are sold by brokers and mutual fund companies like Vanguard, Fidelity, etc. They are traded on the open market and are liquid because you can get your money any day you want to sell. Unlike real estate partnerships, there are no K-1s to make your tax computation difficult, no reporting of income in other states, no appraisals needed, and you don’t have to worry about collecting rent, maintenance, or replacing the floors and dry wall or maybe even the plumbing and cabinets after you've had to evict tenants. tslater
From the time he was young, he started buying old houses to rent. He had a good feel for what would be a good buy and what he should pay considering the future rents. By the time he was about 60, he had a total of over 50 houses in his stable. When he retired as a multimillionaire, he sold them and invested the proceeds in a half dozen U.S. post office buildings. These were triple-net leases, so he didn't have to do any maintenance or make monthly rent collections.
He used 1031 exchanges, which meant that he didn’t pay any capital gains taxes on the house sales as long as the proceeds went into the post office buildings. His gross income was very high, but his taxable income tax was extraordinarily low because he had huge amounts of depreciation and other deductions from the rentals. When he died his estate benefited from the markup of the cost basis to the values on the day he died.
That said, many of us couldn't live with the emotional strain caused by his tenants when he was renting houses. Steve had the kind of personality that would accommodate the many problems. Though soft hearted with friends, he gave renters the impression that he had ice water in his veins and would evict his own mother if she didn't pay the rent. And he could roll with the punches. For example, he wasn't particularly bothered when he had to evict one couple, entered the empty house, and found that the carpets were all covered with dog excrement. Not only that, but the renters had removed the kitchen cabinet doors to use as steppingstones around the house to avoid stepping in the mess. The odor from the urine and excrement was so bad that he had to remove the flooring and dry wall throughout the house. To Steve, this was just part of the business, not something to get emotional about.
A similar problem occurred when our friend Judy rented her old house. These renters always paid the rent on time. One day she went over to check on the house. She noticed that all of the windows were covered so she couldn’t see in. No one answered, so she opened the door. Inside was a marijuana farm with an array of daylight bulbs hanging from the ceiling and an automatic sprinkler system which had caused mildew and moss to form all over the walls and floors. She called the police who removed the plants, but she had to have both the flooring and dry wall removed just as Steve did. Unlike Steve, her real-estate investment career had an unhappy ending.
Similarly, a neighbor got an extended work assignment in a remote location and decided to rent his house to what turned out to be a tenant from hell. After a while the tenant stopped paying rent. Before being evicted, the tenant stole the plumbing, light fixtures and kitchen cabinets.
With one exception, my own real estate ventures were mediocre at best. They were partnerships, most of which were selected by my financial manager from places all over the country. This, of course, meant that I had to file a number of state tax returns in addition to my federal tax return. The taxes were so complex that I needed a tax accountant to help.
One of my adviser’s choices was a commercial rental with IBM as tenant and hence a reliable payer. He said they would be there for the long-term. Well they weren't, and the building sat vacant for a number of years before our partnership became insolvent. It was in that period that I learned that the initials of IBM stood for “I've Been Moved.”
Most professional advisers at least have your best interests at stake. Real-estate agents may not and can easily mislead buyers buyers about real estate. Agents are motivated to get the sale. Some people inherit a home or move to another city and may decide to keep the property as an investment. Others attend free seminars on how to get rich on real estate. What most of these people fail to appreciate is that real estate isn’t liquid. You may not be able to sell when you want unless you are willing to accept a distressed price.
Real estate is really not liquid when in a partnership. Partnerships that aren't publicly traded are virtually impossible to sell when you want. The sale comes only when the general partner decides to do so. So although I got a check once a year for my share of the rentals less costs, I couldn't get my principal back for years — and years. Now after what is approaching 40 years, I still have one of these partnerships and haven’t convinced the general partner to sell. I suspect that he has other motives that fit his life’s plan, wears rose colored glasses, and makes a reasonable income from maintaining the property — which he would lose if the property were to sell. This investment is a real sticky situation for me.
My longtime friend Howard had a situation similar to mine with a real-estate partnership. Then in his 90s, he wanted to get rid of it so his executor and survivors wouldn't have to cope with it. He couldn't find a buyer, so he thought he would give it away to a charity and at least get a tax deduction. He found only one charity that would take it, but they wanted an appraisal first. Getting an appraisal on an apartment building is costly by itself, but a partnership that holds properties in different states is a nightmare — and the costs of the appraisals aren't shared by the other partners. The appraisal cost so much that it virtually wiped out his tax reduction from the gift.
People like our friend Steve have an estate-tax problem which is especially severe in Washington where we live. His heirs had to find a way to get enough money to pay the federal and state estate taxes. Fortunately for Steve’s heirs, post offices aren't too difficult to sell if you are a member of the group that’s in this business. For others, it’s a liquidity problem. And Steve’s son is an accountant.
Many people buy time shares for vacation properties. It doesn’t take long for them to understand the relentless and ever-increasing annual charges for home-owner-association dues and property taxes. Then there is an occasional assessment. To add to the misery, the owners have to make reservations a year in advance to use their own unit. Time shares are extraordinarily difficult to sell. Sometimes people can find firms that will purchase these for pennies on the dollar.
It’s really important to take these things into consideration when looking at “investment” properties, particularly if you are in retirement and may have only a few years to live ahead of you. To avoid other states’ income taxes and probate, it’s good to own out-of-state properties in the name of a trust. Of course, you can leave them to heirs, but it’s important to know whether the heirs feel the liabilities are worth the use.
Reverse mortgages can be a blessing (as heavily advertised on TV) or a curse for the elderly . Those fixed payments that you considered adequate when you were 60 might be worth only half as much in purchasing power at 80 and only one-third as much at 90. On the other hand, health insurance, a primary expense for retirees, could cost twice as much at 80 and three times as much at 90. Perhaps even more serious, is what will happen if you must move to somewhere else before you die. Read a reverse mortgage contract very carefully .
I have come to the conclusion that one of the best ways to own real estate with the least hassle is to buy real-estate investment trusts (REITs). These are sold by brokers and mutual fund companies like Vanguard, Fidelity, etc. They are traded on the open market and are liquid because you can get your money any day you want to sell. Unlike real estate partnerships, there are no K-1s to make your tax computation difficult, no reporting of income in other states, no appraisals needed, and you don’t have to worry about collecting rent, maintenance, or replacing the floors and dry wall or maybe even the plumbing and cabinets after you've had to evict tenants. tslater