Welcome to How to Retire On Time, a show that answers your retirement questions. We're here to move past that oversimplified advice you've heard hundreds of times. Instead, we want to dive into the nitty gritty because, well, frankly, there there's no such thing as a perfect investment product or strategy. There are certain things you just need to know, so we wanna dive into that. As always, text your questions to (913) 363-1234.

And remember, this is not financial advice. This is just a show, so do your research. David, what do we got today?

Hey, Mike. I'm getting 8% cash flow on my rental, but I don't wanna be a landlord. What are my options?

First off, I doubt you're getting 8%. That's just not you're either a slumlord that is just taking complete advantage of someone that's not priced appropriately, or you don't do a proper calculation. Now that's not ignorance. That's not saying you're dumb. I'm not saying that at all.

Yeah. Walk us through how we determine what our cash flow is.

So let's talk more about taxes. Schedule e, real estate.

Okay.

You'll want to understand the current market value of your property. Not how much it was in 1982 when you bought it. What is it valued today? See how you can manipulate that? Well, I bought this house for a $100,000, and I'm getting $20,000 a year in rent.

It's a 20% return every year. No. It's not. Now that's an exaggerated bit, but landlords will do this. Why I put this much money in there, and this is the result I'm getting from it.

You need to account for the appreciation of the property as well.

Okay.

So what's the current market value of the property if you were to sell it today? Then second, what is the net operating income? So you need to account for your taxes, property taxes, and so on. You need to account for any legal issues. Is there maintenance?

What's the cost, the operating costs? And that's all shown almost all shown on your, schedule e, on your tax return. A lot of that's reported. Not all of it, but a lot of it. Most of it should be reported there.

Should be is the keyword. And then you need to ask yourself, is it a reasonable rate or not? So I've found that a lot of people think they're getting a good deal on their properties. Yeah. And it's like, okay.

Well, when's the water tank due? Oh, that that yeah. That should be replaced. How about the AC units? Yeah.

That should be replaced too. Are you gonna put a new roof on that? Next year. Okay. So you've been delaying all of these very large expenses Right.

To maintain better cash flow in the near future. At some point, you're gonna have to pay the piper. So once you understand a more holistic picture of what's going on, then you get a better idea of your actual cash flow. And then when you understand the cash flow, then you can understand your net operating income. Income is not cash flow.

Cash flow is the rent that comes in and then where it all goes. Income is what you get to spend at the end of the day, and those are very different numbers.

So after the cash has flowed to wherever it needs to go

The expenses, the taxes, all the other places at the end, what's your income if you spend it? Yes. And that's not just after taxes, all these things, because landlords will need to put a part of their cash flow into a reserve for larger expenses in the future. So when you start to understand that, you're probably getting at best 4%.

Oh, to be more realistic. And so do people have you ever met anybody that has come to that 3% or 4% on their own, or do most people really need like an independent set of eyes to say, no, it's really this?

I found most people skew numbers to make themselves feel better about it. They wanna distort it so they feel good about their investment. Mhmm. And their investment probably was really good for the first twenty years, but at some point, things typically change. And the other part too is there have been people that thought they had a positive cash flow, and once we do the analysis, they're actually losing money every year.

So you've got to be mindful of how these calculations are done. Yeah. Then the next part of it is where could your money go? So if you're a a landlord, you've probably been depreciating the asset. Depreciation the asset is the value of the property, the basis you put in there.

You can basically write off on your tax return and depreciate the value to zero. But when you sell, it's called a depreciation recapture. You're gonna pay taxes on everything you depreciated. So it's like the government let you pay less in taxes, but then they're gonna ask for it back. When once you sell?

Yep. Unless you die. Only way to get a depreciation recapture is death. So when you understand that complexity, you have to ask yourself, okay. And I'm using an average number here.

Say you got a million dollar property. Do you really wanna pay 30% or so in taxes? And how long is that really gonna take? And you might say, well, the markets are averaging 12%. That's what they have been.

There's a reason why everyone says past performance is not an indicator of future returns. We could be entering to a flat market cycle. What if we do? What if you sell the property, pay 30% in taxes, and you never actually get much growth for ten years? You've got to weigh the risks.

You may want to sell the property, pay the taxes, because you've got more investment options at that point. You may decide, well, maybe I don't wanna do this. Maybe you move the property into a REIT. This is called a seven twenty one up REIT, and then you've got the operating partnership units that you're then maintaining your cash flow. There's probably not much appreciation of the value of your units, but you're getting a higher cash flow.

Okay. That's fine. Cash flow in that situation more like income, because you don't really have expenses at that point. Maybe you decide to do a ten thirty one exchange into a Delaware statutory trust, which then would pay you income, so cash flow, and that's maybe around 4% or so. But the value, because it's fractional ownership of the property, so that's why it qualifies for a ten thirty one exchange, that value increases as well.

So you're getting appreciation, and you're getting the cash flow as well. So you've replaced your income. You're growing your wealth. All as well. That might be a better option for you.

At some point, even if it makes financial sense to keep a property, from a lifestyle standpoint, it might not. Gotta know your options.

Right. And so how do people get a DST or a REIT? Can do they have to go through an adviser? Can they do it on their own? Is there an app that'll allow them to to get it?

Yeah. It's not Robin Hood. You have to go through a licensed professional. There's a couple of ways you could do it, but it's some sort of license because these are much more complicated. They're higher stakes.

It's illiquid. You've gotta go through a certain person, like a licensed financial adviser, just to get access to it.

I see.

And then you have to also use a qualified intermediary as well. There's a lot of layers to it, so you can't just go out and do it on your own. Like, you can buy Apple stock today. You can't go out and buy a DST, and there's only a limited amount of DSTs or UPREITs really any given time. So you wanna do your research with someone that's independent on this to explore the different options and so on, but know your exit options.

Because at some point, being the landlord stinks. Mhmm. And you get tired of the tenants trash and toilets, and you just wanna move on. Even if your real estate is passive, it's not passive. Even if you have a management company that's managing it for you, you're still working.

You're still managing stuff. You're still making decisions. You're still concerned about it on your vacations. So if you really wanna retire, you've got kind of those three options. Pay the taxes, seven twenty one UPREIT, or ten thirty one into a Delaware statutory trust.

And all of them are right. If you got multiple properties, maybe you sell one and pay the taxes. Maybe you do a DST with another. Maybe you do a REIT with the other. I mean, it's what is right for you?

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