Is your life better off having the property, and are you getting a reasonable amount of money from the property? Welcome to the Retire On Time q and a podcast. I'm Michael Decker with David Franson here from Kedric Wealth. As always, text your questions to (913) 363-1234 so we can feature them on the show. Remember, this is not financial advice.

This is just a show. And, let's dive in. David, what do we got?

Hey, Mike. Is it better to sell your rental properties with renters in it or when it is vacant?

I think it depends on the property. Yeah. This is an interesting question because the new laws that are coming out could actually switch this answer. So let's just paint two pictures.

Okay. Yeah.

One picture is there's new laws, high rental or landlord laws, rent caps, restrictions, and so on.

Okay.

So as long as there's a renter in there, you're limited on your cash flow. You're not gonna buy a property that's gonna give you 1% cash flow when a high yield savings might give you 3% on your cash flow. Yeah. That doesn't make any sense.

So in places where there are rental rent laws that can be very restrictive and difficult to work with, that that might actually hurt your property. I mean, it's it's even getting to a point where landlords have to pay their renters when they leave. This is true. If, for whatever reason, a landlord doesn't want to renew the agreement

Okay.

It does not matter if they can afford it or not, if they if they can find a new place or not, if they just believe there's hardship Yeah. The landlord has to pay a couple of months of rent so they can then find a suitable place.

Oh, boy.

Doesn't matter about their debt or their income or anything else. It's just complete abuse to the landlord. Okay. And I get a lot of landlords have abused

Their renters. There are slumlords out there.

Yeah. It's just That word exists for a reason, but

It's that's not that's not cool. But when policy forces people, it can be very dangerous.

So I see the good intention here trying to help people, but it's just so blatantly easy to abuse. So in those situations, you almost want your your renters to leave and then you sell your house so that the new landlord can price it appropriately and so

on Okay.

Depending on the local laws.

Yeah. But if you're in

a place that is landlord friendly, you've got good renters, you've increased things, you're not a jerk.

Right? That's a helpful bit there. Mhmm. Then selling a property with good tenants can actually bring some stability because then the person can buy it and say, yeah, I'm the new landlord, but, like, please stay. Mhmm.

Let's let's we want you to be happy. We want you to stay here because they don't have to go find a new tenant. Yeah. And that's a hassle. I mean, it sucks when you're a landlord and you go six, eight months without a tenant.

So that's kind of the first part of it. The other part I'd look at here is the condition of the home as well. Now you can repair homes with tenants in them. You can report repair homes without. Is this a fixer upper rental?

Is it not? It's like the just the landlord side of the business, I think, would affect it. But the main one from a price standpoint is the local laws and what is the return on investment. When I say return on investment, I'm looking at net operating income. So if you go through your schedule e, and if you don't know what schedule e is, wake up, landlord.

I don't know a landlord that doesn't know what their schedule e, but that's the top part of your tax return that lists all the different expenditures, the what you're writing off and so on.

You

can appreciate your properties and so on. So if you put those those numbers in and you figure out your actual cash flow, net of the expenses, net of the repairs, net of the the management company's costs or whatever it is, you can back it all in and say, okay. Here's what I could sell it to today. Here's the cash flow. Here's the net operating income.

How valuable is your property, really? And then you can make a decision. Oh, I'm only getting 1%. Maybe I should sell it because I don't want to pay for the repairs to kinda get it up to up to where things should be. That's for someone else to deal with.

I'm looking towards retirement, not I'm looking to make this house nice and enjoy it for the next, you know, twenty, thirty years. Does that make sense?

Yeah. So what if you're let's just say sort of hypothetical. You have some tenants and they pay $3,000 a month. K. So you can't just say like, oh, look, I have $3,000 a month coming in.

Oh, no. That's that's not the case.

So you might once you pass through all of your expenses and etcetera, you might only be getting 1% of that 3,000. Is that what we're saying?

Well, what you might so the yeah. Let's let's define this.

Yeah. Spell it out for me.

When you say 1%, one percent of the property value. So let's say let's say easy math, a $100,000 property. No. Okay. No.

Yeah. I can't it's about difficult. Let let's say yeah. Well, it's just it's the calculation. I'll get my calculator out.

There we go. Alright. There's always a calculator in your pocket.

There is. Thank you. Yeah. Steve Jobs. Yep.

May you rest in peace. Yeah. So $3,000 a month times $123,600. Right? And you take that and you divide it by, let's say, 4.25.

Okay? So that's an $800,000 or $847,000 house. If you were to sell it today Oh. Like, that's what it would be worth.

Yeah. What was the 4.25 there?

That's the cash flow that I would assume

that you get from.

So you wanna get anywhere from three to four at least percent cash flow. Oh. So the problem with this is if if you're getting $3,000 a month in rent of an $850,000 property

You might be undercharging. Alright. Because that assumes there's no repairs. There's no problems. There's no taxes.

There's no nothing. Uh-huh. Do you see how that works out? Yeah. So let's just do all of this backwards.

We got $850,000. Great. K? And we're gonna put in I'm gonna put in, like, 7 percent. 60,000.

I don't even know what the rates are for for homes today, but

Oh, like if you had a loan? Yeah. It's gotta be in the sixes now.

Right? And it depends so much on the area, the part of it. But the idea is your what's your what is your actual cash flow app? So let's say that's $3,000 or so, and you're getting really like $2,000 because a thousand dollars a month is going to like a side account.

Okay.

Are you with me now?

Yeah. So, yeah, 3,000 coming in And how how much is going to the side account?

$1,000 Okay. Just going to a savings account just to maintain the property.

Alright. Yes.

Right. Now you're looking at $2,000 as your actual income in this oversimplified situation. I hate oversimplified, but there's just so many variables with rentals.

Sure.

So in in that situation, okay, two you're earning $2,000. K? So let's just go back real quick. $2,000 or 24 a year. Take the $850,000 property, and you're really getting 2.8% cash flow.

Woah. Yeah. And this idea that, oh, you can you depreciate yourself into wealth. Well, hold on. That only worked for so many years.

And usually, what I see is people lose the depreciation. They fully depreciate their property around retirement or in the beginning of their retirement. They lose that tax benefit. And so now they're getting 2.8%, 2% cash flow. Oh, but, Mike, the property appreciates in value.

Well, hold on. What good is that if you don't sell the property? Right. And if you don't increase rent, you don't grow things, like, it's a dead asset. It's getting you 2.8%.

You could do better in a checking account or a high yield savings account. Yeah. And so this is where you say, okay. I got $850,000. I've got a new roof I need to put on at some point within the next three years, and the water tank's probably gonna go out soon.

Mhmm. I'm getting 2.8% right now. I didn't keep up with rental laws. I didn't increase my, you know, my my rent each so it this is now a problem.

Yeah. And property taxes keep increasing and

Property taxes are increasing, all sorts of issues. Insurance. This is where you just have to get rid of the property. This is hot potato. Just get rid of it.

And so what typically I see people do is they will, one, just sell the property, pay the taxes, which hurts. Mhmm. And then they invest it in a way that they hope within a couple of years they can break even, and then they advance the portfolio forward. That's a pretty painful way. Yeah.

Now you could, if you wanted to still be a landlord but just move properties, which is a very normal thing that people do, you'd sell it, and then you would do a $10.31 exchange into another property that just suit your needs a little bit better.

Okay.

It's still a problem child. It's still something you have to deal with. Whether it's just another house that has its own you know, they say the devil you know is better than the devil you don't. Oh. Just selling your property and getting another house that you don't know with all of its quirks

Right.

It's not always gonna work out. Right. Maybe you'd go into, like, farmland that you lease out for cattle. The cash flow is not gonna be as good. There's maybe less risk, less maintenance.

Still, it might be less cash flow. So what I see I think is the favorite option, if you will, is to sell a property, do a ten thirty one exchange into a Delaware statutory trust, which is an institutional grade, you know, the large properties. Think of like the warehouses, the self storage units, the kind of those massive things that you know they're not paying for it themselves. Yeah. They're getting investor money to to basically create or build or buy the property.

They maintain it, you don't. You get the cash flow from it. All is well.

It sounds almost like is that too good to be true? No, it is true.

Well, it's true. You're giving up risks. You're giving up well, there's there's just a a different benefit detriment situation. So one of the features or or you could say benefits, guess, is that you're gonna have someone else take care of it. That's a benefit.

Yep. The detriment is you're gonna have someone else take care of it. You're not it's you're not the landlord anymore.

Someone else is. So you need to trust that they're able to be a good steward over the property.

Yes.

One of the benefits is you're gonna increase the cash flow. Hopefully, that's usually why people do it. But the detriment is you're gonna lose liquidity. You're not selling this thing until they decide to sell it, which could be in five years, but probably more like seven to ten years. That's a detriment.

Right? You lose the liquidity. You're not guaranteed the cash flow. So if something goes sideways, you might not get some payments. It's it's not just like you might lose a tenant, they might have something that comes up that they don't lose or you you don't get paid on the cash flow.

So Okay.

So it's just like any investment, there's benefits and detriments with it. But, I mean, if you're able to increase your cash flow, you can retire from a landlord, and you're good at the research. Might be a good option. Yeah. As rental laws increase, and we're seeing them in Washington State, We're seeing them in California.

We're seeing them in New York, especially New York.

People want to get out. But they don't wanna pay the capital gains tax on the properties. They don't wanna pay the depreciation recapture tax. I mean, can you imagine owning a $10,000,000 property and getting taxed like 30 plus percent

Of $10,000,000? That's a big check. Yeah. There's a reason why people don't want to sell their properties. Right.

So this is a way that you can exit out. And by the way, once when you pass, not like we're looking forward to it, but when you pass, your real estate gets a step up in basis. So then you can transfer to all the other kids without paying the depreciation recapture, without paying the capital gains tax, and so on. Right. So don't put your mark or your your property up for sale and then, you know, get the proceeds and then call someone like us to help you with this.

You there's a very deliberate process. First, you need to have a qualified intermediary, someone to accept the funds so that you don't touch them. Mhmm. You touch the money, the proceeds from the house that you sold, you're done. Doesn't qualify.

So it has to go to a third party. Yeah. A QI is what they call it. Okay. Then you have forty five days to identify the properties that you want.

There's all sorts of rules around that. Once you identify those properties, then you have really a hundred and eighty days from the start, but it but you've got around a hundred and eighty days in total that you then have to move the funds into the property. That's usually the easy part. It's the forty five days to identify the properties and then finish your due diligence.

So you can't get these things on your own. You have to go through a qualified professional like a financial adviser like us to even do it, which is kind of a funny thing, but that's just how it works. Right. I didn't make up the rules.

Yeah. Sorry, DIYers. Yeah.

But but it's it's incredible when you go, and we have all this on retireontime.com. Go to the the landlord real estate exit calculator. Put in your Schedule E. Just see what it looks like and see if you were to get a DST if your cash flow improves and you have less responsibility. It's been nicknamed the retire the landlord's retirement plan.

Okay. So you they can go to our website and they can put in their details and see what kind of cash flow they're getting?

Yeah. You don't even have to put in your name to have access to this. Because I hate when people do that. You know, you're like, oh, I want this tool. We'll put it then you're gonna spam me.

Yeah. It's

like, no. People want me if you want my newsletter Yeah. Then you'll subscribe to it. If you don't, I don't want you on there. Yeah.

Like, I wanna send people stuff they want to receive. Yeah. I don't wanna put up a gate for all this stuff. Like, it's publicly available. Just use it.

Whatever. Yeah.

So that that's a that's a great benefit. So we thanked Steve Jobs earlier.

Who should we thank for for this free tool? I don't know. The AI revolution Yeah. That made it possible for us to easily create these these tools.

There you go. Thank you, AI.

But the point being is, in my opinion, rental laws have a significant consequence on your ability to sell. If you're thinking about maybe getting out, maybe retiring as a landlord Mhmm. Start looking at these options now. It doesn't mean you need to do it now. It means it's I'm suggesting it's important to understand how it works so that if it's right for you, you know what you're going to do ahead of time.

It's easier when you have familiarity with the process. So educate yourself with that, look at the tools, vet a couple of DSTs just as a practice run. I mean, why

not? That's interesting.

Yeah. That's easy for us to connect you with those. Right. And then one shameless self plug.

Alright.

I shouldn't say self plug. Caution slash self plug. Alright. With the DST space, this isn't bad, it's just how it is. Yeah.

Many people that operate in this space as a financial adviser get a back end commission for DSTs, and it'll be anywhere from five to seven percent one time back end. It's built into the cost. It doesn't come out of your principle. It's just a part of the deal in most situations. That's how it works.

That's a lot of money.

It could be. So if like 5 to 7 percent of millions

That's $10,000,000? Yeah. That's a lot of money.

We can't accept that.

Yeah, we here at Kedrick.

We can't accept those back end commissions. So with the different sponsors all over the country that we work with, and we're agnostic, we'll work with any sponsor. Since we can't accept it, we just negotiate so that the client gets the money so the money's not lost. We just have our flat fee, how much does it cost to do the job, the paperwork, the vetting to work with you and all of this, set it all up, help you along the process. That's just a flat fee.

So in most situations, in every situation so far, the client actually, they increased their overall value. They didn't pay any capital gains tax. They didn't pay any depreciation recapture tax. And when they put them on the DST, the amount increased because they got the commissions and we didn't. But it Hey.

I mean, that's my whole, like, shtick here is how much does it cost to do the job, and why don't we just charge that instead of trying to tie commission to everything? Yeah. Just let's make things more honest in this service base. And then maybe, may maybe these different financial positions, according to the Gallup Report, that are like as low as politician and used car salesmen, maybe you could go a little bit higher on the trust ranking. Maybe we could bring trust back to this industry by radical transparency and fees, and basing it on the work and not the back end commissions?

I don't know. Call me crazy.

Yeah. We're doing our best here.

Call me crazy, but

Go up the rankings.

Anyway, any anything else on this one do think, or do we answer it?

I I think we answered it. I mean, it kinda depends. Right? Sell it with renters or without. There's different situations that would maybe say that you should or shouldn't do with people in it or with people not.

There's always complexities to it. Yeah. But as a general rule, are is your life better off having the property, and are you getting a reasonable amount of money from the property? Yeah. I mean, would you walk up to a a bank and say, hey, bank.

I know that CD's 4% you're paying out, but I only need two. Mhmm. You can just keep the rest.

That's that's what you're telling the world with your real estate properties. Hey. I could get more, but I don't need more. I wanna be slothful with

Mhmm.

With my money. Yeah. Yeah. That that probably rubs a few people the wrong way. Right.

Because they they got wealthy for for being aggressive Mhmm. For being a good business person.

And then somewhere along the way, they they started doing the numbers wrong, and they didn't realize many times they're actually losing money on some of these properties.

That's wild. To to not know that maybe what the true cash flow is or that you're actually losing

They think they know. Yeah. And they don't. That's that's the issue. So anyway, that's all the time we've got for this this question.

If you enjoyed it, don't forget to like, subscribe, leave a comment. We do read the comments and so on. You can also go to retireontime.com to grab the book, the workbook, all the resources that are there, as well as just join me for a fun workshop where I build a plan live and then take your questions along the way. Again, that's retireontime.com. Thanks for joining us.

We'll see you in the next episode.