How much do YOU think YOU need to retire? ...and at what age will you (and spouse) retire? (Part 1)

Parent Cafe
8321

A small change in cap rates can increase a property’s values hundreds of thousands or millions too. That is what happened in SF. Actually, it has happened all over the country. Cap rates have declined all over the US which has increased real estate values.

Rent control in SF helps a lot of people. I believe most people are renters in SF. So…in SF, rent control has helped a lot and hurt fewer.

However, rent control in SF is probably a good idea gone bad. An example, an apartment under rent control has a rent of $1,000 a month. Without rent control, that rent would be $2,000 a month. So…the renter gains $1,000 a month while the landlord loses $1,000 a month.

Except, the landlord loses a lot more than $1,000 a month or $12,000 a year. There is a large decrease in market value because of rent control. If the value of a building is 25 times rent, the landlord loses 25 times $12,000 when the landlord goes to sell.

Rent control…25 x $12,000 =$300,000.
No rent control…25 x $24,000=$600,000.

Landlord loses an additional $300,000.

(The value difference isn’t this linear because rents can be raised to market value when a renter leaves. But this example is close enough. Plus…renters don’t leave much. Why should they?)

I would be wary about investing in rentals in SF.; although single family homes are exempt from rent control. Buildings built after 1979 are also exempt from rent control. When my parents bought the building, there was no rent control in SF.

Then again, I know people who have made millions of dollars investing in SF. So…

8322

NO ONE can buy a home/ appt in SF these days for less than $1,000,000.
There are lots of places in CA to invest $$ for rental income.
We bought a townhouse in Pasadena in late 2014 for 500+, which rents for 2500/month and are looking for other properties in the same area.
The same property in Mt View would cost minimum of 1.3 mil if it were even available.

8323

@menloparkmom,

Who is going to manage the property for you? Or are you going to manage?

8324

I wouldn’t buy property to invest in SF. My son says that tenants have all the rights in SF, and the property owners have very little. Too expensive, too risky. If they can also impose rent control on you, well, who pays when property taxes go up? Homeowners association fees? Insurance? You might already be taking a loss.

Though I’m not one to talk. We’ve only raised the rent on one set of tenants…$25, but that’s because we’re suckers, not because it was imposed upon us. I think we might raise rent a big $50 on another set of tenants, finally, after three years. We are getting a $11K assessment, HOA fees have gone up $50, property taxes have gone up. We could probably raise the rent $1K and still get tenants, but we’re suckers. It’s kind of like our charity, I guess.

Renting property isn’t for everybody, that’s for sure.

8325

Real estate is definitely best to consider a longer term strategy, as there are so many variables. It can provide some nice cash flow and a hedge against inflation, but it certainly has its complications. You also have to add in maintenance fees as part of the cost of ownership and those can have their own upward trajectory, especially as property ages.

8326

That’s how I look at it.

8327

Yes, we rent at below market value and have very stable tenants and hardly any turnover. We consider it partly charity as well.

8328

If you’ve ever seen the movie Pacific Heights, you’d never be a landlord in SF. :smiley:

8329

“Yes, we rent at below market value and have very stable tenants and hardly any turnover. We consider it partly charity as well”

Kind of makes you wonder what you and my tenants would think of this! Would they be insulted, flattered, or just grateful? The problem is, that I have met all the tenants (except for one set, that my husband really likes). I like them all. I know their finances because of the credit reports, and I wonder how they can even afford these condos as it is, at a reduced rent. We all get along, they don’t ask for little stuff, but tell us about the big stuff, we’re there in a split second if they have a problem, and I feel bad about raising the rent. Ugh. I should never meet them!! But we’re still getting a good cash flow, so how can I complain?

8330

"Who is going to manage the property for you? Or are you going to manage? "
fortunately, DH is a certified PM, as well as a Calif RE Broker.
So he manages it.

we were going to buy a unit in HW, but state law there requires PM be on site and they DO charge 25%. So we moved on to S Calif.
we are now also looking for more properties [ in SCalif, since its more affordable] to buy with our SEP IRA $$ commingled with our own $$. It can be done.
The IRA intermediary company will handle all monetary matters of the property owned by the IRA, and we will handle the rest [ and basically be the property managers of the unit since DH is in the business.]

We are really picky, and as a result of good luck, timing and his doing a lot of leg work ahead of time have had only 1 - $250 problem in 1.5 years on the property we bought and now rent out.

8331

I think the tenants are grateful, because they likely could not afford to live in the area if we raised the rents and many have lived in the same unit for decades. On the rare occasion that someone moves out, the property manager fixes things up and raises the rent to be closer to market rates, but it’s still on the lower end. We sleep well at night and feel we are doing our bit to help people have a place to rent that they can afford. We have not met the tenants since we hired a property manager–he’s able to be much more objective than us and is OK at raising the rent a bit when expenses get high (insurance and maintenance).

8332

we can’t afford to be charitable landlords.
This represents retirement income.
We rent at market value.

8333

Rent control in SF is on buildings built before 1979, yes?

8334

@shawbridge - we live in MA, got a condo in Myrtle Beach SC. The rental history has not been what we expected, relative to what the place cost. And the management company keeps jacking up the rate, they are at 40% now, and ding us for credit card fees, cleaning, repairs at an overly high hourly rate, etc. We don’t make money on it, cash-flow is negative.

We are a mile or so from the coast… one year a hurricane came fairly close, and did some damage in other parts of the state. For the next three years, the condo fees quadrupled because the insurance went through the roof. Not something you can anticipate, that was a pretty unpleasant surprise.

It’s all about location though, you can’t generalize too much, each property has to be evaluated on its own.

I don’t know much about AirBnb - how much do they take? And wouldn’t you still have to have someone local to manage it? Key hand-off, making sure it got cleaned, handling repairs, etc.

Sounds like your tax situation is as complicated as mine, with sched C income and rental income, etc. So you are well-equipped there.

Certainly didn’t mean to imply anything! Sorry if it came across that way, just trying to share my experience. :slight_smile:

8335

I wish we had taken a closer look at doing this when we were buying properties.

My understanding is that if you are going to manage it yourself, you have to be very careful to avoid “prohibited transactions” - basically there are limits on what you can do yourself (which of course the IRS chooses not to be specific about), and if you mess it up the whole IRA part of it can be unwound, and you wind up with a huge tax bill plus penalty for early IRA withdrawal.

8336

^ that is correct.
we and DS have no intention of moving into these units- they are located in desirable smallish cities close to colleges and mass transportation where grad students/ young professionals want to live and cant afford to buy.

8337

It’s not just living there, though.

I’ve seen on various websites everything from “you can’t do anything personally which will increase the value” to “you can’t lift a finger to do anything on the property at all, even simple repairs or landscaping” to “you can’t manage the property yourself, you have to use a property manager for everything, even selecting and approving tenants”.

There seems to be a lot of uncertainty around what exactly is a prohibited transaction and how to avoid them, even among the so-called experts.

8338

All of those would apply IF it were being bought with 100% IRA funds.

we will own each unit with 50/50 IRA/ non IRA savings.
the non IRA ownership means we can technically manage 1/2 the unit [ from afar] . The reality is our tenants will call us if there is a problem.
We dont have to have an official manager in any case cause of DH expertise, the tenants we choose, and the great amount of due diligence we do before buying.
We will take care of any repairs using non IRA funds.

8339

If you keep real estate in IRA, I would think you can’t get involved personally. If you do, you are effectively contributing to IRA in an invisible way. If that’s allowed, theoretically, you could buy building materials using IRA fund and build a house yourself and sell it at a great profit putting the proceeds back to IRA. All tax free.

8340

The IRA portion of the transactions will be managed a local company that does nothing but IRA real estate transactions and property management.
one cant buy building materials with IRA $$.
so that scenario is not realistic.
And any proceeds and profits DO flow back into the IRA. We are counting on that. Since we are over 59 we can now withdraw $$ from the IRA proceeds- regardless of where they come from- from the sale or from rental income. So we will get 2 checks from rentals each month- one from the IRA portion of the rent [ through the IRA property management co] and one from the non IRA portion of the rent. And if we choose rental properties carefully they hopefully will increase in value over time.