Managing Your Property Portfolio into Retirement

When people think of preparing for retirement, they often think of how they'll transition out of their career.

But for those who have real estate holdings, they also need to consider a course of action for transitioning out of being a landlord.

Many real estate investors start with one or two residential properties and then eventually find themselves in their 60's or 70's with a portfolio of property investments, said Cliff Hockley, president and principal broker of Bluestone and Hockley, a real estate management firm in Portland, Ore.

Whether or not you plan to keep your properties through retirement, consider sitting down and assessing:

• How your finances will change in retirement.
• If there's any changes you want to make to how your properties are managed that differ from the way they're currently managed.

“Decisions about how to handle real estate investments prior to retirement are extremely individual, but in general, investors need to consider what their cash flow will be like in retirement and how they want to handle their real estate investments in the context of family dynamics," said Malia Haskins, a wealth strategy consultant with RBC Wealth Management in Minneapolis.

If you own multiple investment properties, your real estate holdings may become a burden in retirement, consuming both time and money – but with careful planning, you can find ways to simplify.

Here are some ways you can simplify your real estate holdings before retirement.

 

Transition to Professional or Joint Management

“There are several ways to simplify your investments as you prepare to retire, but I always recommend that at least by your early 60's, you should be talking to your kids about whether they have an interest in partnering with you to manage the properties," said Hockley. “If not, you can look into hiring a property manager for each place or an asset manager to oversee your whole portfolio."

Haskins worked with a family that inherited a property portfolio including hotels, rental homes and farmland. They initially considered selling the properties because the heirs were too busy to manage the real estate, but following Haskins' recommendation, they hired a chief financial officer to handle the real estate investments for the whole family.

“They realized that the investments were worth keeping, liquidated a few properties because the timing was right, and now they're actually adding property to the portfolio," said Haskins.

Hockley noted property managers typically charge 3 to 10 percent of your rental income.

“If you own $100 million or more in real estate, an asset manager will probably charge you a fee of 2 percent of your rental income," said Hockley.

Consider How Long You Want To Be a Landlord

Van Pate, a wealth strategy consultant with RBC Wealth Management, agreed and said he asks his clients how long they want to be landlords.

“Most people say they want to wait until they are 80 to sell their property, but often they have hired someone to manage their properties, or own property that essentially runs itself and just generates automatic monthly rent checks," said Pate.

Transition to Commercial Real Estate

Hockley said another option for people who want to simplify their investments – yet stay in real estate – is to transition from residential properties to commercial buildings, since commercial properties tend to require less hands-on involvement.

Consider Timing and Tax Implications

While selling your real estate investments and investing the profits elsewhere may seem like the easy way out of landlord duties, Haskins warned that divesting yourself of property must be handled with caution.

“You have to be careful of the timing and the tax consequences of selling," said Haskins.

Pate said investors should evaluate their portfolios so they have the appropriate diversification of locations and property types.

“You need to decide which properties to sell while you're in your 60's, and which properties generate the most income that you could use when you're fully retired," he said.

Haskins said some investors need to reduce their exposure to real estate if their portfolio is heavily invested in property, yet still consider cash flow.

“You need to think about where your cash flow is coming from in retirement, such as investment income, pension payouts, IRA or 401(k) distributions, annuities or rental income," said Haskins. “You can weave all that together to decide when or whether to segue out of real estate."

 

Be Cautious of Estate Planning Implications

Retirement planning and estate planning are closely linked.

Pate said some families who think they are making decisions to simplify their investments around this time actually make them more complicated.

“Some people think it's a good idea to go to the courthouse and transfer the deed to each property they own to their kids," said Pate. While it's easy to re-register your assets, this can actually have unintended consequences and possibly lead to future family disputes, he added. “If the properties are unequal in value, the heirs could end up in a battle."

Consider an LLC

Many families opt for a Limited Liability Corporation (LLC) that provides shares so that each family member owns an interest in the LLC, rather than an individual property, said Pate.

“An LLC provides better protection for your assets since the properties are owned by the LLC instead of individuals," said Haskins. “If you turn your property over to individual family members, you expose the property to potential creditors and a potential marital claim during a divorce."

Another benefit of an LLC is that you can transfer shares among family members while the original owners are alive and after they pass away, said Pate.

Even if you have a separate LLC for each property, you can roll them into one master LLC or a revocable trust to simplify your real estate investments.

 

The Takeaway

“The main thing to consider during your retirement planning is whether your objective is to sell your property and move into retirement without the necessity of hands-on involvement, or to leverage your property as part of your investment pool after retirement," said Haskins.

If you're uncertain which strategy is best for you, a City National Bank wealth planner and an attorney can help you restructure your property portfolio to suit your needs.