Ahhh, retirement. Time to relax on the golf course or travel to exotic lands. But if you own multiple investment properties in numerous jurisdictions, your real estate holdings may become a burden in retirement, consuming both time and money. Before you surrender and sell all your investment property, consult with your wealth advisor and explore all the potential solutions.
“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,” says Christine Gehring, a wealth planning consultant with RBC Wealth Management-U.S.
Here are three tactics to consider:
1. Hire professional help
Many real estate investors start with one or two residential properties and then eventually find themselves in their 60s or 70s with a portfolio of property investments, says Cliff Hockley, president and principal broker of Bluestone and Hockley, a real estate management firm in Portland, Ore.
“There are several ways to simplify your investments as you prepare to retire, but I always recommend that at least by your early 60s, you should be talking to your kids about whether they have an interest in partnering with you to manage the properties,” says Hockley. “If not, you can look into hiring a property manager for each place or an asset manager to oversee your whole portfolio.”
Hockley says property managers typically charge three 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 two percent of your rental income,” says Hockley.
Dean Deutz, a private wealth consultant with RBC Wealth Management, says he asks his clients how long they want to be a landlord.
“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,” says Deutz.
Hockley says one 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.
2. Simplify by selling
While selling your real estate investments and investing the profits elsewhere may seem like the easy way out of landlord duties, Gehring warns that divesting yourself of property must be handled with caution.
“You have to be careful of the timing and the tax consequences of selling,” says Gehring.
Deutz says investors should evaluate their portfolio so they have the appropriate diversification of locations and property types.
“You need to decide which properties to sell while you’re in your 60s, and which properties generate the most income that you could use when you’re fully retired,” he says.
Gehring says 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,” says Gehring. “You can weave all that together to decide when or whether to segue out of real estate.”
3. Create an LLC
Pre-retirees who decide to keep their property—but want to build in protection for their heirs and their investment portfolio—can choose between a Limited Liability Corporation (LLC) or a Family Limited Partnership. Gehring says most people opt for an LLC but the decision depends on state laws, local customs and attorney preferences.
“We recently worked with an 80-year-old woman who owns property in Georgia, South Carolina, North Carolina, Florida and Texas,” says Deutz. “It made the most sense to create an LLC for each of her properties in order to avoid probate in each state.”
Retirement planning and estate planning are closely linked. Deutz says 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,” says Deutz. 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.”
That’s why many families opt for an LLC, which provides shares so that each family member owns an interest in the LLC rather than an individual property, says Deutz.
“An LLC provides better protection for your assets since the properties are owned by the LLC instead of individuals,” says Gehring. “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, says Deutz.
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 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,” says Gehring.
If you’re uncertain which strategy is best for you, a wealth advisor and an attorney can help you restructure your property portfolio to suit your needs.
This article was originally published on Forbes WealthVoice.
RBC Wealth Management, a division of RBC Capital Markets, LLC, Member NYSE/FINRA/SIPC.