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IN 1954, THE SPANIELS sang, “Goodnight, sweetheart, well, it’s time to go.”
It may not be time for me to go, but it is time to hand over the keys to our rental properties to my wife, Alberta. Since 1983, I’ve had primary oversight over our family’s residential real estate. At age 79, I’m dogged by heart disease and cancer, and weary of scrimmaging with delinquent renters and dishonorable service people. After assisting me and grooming for the role, Alberta is ready to take the reins.
I’ve previously lamented my imminent passage from retirement’s challenging accumulation phase to the monotonous withdrawal phase. Little such remorse accompanies letting go of the head-knocking that comes with private property ownership. I’ll welcome the release from anxieties over vacant units and the dreaded black mold.
Such family transfers of responsibility can run the gamut. Maybe your spouse or partner just needs to get into the habit of scrolling down the credit card statement, ensuring the charges are legitimate. On the other hand, maybe he or she needs to get up to speed on the nooks and crannies of your complex family trust.
Passing the baton may also call up old relationship battles over who’s in control. Be aware of any festering conflicts brought to the surface by the shift in decision-making authority. Here are some changes I anticipate as Alberta takes over.
Our marriage will suffer less tension and anxiety. As Alberta became more comfortable making business decisions, she naturally expected our input to be 50-50. Taking a page from my father’s playbook, I saw it as 51-49—in my favor. Now, we agree the balance of power will be something like 25-75, with her taking the lead.
An added bonus: The investment anxiety that has stalked our relationship will be reduced. Alberta won’t be freaked out, as I’m prone to be, about an impending empty unit or a leaky roof. She’ll just calmly get together with our property manager and handle it. And I’ll need to be patient with the often-stressful re-rental process.
Oversight will be more hands-on than it has been. Years back, we secured first mortgages at nominal interest rates from motivated sellers. In a very real sense, we were “buying the mortgage” as much as the property. We prioritized keeping good tenants by raising rates judiciously and limiting maintenance expenses to what’s necessary, rather than what’s gorgeous.
Here comes a true confession that may cost me some credibility. How hands-off have I been? Well, it’s actually been more arms-length than hands-off. I’ve met monthly with the property manager to ensure all the ducks were in a row. But I’ve never personally visited most of the properties since I bought them 40 years ago. I never interviewed a single prospective renter.
We bought well and managed well, so inspections and meetings with potential tenants simply haven’t been necessary. This arrangement has allowed me to minimize my involvement in an activity I don’t enjoy, yet served as a profitable diversification from the vagaries of the stock market. Applying this model over 40 years, we profited handsomely from income and capital appreciation.
Keeping renter turnover low is essential, because the cost of alienating or losing good tenants is prohibitive. You have the cost of primping the property for the new tenant, absorbing the property manager’s commission for renting the unit, and the silent cost of lost rent for the duration of the vacancy. And despite your best efforts to screen out problem tenants, you may get a real deadbeat to replace the tried-and true renter you just drove out, perhaps with an overly large rent increase. Of course, you can raise the rent on the new fellow, but it may take several years to recoup the outlays.
Alberta and I are reasonably well-informed about the intricacies of buying and financing, but egregiously unsophisticated about property maintenance and repair. Fortunately, we hired a long-term property manager knowledgeable where we’re not, and the manager was similarly committed to rental longevity and unremitting cost control.
Alberta’s modus operandi will play out very differently. For one thing, our battled-tested property manager of 35 years retired, and Alberta will now be working with a new person whose philosophy of management may conflict with my own. He’s competent and diligent, but uses established retail vendors before considering talented and versatile handymen or retired service people. No less important, he doesn’t always get second bids on large projects. To me, this gives a blank check to service providers who are relied on exclusively and know they’ll get the job without price competition. I honestly don’t know how Alberta will navigate these waters.
The new regime will value quality over cost. Where before it was merely mowing and blowing, our rentals will now get some landscaping. The new carpet will be premium rather than a step above commercial grade. This approach will reduce our income, but should also attract higher-quality renters and enhance property value.
My wife’s supervision will be more personal. Right now, I read over the monthly report, checking in only for elaboration of a missing rent or an unexpected humongous expense. Alberta will meet one-on-one with the property manager, periodically visit the premises and perhaps interview some of the rental prospects.
My major contribution now will be in the quantitative realm, like helping to translate the expense categories on the reports into IRS-speak. I’ll also be consulted on complex projects and weigh in on sensitive questions, such as the rare eviction and liability exposure.
While ready and relieved to let go, I’m under no illusion that stepping away from the role of family real-estate guardian will be without a sense of loss. I’m wistful, but also hopeful that the new division of responsibilities will help Alberta and me to work together effectively and harmoniously.
Steve Abramowitz is a psychologist in Sacramento, California. Earlier in his career, Steve was a university professor, including serving as research director for the psychiatry department at the University of California, Davis. He also ran his own investment advisory firm. Check out Steve’s earlier articles.
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Caution: Rent doors in California are getting more difficult to manager due to the “Progressive California” political climate at the State legislature & Local community initiative levels: In this rapidly changing business environment the hard working long time Rent Door property owner needs to take long-term evasive measures to guard Your business AND personal equity from the old fashioned “Taking”.
We are “Small-scale (8 units), Family Retirement residential income property owners, since April, 1979 in Southern California. After years of hands-on management, I currently use a Property Manager to manage & maintain our portfolio of Family Retirement properties. As owner, I am “Respondeat Superior” for everything (resident & guest behaviors, facility failures, mold & mildew, dog-bites, etc.) that happens on the parcels that we own.
At age 72 (almost 73) after two bouts with Cancer, I see two long term trends in our business that concern me:
a) the Statewide drive to establish “Tenant Justice” Rent Control at the local level driven by the “Equity” & “Rent Justice” folks. This is Rent Control that can cause massive disruption / decrease in revenue and add massive new administrative fees & expenses to each Rent Door.
NOTE: To support this statement, I point to what has happened in the City of Pasadena, CA since November, 2022 and the 2024 state-wide “Justice For Renters” ballot measure that is polling at a favorable 55% approval as of March, 2024.
b) The 2nd long term trend is the rapid change of the “Norms & Values” that set expectations and behaviors in the population of current potential rent door residents. Their expectations & behaviors are very-much different from the Norms & Values of those who built the California Small-scale, Residential Property Rent Doors between 1946 and 2010.
NOTE: This is a hard part of the discussion to pull off and I don’t want to sound like an angry old man standing in his driveway & shouting at the neighborhood kids riding their bikes in the street, but attitudes, behaviors & expectations have changed with the new renter in 2024 Progressive California.
In response to these and other trends, I have decided to (as effectively as possible) use current-available-tools to avoid long-term-taxes and move this California-Rent-Door-Equity to properties in other more landlord leaning States by placing my post-sale rent door property equity into Delaware Statutory Trusts (DSTs) and other IRS Section 1031 alternatives. NOTE: Naturally, there is a lot more to this decision, but it’s a trend that I feel is going to stamped rent door capital out of California in the coming year.
The new Progressive California reality became “crystal-clear” during the discussion for the adoption of a scaled-down rent control ordinance for an old RV-Trailer Park in the City where we own rent doors. During the Public Discussion of the proposed ordinance, the New owner of the old-run-down-blighted RV/trailer park who has been raising site-rents, upgrading facilities and moving “fire” trap Recreational Vehicles out of His park in a rather compassionate & caring manner was asked by a long-term City Council member what he did with his money from his business operations.
This exchange might seem trivial and unimportant, but after having several eye-popping rent door resident situations (too many to list and I don’t want You falling out of Your chair laughing) over the years, having an elected, long-time, “politician” in a small California City of 28,000…a City that can’t provide sidewalks, pothole free streets, working street lights, working traffic control lights and working stormwater runoff drains, ask a young risk-taker who is trying to use the marketplace to improve a downtown property what he does with the money from his business operations, “takes-the-cake”: 2024 Progressive California at it’s finest!
Note: This week the industry just got the “effective” letters about who is going to have their Property and Liability insurance “not renewed” by State Farm Insurance Company. If You are an owner of a clean & well maintained sixteen unit building and received a non-renewal letter sitting next to a “Justice For Renters” flyer, after all of Your hard work, moving Your legacy equity out of State might be a very good peace-of-mind move. God Bless the IRS and Section 1031!
What is interesting about this article to me, is that, rather than planning to sell and consolidate rentals and investments, you are planning for succession of the next generation. I would add that, if the property manager does not do the accounting and taxes, that you add a person like that to your business. My friend, in her 80s, is struggling to manage all of that in addition to paperwork. Then, Alberta can do what she loves best without getting into the weeds in older age, and bookkeeping will be on someone else.
Your points and suggestions are well-taken. We do, of course, have an accountant and a very effective property manager who does all the bookkeeping as well. Alberta will have the choice of merely reviewing the monthly reports and checking in if she has a question or becoming more hands-on, if she wishes. Alberta is looking forward to her new role.
Steve, a question for you. If for some odd reason Alberta turns out not to enjoy “scrimmaging with delinquent renters and dishonorable service people” and the other unique pleasures of landlording, will it be her decision 75-25 that the two of you sell off the properties, pocket the massive equity you will have accumulated over 40 years of ownership, and relax into your final years?
Alberta, especially as compared to me, loves private real estate investing and probably always will. I’ve tried to elucidate, as best I can, my reasons for not “selling out.” I might add, as irrational as it is, that I want to honor the hard work of my parents for providing me with a relatively worry-free financial life. Otherwise I would like to refer you to R Quinn’s incisive comment and my response below.
Steve, I read your reply to Dick, and I understand perfectly. To the many reasons you have been so fortunate to have Alberta, you can add her shared priorities regarding the rental properties. My question was more hypothetical, I suppose — should her priorities or circumstances change and she chooses to sell, would your 25% include a veto?
Good question but no, I’d have input but it’s her baby now.
This. Steve replied to Dick that he was keeping the properties because he didn’t want to pay the capital gains taxes. Seems to me that’s letting the tax tail wag the lifestyle dog. If you’ve made a huge capital gain, why shouldn’t you share some of it with your fellow citizens? Doesn’t sound like you’re in financial need.
One invests for the future benefit of family and oneself. There is no obligation, moral or otherwise, to share capital gains with others because those same others don’t bear the risk of your investment.
We often hear about people enjoying successful investments that yield handsome capital gains. But we seldom hear about the more numerous failed investments that lose money.
Even if you can regain some of those lost dollars with a capital loss tax break, you pay a significant opportunity cost. That money trickling back to you via your tax returns is not compounding for future growth.
I should also mention that all the years of pressure and anxiety accompanying one’s real estate investments don’t contribute to cost basis. If one should be compensated for mental anguish, perhaps the true capital gain is less than meets the eye.
So well put. I couldn’t have said it any better.
Here’s my response, made with some awareness (and guilt) of the limits of my generosity. The tax system here is less empathetic than Europe’s. I feel I pay my fair share. I have already paid taxes on the income I earned and am reluctant to pay them a second time.
I am not sure what you mean by “empathetic” in this context. Paying tax on the income is a separate issue from tax on the capital gains. You would not be paying twice. I see no good reason for the step up in basis.
If you see no good reason for the step-up in basis, then you see no good reason for people to invest for the benefit of their descendants. Are familial relationships overrated?
I presume that people are more concerned about the welfare of their children and grandchildren than the welfare of unrelated others. Private citizens can donate dollars to charities to help those in need without yielding the gains from their life’s work in business or investing.
Government welfare programs more than make up for any dollars lost through the step-up in cost basis.
My wife and I are holding on to our rental properties for the same reasons. Per your reply to Dick, the tax burden will be fully erased when our sons inherit our rental properties. I believe Biden is on board with a change in the tax code that will limit the tax free inheritance to $5 million, but that is still a significant benefit and considerably more than the value of our properties.
I also don’t like the fact that, in addition to capital gains, the IRS taxes recaptured depreciation at 25%. (The IRS taxes recaptured depreciation even if you didn’t depreciate.)
Your sons are very lucky to have such well-informed and caring parents. They will, I’m sure, always appreciate it.
It would take all day to enumerate the various forms of torture that I would endure before I became a landlord.
My hat is off to you and other landlords since I was multiple times in the past an excellent tenant.
Seems like you’ve moved on, but if you ever wish to return to tenant-hood, please let me know!
Agreed. My quote for many years when my wife has expressed preliminary interest in investment property has been simply that I wouldn’t be a landlord at gunpoint. Life’s too short for that level of aggravation. All respects to those who can do it.
Steve – good luck with the reduced responsibilities. Please pay appropriate attention to your medical requirements and keep writing for HD.
Thanks for the support. Fortunately (so far!), the cancer is “under control” and I’m told I’m a golden heart patient—no smoke, no drink, slim, cholesterol 150, Pilates 3X weekly. Unfortunately, there’s obviously mucho plaque, so who can know for sure?!
Steve, thanks for a very thought provoking article. I’m wrestling with how to deal with one hybrid vacation property. There are questions of income, taxes. and inheritance. Less quantitatively is the concern of increasing the complexity of our finances. I’m comfortable managing it for now, but if something happened to me Wouldn’t want it to be a burden on my wife or sons (who are both more than capable of handling it, but busy with careers and growing families). Putting all these ingredients into one big financial stew is my current obsession. One of the hardest questions if what is the best outcome – lowest taxes, highest income, maximum inheritance, simplest financial management? I’d be interested in how you think about those kind of questions.
Wow! Let me try and tackle a few. I would be very careful about complexity, even if it means missing out on some opportunities. So much depends on the values and personalities of your family members, as well as their job responsibilities. Who wants a lot of free time and leisure? Who would sacrifice that for a life more financially free and providing more challenge? It might be helpful for all concerned to see whose life would benefit most from each of the various things
you can apparently provide them. It can all be so overwhelming. Although I’m generally leery of getting professional advice, you probably need to huddle with your accountant and others to “share some of that anxiety with you.” There have been some excellent articles on HD about simplifying finances and a very recent one on the pros and cons of inheritance versus “why shouldn’t we spend it now.” I know I haven’t touched on everything, but I hope this helps.
Why obsess Rick, the real issue is to keep it simple and fair. We set things up so that all, one or several of our children can keep the vacation home as they choose. Valuation, allocation and ongoing expenses are all taken care of in our wills and the house is owned by the family trust with children as beneficiaries. Not at the point to worry about estate taxes.
Congratulations on passing the torch. I hope the reduced stress has a positive effect on your health. It sounds like the properties are heading in the right direction, though I agree on the importance of multiple estimates from contractors.
Thanks for the concern. The transition is going real well and we’re both happy in our new roles. Alberta has always been competent, and I am particularly pleased to see her become more confident in dealing with the periodic snafus.
Steve, you have written several times about the many issues with rental property and the aggravation. At your age, why bother?
Why shift all that to your wife? Sounds like 25-75 is setting you up for a different kind of stress,
Why not phase out, sell, live with as little stress as possible?
A VERY good point. Several reasons, some financial and some relating to personal values.
First, most of these properties have been held for over 40 years in California. They have enjoyed enormous capital appreciation. To sell now, even property by property, we would be on the hook for a huge tax hit. If we hold and I pass, the basis is fully “stepped up,” so that the tax burden is FULLY ERASED. When Alberta passes, my son Ryan would ALSO get a stepped-up basis.
Second, Alberta does not have the same intolerance for the real estate hassles as I do. Her pride of ownership is much higher than mine, and so is her sensitivity to renters’ complaints.
Third, we already enjoy a rewarding lifestyle, full of good dining and entertainment and a freedom from the stress of “not having enough.” I’ve been having a wonderful partial retirement that includes breakfasts with friends and a bountiful social life made possible by Alberta’s network. I get gratification from seeing several patients weekly, continue to poke around in the stock market and have a very close relationship with Ryan. The real estate is a flaw in my life but, in the bigger picture, not a fatal one.
Fourth, the income from the real estate has given us a life with few financial worries. It’s paid for health and education and a myriad of other concerns that might otherwise have become financially overwhelming.
All that being said, would I do it this way again? No. Maybe a few for diversification, but otherwise funds and real estate investment trusts. Maybe next time around…
I don’t do tenants and toilets just dividends. I admire your hard work and family values.