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>>and I'd strongly urge you to run some numbers rather than automatically assuming you'll keep the properties.<<

Good point. I've thought a lot about this and here is the result of my thinking so far:

-When I got the properties I knew very little about the real estate business vs. other forms of investment, which I'm been trying to remedy by studying. Since I can't easily undo the sale of the properties I figured I'd hold off on any drastic action for a bit until I figure this out. My post that started this thread was one attempt to get more information for this larger decision. If the $85k or so in profits per year are taxed at my marginal tax rate and I can't do anything about it, then I probably want to sell so that the investment income which replaced the rental income is taxed at 15% (assuming the next president doesn't increase capital gains and dividend rates).

-The management company takes 10% of rent collected, but they are pretty good at keeping vacancies low. They've been managing since December of 2006 and I think there have been 3 months between all of the properties where there was a vacancy.

-Although I could sell all the properties without much of a tax hit right now, given that the actual market value of the homes has fallen sseveral % (the St. Paul market isn't falling THAT fast fortunately..yet) and that each year doesn't bring in that much new depreciation, I don't feel pressure to sell ASAP due to depreciation. I think waiting a year or two isn't that costly..

-If I were to sell the houses and put the $ in an account bearing 3% (I think 6% is more realistic), then the $60k per year would basically match inflation. Over the long term real estate should at least keep up with inflation (unless I think we're still going to fall a long way in prices from the real estate bubble), so the $85k in profits from the rental properties is actually equivalent to about $145k in increased value per year if I assume inflation is 3%.

-I am concerned that the gains of the stock market from the past are partially fueled by a greater and greater proportion of people investing in stocks. For instance now that the baby boomers basically all have 401ks or ROTH IRAs and such and have all put their money into the market, stock prices will naturally be higher than they would otherwise be if we were still seeing the patterns of stock market investment that we saw 50 years ago. Maybe now that most people are in the stock market we won't see similar price increases in the future? Maybe it will only be 7% per year pre-inflation? Therefore when people tell me that I should expect 9% per year pre-inflation from the market I have some doubts. I'm not sure how plausible this is though so I need to research it more.

-Given all the home forclosures recently, it seems like the # of renters needing an apartment/home should increase, raising rent prices and making rental properties more attractive for a little bit at least. I need to investigate whether this is likely..

-I'm concerned that creditors are over-reacting to the housing crisis by making credit too expensive. No one wants to continue making bad loans after all of the publicity around this. If creditors lose money by being too conservative at this point then they may not be evaluated as harshly as those who lose the same amount of $ by being too aggressive, after what has happened. Therefore there may be a bias right now which is depressing home prices more than necessary. I need to do a lot of research on this. I'm not saying it's true -- just something I need to evaluate.

-There will be a light rail line between St. Paul and Minneapolis built within the next few years (probably.. you can never be sure). All the houses are basically right between St. Paul and Minneapolis, so the light rail line would make this area especially valuable to professionals working in either city (although an efficient market theorist could argue that the possibility of that is already reflected in the price).

-If there is a complex tax strategy which I can use to reduce my taxes in this situation, it shouldn't be that much of a headache for me because my CPA will handle all the unpleasant details, and once the strategy is set up I assume the costs of keeping it up to date with tax law aren't huge.


Those are some of my thoughts on the matter. Let me know if any of them are wildly irrational :)

Thanks,
Charles
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