Rental-Property Advice:
Hold On to Your Winners

Question: I own five investment properties: a one-bedroom condo, three single-family houses and a duplex. I am 46 years old, don't need cash right now and don't hate being a landlord. The properties account for approximately 85% of my net worth, not including my own home. I have calculated that I will owe about 30% in capital-gains taxes, including the state tax, if I sell. Should I unload these properties?

-- Andy, Narragansett, R.I.

Andy: Congratulations on your prowess as a real-estate investor. There are many people out there who would envy your achievements. But why are you thinking about selling?

Real estate by its very nature is illiquid. Selling can be difficult, transaction costs are high, and then, of course, there is the matter of capital-gains taxes, which you mention. Most real-estate fortunes are built by buying and holding for the long term.

You seem perfectly positioned to do this. You are still relatively young, say you can handle landlording and don't need cash immediately. Hang on to those properties for 10 or 15 years and chances are they will double in value. (Don't believe it? Consider what properties cost 10 or 15 years ago.) By then, the homes will be close to being paid off -- assuming they aren't already -- their rental income should give you a strong positive cash flow, and chances are the government will have abolished the capital-gains tax (at least one can hope). In short, they should create a wonderful retirement package for you.

Selling now, based on what you say, means you will give almost one-third of your profit away through taxes. Then you will need to reinvest that money. And where will you put it? Probably in real estate, which most people feel is currently the best investment… and where you already are!

Unless you are wise enough to pick the top of the current boom and the bottom of the next cycle, my suggestion is to hold. Over the long haul, I don't know of a safer -- or more profitable -- place to be.

-- Mr. Irwin has more than 25 years' experience as a Los Angeles-area real-estate broker. He is the author of more than two dozen books about real estate and is recognized as one of the most knowledgeable writers in the real-estate field. Mr. Irwin's most recent books are "How to Get Started in Real Estate Investing" and "How to Buy a Home When You Can't Afford It" (McGraw-Hill, 2002).

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