Does it make more sense to sell my commercial properties or keep earning monthly income off of them?
I have inherited 25 percent of five commercial properties which brings in $1,500 a month for me. If we sell the properties I could earn at least $500,000. By my calculations, it would take me more than 25 years to make that amount at $1,500 a month. The others want to keep the property for sentimental reasons, but I would rather have the cash. What would be the better thing to do?
You'll get this disclaimer from any fiduciary adviser: It all depends on a lot of other factors that would be uncovered with a comprehensive plan: your age, retirement time horizon, budget, risk tolerance, how you own the properties (in trust, partnerships, etc.), tax bracket, etc. But let's take a quick look at just the scenario you describe.
Suppose rather than spending the $1500/mo. you save it at 4% for 25 years. That would accumulate $772,000. Suppose also that you keep the property and it appreciates at 2.6%. That would equal $949,000 for the same period for a total of $1,732,319.
If you take the $500,000 you run the risk of frittering it away, losing some or even all of it to market risk, transaction costs & taxes. On the other hand, if you could invest that lump sum at 4% it would equal $1,332,978 in 25 years. At 6% it would grow to $2,145,935.
But to be fair, if we apply a 6% rate of return to the first scenario your total would be close to $2.0 mil. Scenario #1 also presumes rents would never increase. And the second option- selling at taking your $500,000 -doesn't take into account the income tax advantages of rental real estate: Approximately 2/3 of your rental income would be tax free.
Bottom line: This is a large enough asset to justify hiring a fiduciary planner to be sure that your ultimate choice makes sense.
There's much to consider in this decision. How is your 25% owned? What are your income needs currently and in the future? What is the cost basis in the property? Will the properties require any capital improvements or significant maintenance expense in the coming years? What percentage of your total net worth does your interest in the commercial properites represent? In and of itself, having income producing real estate of this type is a good portfolio diversifier. It's hard to give specific guidance without knowing more about your situation. One observation: keeping any investment solely for sentimental reasons isn't a smart strategy. Neither the building nor the market care one iota about your loyalty or sentiment.
The best thing to do is make a comparison to other investments. In order to do this you need to come up with a current yield on the property. $1,500 *12 = $18,000 a year in income. $18,000/$500,000 = 3.6%. 3.6% is a fairly low yield for commercial properties. In other words, if you can get the price you are looking for then these properties are priced attractively in your favor.
However, there are a lot of other things to consider before you sell the properties. Depending on how the properties are structured (trusts, LLC, Partnership) there will be a cost to unwinding these. Additionally, there will be other transactional costs as well. You will also want to do an analysis of the properties which would include how long the lease in place, credit quality of the tenants, if there is debt on the property etc.
With that being said, there are a number of different alternatives to simply selling the property outright or keeping it. I would suggest talking with an advisor about your options and coming up with the best plan for yourself and also the other beneficiaries.