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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?

Real Estate
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February 2019

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.

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February 2019
February 2019