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Last
week - in this space - we massaged the merits. Discussed were the reasons why
not - a liquidity event, a sale of the business that occupies, a mis-match of
risk, a dispute, and finally aging owners.
From
last week -
“You’ve
achieved a nice portfolio over the years with timely purchases, well-timed
trades up, and careful management of the occupancy, income and expenses. But
you are tired! Akin to captaining a ketch - tiny tweaks and tightening take
time and talent. In order to capture the winds of income - your sails must be
trimmed and you must stand watch over the ocean swells of expenses - lest your
vessel should capsize.
Whew! How about we find a nice cozy port - drop anchor - and relax. But, your ports are limited - as we will discuss next week.”
Whew! How about we find a nice cozy port - drop anchor - and relax. But, your ports are limited - as we will discuss next week.”
Today
- as promised - we continue our voyage with a precise probe of age and its
impact on ownership.
Here
is the dilemna. Changes occur as we age - aside from a bulging waistline and
the need for hearing devices. Our risk tolerance declines plus our patience
subsides. No longer are a tenant’s late payments met with a cordial
conversation or the request to plunge a toilet tolerated. But there is a
problem - most commercial real estate requires management to max the income and
someone must fill the vacancies, collect the rents, chase flaky occupants, pay
the bills, fix the roof, file the tax returns, etc.
So,
if you’re fed up and want to pivot - what are your options?
Exchange into to a less management
intense property. Let’s
say you own an apartment complex of twenty units. Your income is dependent upon
twenty timely rent checks each month. If one loses a job - you wait, or evict
and suffer a vacancy. Until the vacancy is vanquished - the top line is in
tatters. So, one strategy is to sell the project and move the money into a
single tenant investment - a Dollar General or Caliber Collision as examples.
Just keep in mind - your management is lessened to nothing but your risk just
sky-rocketed - one blip - no more income. Make sure the tenant is solid and the
rent sustainable.
Sell and pay the taxes. Uncle Sam and governor Brown
will take a nice bite - in some cases half the gain. Great. You’ve now got a
chunk of cash you must re-invest and find a decent return - good luck!
Hire a property manager. Keep the buildings but
divorce yourself from the day-to-day. You pay a percentage of the gross rents -
generally 5-7% - but you pacify the panic El NiƱo portends for that vintage
roof.
Craft a creative transfer of
ownership.
Charitable remainder trusts, deferred sales trusts and the like may be a good
option. You exchange the daily aggravation for a fixed return - all very
complicated yet legitimate. Strong encouragement is given to seek professional
legal and tax advice if a creative transfer is considered.