Is Commercial Real Estate a Good Investment - Part Deaux

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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.”

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 Niño 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.