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re: To sell or not to sell commercial property?
Posted on 1/28/24 at 12:09 am to Mohican
Posted on 1/28/24 at 12:09 am to Mohican
I’ve lived long enough to see that even the hottest retail areas often turn to the shitty or dead part of town, and it can happen real fast. What was the cool store becomes the markdown dollar shop.
If you had plenty of money and wanted to ride it out and see if you hit a jackpot, fine. I would do that myself. But if you are depending on this property to give a big return and can’t easily handle a loss down the road, strongly consider a sale now rather than having to sink $$$ in the needed improvements and hoping for the best.
If you had plenty of money and wanted to ride it out and see if you hit a jackpot, fine. I would do that myself. But if you are depending on this property to give a big return and can’t easily handle a loss down the road, strongly consider a sale now rather than having to sink $$$ in the needed improvements and hoping for the best.
1
Posted on 1/28/24 at 8:03 am to Twenty 49
Just my opinion after reading the scenario, the safe bet is to sell now and take the profits (either into retirement or into another real estate deal). It sounds decently risky worrying about tenants and then having to complete big ticket upgrades to the building.
Posted on 1/28/24 at 10:35 am to Mohican
You really need to put real numbers out to give everyone a full perspective. So I’m assuming you bought it for $250k, you owe $200k+, and you got an offer for $600k without listing it? How many square feet? What is the parking situation? You are talking small retail? You need to get some comps for what the land is worth and what other rents are available and going for locally?
Again, money in hand is worth something but you will owe A LOT in taxes. You could 1031 it but that’s not easy and often pushes people to make bad quick decisions just to kick taxes down the road.
I’d strongly consider selling, taking some income as a reward, and then trying to put a big chunk into a future project with a better long term plan.
Btw, letting the mortgage run out with less than a month to go with no plan is very VERY bad planning.
Again, money in hand is worth something but you will owe A LOT in taxes. You could 1031 it but that’s not easy and often pushes people to make bad quick decisions just to kick taxes down the road.
I’d strongly consider selling, taking some income as a reward, and then trying to put a big chunk into a future project with a better long term plan.
Btw, letting the mortgage run out with less than a month to go with no plan is very VERY bad planning.
This post was edited on 1/28/24 at 10:36 am
Posted on 1/28/24 at 11:35 am to baldona
quote:
Btw, letting the mortgage run out with less than a month to go with no plan is very VERY bad planning.
Well, I've got a hot offer on the table that I could take right now so the situation isn't dire. My biggest problem in keeping it is that my current tenant isn't willing to sign long term and isn't paying market value. I could probably go up on the rent, but for only 1 year. That year could buy me time to find a high quality, NNN, more corporate type tenant. I'm trying to maintain some confidentiality since there's an offer with real people and brokers involved, so I'll delete this later, but I value this boards opinion so here goes:
- Bought the building 8 years ago for $620K with nothing down on it (SBA/minority business type loan opportunity with my wife being the sole owner of the business in the building. She sold that business 3 years ago).
- 9300 sf office/warehouse with 1700sf of office/lobby space and an upstairs office overlooking the warehouse.
- The building has interstate frontage and is 2 minutes from the exit ramp. Again there's a LOT going on around us, much of it just hasn't broken ground yet.
- Current offer is for $1.3M.
- We owe about $430K on it. After taxes and broker commission we would net $660K according to my accountant.
- I should add that my business is leasing part of the office space and warehouse but that is not enough to float the note.
Running all my numbers on a spreadsheet, if I kept the property with the current tenants (assuming the bank let me) and rolled some upgrades into the new note (around $6000/mo) I would make $25-30,000 a year. BUT I would be in the market for a new tenant during the year.
Any more questions shoot. Need all the input I can get.
Posted on 1/28/24 at 11:58 am to Mohican
See below, He hit the nail on the head. Low cash reserves with known needed improvements is risky. 1 year lease on a highly valuable property is weak.
Commercial banker here - sell it if it’s that kind of life changing money to you. A one year lease is a short fuse and a lot can change between now and then. Plus if you switched out tenants you’re probably looking at a few months of no income plus all the expenses of doing upgrades for the new tenant (given you can finance that in to the new loan).
On the flip side if you have a much stronger tenant in your back and can get the bank to finance in the rehab work then keep it. A stronger tenant at market rates is going to make the value of the building go up even more. But have that tenant in the back of your pocket. Don’t go to the bank looking for a new loan with a single tenant lease in place that has less than a year to it. Might not be a great conversation.
Why don’t you sell it, 1031 the money and put it into two or three cash flowing properties to diversify your holdings? Get with a good COMMERCIAL broker and discuss the options. Whatever you do, don’t use a residential realtor.
Commercial banker here - sell it if it’s that kind of life changing money to you. A one year lease is a short fuse and a lot can change between now and then. Plus if you switched out tenants you’re probably looking at a few months of no income plus all the expenses of doing upgrades for the new tenant (given you can finance that in to the new loan).
On the flip side if you have a much stronger tenant in your back and can get the bank to finance in the rehab work then keep it. A stronger tenant at market rates is going to make the value of the building go up even more. But have that tenant in the back of your pocket. Don’t go to the bank looking for a new loan with a single tenant lease in place that has less than a year to it. Might not be a great conversation.
Why don’t you sell it, 1031 the money and put it into two or three cash flowing properties to diversify your holdings? Get with a good COMMERCIAL broker and discuss the options. Whatever you do, don’t use a residential realtor.
Posted on 1/28/24 at 1:31 pm to southside
Never ever ever ever let owning commercial real estate be an emotional decision. Never.
It’s an investment. If apple stock starts tanking, you’re not going to keep it because you have your kid’s pictures on it.
Real estate is - how much money goes in at the purchase, how much cash flow is generated while you own it, and how much money comes out when you sell it (and what’s all your return for that). It has nothing to do with emotion
I’m a 25 year banker and can tell you one of the very few times I’ve foreclosed on a property is because an owner had too big of an emotional attachment to his property. And it was an investment property at that, he didn’t even occupy it. He had offer after offer and refused to sell even though the building was about to go dark.
So he ultimately lost the building, lost his equity and had to file a BK at the end of the day.
Pigs eat at the trough, hogs get slaughtered. I’d sell and buy a few properties. Get a really good commercial broker and diversify.
It’s an investment. If apple stock starts tanking, you’re not going to keep it because you have your kid’s pictures on it.
Real estate is - how much money goes in at the purchase, how much cash flow is generated while you own it, and how much money comes out when you sell it (and what’s all your return for that). It has nothing to do with emotion
I’m a 25 year banker and can tell you one of the very few times I’ve foreclosed on a property is because an owner had too big of an emotional attachment to his property. And it was an investment property at that, he didn’t even occupy it. He had offer after offer and refused to sell even though the building was about to go dark.
So he ultimately lost the building, lost his equity and had to file a BK at the end of the day.
Pigs eat at the trough, hogs get slaughtered. I’d sell and buy a few properties. Get a really good commercial broker and diversify.
Posted on 1/28/24 at 1:33 pm to Im4datigers
quote:
Im4datigers
Good stuff. Thanks.
Posted on 1/28/24 at 1:59 pm to Mohican
quote:
That's good money. It's not a life changing amount though.
Dude, taxes aside, in the situation presented, that’s life changing money. Even after taxes.
If he clears $400k, 8% a year for 20 years gives him close to $2mm in 20 years. No way that property is going to appreciate like that.
Posted on 1/28/24 at 2:02 pm to Im4datigers
quote:
Again, money in hand is worth something but you will owe A LOT in taxes. You could 1031 it but that’s not easy and often pushes people to make bad quick decisions just to kick taxes down the road.
10,000% right here. Can’t tell you the number of times someone brings me an offering memo for something they want financed. I ask them why in the hell are you buying this dog and their answer is because my 1031 window is about to close.
Have to do it smart if you do it. Again, get with a good broker and a good 1031 specialize attorney to handle the transaction.
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