Keep or Sell the Commercial Real Estate, please advise

[rkser]

I am in a quandary whether to sell or keep the building to sell later.

Let me give some information -

We built this medical office building in 1999 for $600,000, I use one section & rent out the other two sections. We paid the mortgage off in these 12 years with extra payments.

Now total rent from 3 offices - maintenance & taxes = $50,000 net.

We have an offer of $600000, which is 12 times the net income of $50000. I want to retire in 1-5 yrs & can possibly sell it at that time also. The proceeds will be saved for retirement, as we are self sufficient at this time.

The question in my mind is to sell now or wait for a few years and sell, there is no way to predict this real estate market, it may come back in few years or may take 10 yrs.

Is 600k a good offer for the above given returns or should I wait for few years for a better offer (??), and in the mean time keep saving the 50k each year. We do not have any other rental properties.

Thanks in advance, will be happy to give any other needed information.


Regards

 

[arebelspy]

Insufficient data for educated response.

Real estate is local.

Look into what commercial RE in your area goes for (cap rate and GRM - gross rent multiplier, which is the number you are referencing when you say 12 years). Maybe talk to a commercial RE agent or broker in the area?

Good luck!

 

[Meadbh]

Let me get this straight. You don't owe anything on this building, and it's generating $50K in annual cash flow, net of expenses. You use one suite in the building, which you would otherwise have to pay for.

Let's say your investment was $600K. ROI is 50/600 = 8.3%.

What's not to like?

 

[chinaco]

Is your main concern the building value now versus 3 to 5 years from now?

IOW - You intend to exit (that decision has been made), but you are struggling with whether waiting to sell may fetch a better sale price (vs possibly a lower price).

 

[plattj1]

Low offer

I realize that all real estate is local, but based on multipliers in our area that offer is at least 40% low.

IMHO that is why the offer is being made.

You need to talk to a certified commercial real estate appraiser in your area.

 

[tryan]

I wouldn't slaughter this golden goose ... yet ... 5 years out is a long time; I like the odds of the price going UP.

Interesting that your market is back to the 1999 construction costs. At the peak I'll bet a shiny nickel it was worth ~$1m.

 

[l2ridehd]

I would also keep the property. The 600K will face some tax issues, and also think what you would need to use as a SWR on that 600K to get 50K annual return. It would need to double in 5 years to match that rate of return. So I might just consider keeping it for another 20 years and use the 50K as retirement income. I assume your mortgage is paid or very low, your space will be available to rent once you retire, so I would retain the asset for a long time. Looks like a cash cow to me going forward.

 

[sheehs1]

From a purely financial perspective and a very rudimentary quick math calculation There is A or B.
A = net income plus current building value over 20 years
B = 4% interest on $600K proceeds over 20 years

A's baseline value is 1.6 million. Doesn't include compounding interest on the $50K income or possible appreciation.

B's baseline value If you sell, is worth 1 million to you over 20 years. Proceeds invested at 4%. Doesn't include compounding.

Difference is $600,000 which just happens to be the price of the building.

This is why they say, "It's paid for...(fill in the blank). No offense intended.

That said there are other non-financial reasons you may be looking at selling now. Don't know. Perhaps you don't want the headache of being a landlord, maintenance..etc. You could wait and revisit in 5 years...perhaps.

Best of luck with your decision. Either one is a good position to be in.

 

[rkser]

Thank you all for chiming, I appreciate all your replies. Some answers to the questions raised -

-The 50k per year are the savings after ALL EXPENSES. The Tenants are Doctors & Psychologists & rents have been paid regularly .

- The headaches are nothing major, on a scale of 0 to 10, say about 2, mainly involve Lawn Man, AC Man ... etc

- Can you please walk me through the calculation of YIELD - 4%, 8% ....etc.

- Yes, the Building is paid up, no mortgage....

Thanks & regards

 

[pb4uski]

Yield is return for the year in relation to investment, in your case 50k a year net profit (arguably more since you are also getting space for free) divided by investment of 600k. 50 return divided by 600 investment = 8.3%

I would keep it since the return is likely better than any alternative investments that the 600k would go into.

My 80 yo mother has a commercial building that provides more than what she needs to live on so her SS goes into the bank.