It’s time to wrap up our strategy guide by taking a final look at the real estate options open to long-term owners.
Missed Parts 1–4?
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In the last few weeks, we have been exploring the possibilities for those who are long term owners of industrial real estate.
These are the folks who have the most to gain and the most at stake when it comes to executing a strategy for their properties. The good news is that every one of the options we have discussed is good news, but each has distinct advantages based on individual circumstances, tolerance for risk and the stomach for writing big checks to the IRS and the Franchise Tax Board.
Let’s review what we have discussed so far…
In Part 1 we looked and holding property for cash flow generation and then at refinancing as a way to tap equity for further investment without creating a taxable event.
In Part 2 we looked at tax deferred exchanges and then at outright sales. The former delays the pain of paying taxes while the latter is about biting the bullet and pocketing a handsome profit to call our own. While most of us are loathe to write massive tax checks, many are surprised at what is still left over after they do. It’s not as obvious thing to avoid as it often thought to be. Exchanging is a tremendous tool for those still in the wealth creation phase of their financial lives, but may make less sense further on in life when financial give way to life fulfillment goals. More on that in a moment.
In Part 3 our discussion turned to installment sales, an option that gives us a chance to pay our taxes over time, and still generate cash flow in the form of loan payments rather than rental income. We like this one for those of you out there that have little or no current debt on your property and fancy making just one trip to the mailbox each month to collect your cash, without the hassles of managing property.
In Part 4, we spoke to you owner/users out there who would like to cash in on the prolific run-up in your property’s value, but still need the space to run your business. If you’re company is willing to pay a market rent, this option could be just the thing for you. We encourage you to take a closer look at these posts and give some thought to which direction is best for you.
Knowing Your Options
Now, we don’t claim that anyone should make a big real estate decision based solely on what we’ve presented here. We only scratched the surface and did so deliberately for the express purpose of getting property owners thinking about a plan that works best. Action should only be taken once all the options and all their variations are fully considered with the help and guidance of specialists in the professional disciplines.
Your CPA, financial planner, estate attorney and yes, even your go-to real estate professional, should all be given a chance to weigh in. Without a thoughtful plan, chances run higher that a decision regarding a critically important, long term investment will be made based on short term circumstances. With a savvy strategy based on your unique circumstances, the option you choose can be exercised when your interest and market circumstances will yield optimum results.
Perhaps the most important consideration for you is one that real estate professionals are seldom turned to for advice. And, that is; how are the decisions you make going to make a difference in your life. That may fall into the “it’s none of our business” category, but we feel compelled to offer our two cents on the subject anyway. So, here goes.
You may be sitting hundreds of thousands or even millions of dollars in equity in your property. But, when you think about it, unless you access that equity it really doesn’t amount to much. It’s there and that fact may give you some comfort or sense of safety, neither of which are bad things.
Yet, until you take action, equity in your building is an untapped resource. It’s up to you how you will allocate that resource as a wealth-building source. You can let it grow naturally by keeping the property. But that carries with it the risk of loss due to a market correction. You can refinance it, but that creates debt and adds a new long-term obligation.
You can exchange, but that means paying a premium for someone else’s property that you are less familiar with. You can sell and agonize over the injustice of giving a third of your proceeds to taxing authorities, or you can pay your tax over time by collecting profits incrementally. If you use your property for business purposes, you can sell and be somebody’s tenant again, the very thing you got away from when you bought your property in the first place.
Making a Decision
The biggest and most important question of all is: what will make you happiest? When you look back on your life, how could your decision to buy your property end up changing the course of your life?
Most of us start out with dreams of what we want to achieve in life. Family, friends, adventure, travel, recreation, education, philanthropy, fitness and the freedom of choice, among others, come to mind for us. Accumulation of wealth helps with that last one, and it has a lot to do with all the others. What will your wealth help you achieve in terms of your life’s goals?
When you look back on your life, how will the fact that you owned commercial real estate make a difference? We think about that all the time and hope that by sharing our perspectives we encourage you to do the same.