As a building owner looking at a possible sale, you’re not on your own – how and when to seek financial advice to clarify your options.
In our past three posts, we have been responding to a critical question as it relates to building wealth: when is more just…more?
We chart our course, work hard, succeed, fail, succeed again and end up with a net worth that often exceeds our wildest dreams.
More from This Series:
- Part 1: The Connection Between Wealth and Happiness
- Part 2: Taking the Tax Hit
- Part 3: The Joy of Spending (and Preserving) Wealth
We may not all be as intentional about making money as Jim Carrey, who allegedly wrote himself a $10 million check when he was a struggling comedian as motivation to actually receive a real check in that amount for starring in a hit movie.
Apparently, it was good idea for him because he received several checks in even larger amounts just a few years later.
Most of us just put our heads down, do what we do best and keep at it until we fail or succeed at our chosen profession.
Let’s pick back up with the story of the fictional Mr. Smith, successful business owner and eventual seller of a 20,000 square foot industrial building he bought for $100 per square foot in 2010.
As you may recall, he put $500,000 down, borrowed $1,500,000 at 6% interest and walked away with nearly $2,000,000 in after-tax cash by selling the building for $210 per square foot to another owner/user in 2017.
He promptly reinvested the original $500,000 in stocks and bonds through a financial advisor, gave a healthy raise to his right hand man and began training him to help run his company, reduced his workweek to 3 days, bought 3 vintage American muscle cars, improved his golf game, took his wife on safari in Africa and makes routine visits to Boston to visit his daughter, son-in-law and newborn granddaughter.
If he had kept the building, it would still be going up in value, but it would be in illiquid form and at risk to a potential market correction that was making him increasingly uncomfortable given his age (63) and his loosely defined strategy to retire around age 65. It is also likely that he would still be working every day and Jack would not be in the front office learning how to run the business.
Neither of those alternatives is such a bad thing, but we like the first one better. It sounds like a lot more fun and has a large impact on the most important people in Mr. Smith’s life. To us, it appears to be the smarter of the two paths from a quality of life point of view. He had to suffer a significant tax hit, but now that’s behind him.
Most investors keep exchanging to delay the payment of taxes, but Mr. Smith wasn’t interested in paying a premium for someone else’s highly appreciated asset just to delay the pain of paying taxes. For him, it was either keep the property and stay the course, or sell it, cash in his chips, bite the bullet on the taxes and invest some of his equity in the people and things that mean more to him than a concrete box.
For those of you who have been following our little story, we encourage you to become Mr. Smith and role play the sale of a commercial property asset that you own.
Seeking Financial Advice
You’ll need the answers to some basic questions about your real estate that we can help you with. We can give you the low down on the market and an estimate of your asset’s approximate value.
Your accountant can run the final numbers because he knows your situation better than anyone. Warning: the estimate of your tax liability will be something you’ll want to hear sitting down. It will literally make your eyes roll back in your head and you might go on a short but energetic expletive-laced rant.
The good news is that in most of the models we run, the entire tax bill is less than the increase in a property’s value over just the last two years. The rest of the gain will be yours and that adds up to a number you will want to get up and dance to.
If nothing else, the exercise might be fun, kind of like thinking about what you would do with the money if you won the lottery. Admit, you’ve done that before and it was fun.
Many of you who follow our blog own multiple commercial property assets along with investments in other asset classes like stocks, bonds and equity stakes in other companies.
So, the asset that you use for this exercise doesn’t have to be an industrial building. Maybe you made a good pick on a stock when the Dow was at 7,000. Maybe you bought an 8-unit apartment building in 2009 or 5 houses in Phoenix from a bank that you rent for passive income.
The choice is yours, but we suggest an asset that is highly appreciated and may be at significant risk if an economic correction occurs.
Since industrial property values have been driven up sharply by low interest rates, we think it is an asset class at particular risk given the fact that interest rates are likely to move substantially higher as the Fed boosts its benchmark Fed Funds rate and works to reduce its balance sheet of US treasuries and mortgage-backed securities.
Remember, gravity works. What goes up, comes down unless it’s a rocket with power enough and fuel enough to reach escape velocity. The Fed fueled the surge in prices, but the fuel it used to do so may be running low.
So, go have some fun, and give us a call if you’re ready to crunch the numbers – we’d be happy to help.
This series continues next week. Stay up to date by joining our mailing list.