Wealth: what to do when you’ve acquired it through the sale of a commercial building, how to spend it, and how to make it last.
In our last post we told a story about our fictitious friend, Mr. Smith, who decided to sell his highly appreciated industrial property, pay his taxes and walk away with a pile of cash to do with as he pleased.
To get top dollar, he sold the building to an owner/user and moved his own company into another building on a 5-year lease that will give him greater flexibility down the road.
This scenario, in our view, mirrors the position that many of you are in today, so we thought it would be a good way to discuss the more qualitative aspects of navigating the Wealth Cycle.
More from This Series:
Why We Care About Wealth
We believe it is safe to say that most of us set out to create wealth so we can take care of ourselves and our families, and earn the ability to make choices regarding where and how we live.
For many of us that means having a beautiful home in an area with great weather, beautiful beaches, great schools and a wide variety of cultural and recreational amenities. Think Orange County.
For others, it may also mean being able to pursue passions like world travel, collecting vintage cars or volunteering time and resources in support of a noble cause. Think about the thousands of lives the late great Jerry Lewis touched as a result of his passion for ‘his kids’.
He made his money and earned his fame by being a funny guy, but he will be remembered more for his philanthropy than his antics on the sound stage. For Mr. Lewis, acquiring wealth became a means to an end, not the end itself.
Now, it makes perfect sense to preserve our wealth once we have acquired some. No one likes the idea of starting over from scratch.
However, it is equally important for our wealth to be put to its highest and best use in terms of the quality of the lives we lead. Sure, how much money we have is a good indicator of how well we are doing, but at some point having more money reaches a point of diminishing return in terms of the quality of our lives.Life is a one shot gig, we can’t buy a do-over no matter how wealthy we are. Click To Tweet
So, what did our Mr. Smith do with his windfall profit?
First, he decided to take his original $500,000 in cash and reinvest it in stocks and bonds through an account managed by professionals. That way, some of his money is back in play and he still has nearly $1.5 million in after-tax cash burning a hole in his pocket.
For the sake of our exercise, let’s assume that he already has a retirement plan with adequate funding to meet his daily living expenses. He and his wife own their home with a small mortgage balance and their children are grown and living independently.
As we mentioned earlier, Mr. Smith is 63 years old and each year seems shorter to him than the last one. As a result, having more time to engage in activities other than work has moved higher on his list of priorities.
But, he still loves to work and wants to see his successful company keep growing for the sake of his family and employees. So, he decides to promote his warehouse foreman, Jack, a loyal, hard-working employee of 18 years, and begins training him to take over day-to-day operation of the company.
Within a few months, Mr. Smith is working just three days a week, spending more time on the golf course and taking long weekend trips with Mrs. Smith, including more frequent visits to Boston to visit their first grandchild. The company is still doing well and the $50,000 raise he gave to Jack is turning out to be money well spent. In fact, Jack’s new ideas and enthusiasm for his new role has resulted in increased revenue and profits that more than offset the raise he got.
Mr. Smith has always been a car buff, especially for 60’s era muscle cars. His first car was a midnight blue 1966 GTO and he has long lamented selling it to help pay for college.
He decides to buy another one, completely restored for $65,000, so he can drive it to the coffee shop on Sunday mornings to visit his other car-crazy friends. Before long, he has added a 1969 Chevy Chevelle SS and a 1967 Camaro to his collection. A 1966 Mustang is next on his list.
In return for hogging their garage and spending so much time tinkering with his cars, Mr. Smith makes good on a 40-year-old promise to take Mrs. Smith on safari in Africa, which has always been number one on her personal bucket list. The trip exceeds their expectations and they plan to go again.
After all this, Mr. Smith has spent a chunk of his windfall, but his company is doing better than ever, his new toys are going up in value, the rest of his cash is still carefully invested, and he is spending serious quality time with family and friends.
We think that sounds like a pretty good outcome to the sale of his building.
Did we make this scenario up? Yes, we did. Is it completely believable? We think it is. Did it make you stop and think? We hope so.
That said, we are not advocating that every highly appreciated asset should be sold just because there is a big profit on offer. There are actually many good reasons to hold valuable real estate for the long term. Indeed, most commercial property investors do just that.
Most commercial property investors do just that. What we are saying is that it’s not all about how much we make, but what we do with how much we have.
More next week…stay up to date by joining our mailing list.