Lease income vs cash out of RE

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ZWorkLess
Posts: 345
Joined: Thu May 04, 2017 8:13 pm

Lease income vs cash out of RE

Post by ZWorkLess »

We’re in the process of negotiating the sale of our principal asset (and retirement funding) - our small business and the associated real estate. We will likely face the choice between selling the RE (to the purchaser of the business) vs negotiating a long term lease. I am trying to get my head around how to decide.

Current plan is for spouse (bread winner) to semi-retire and continue to work about 60% hours for at least 2-3 years. (This will be contractually required.) Longer if needed.

We’re in our mid 50s.

Depending on the final sales agreement, we expect to want continued work income for about 5-10 years, with lower hours. This PT wage income should be (and easily could be if spouse works closer to FT hours) sufficient to support most or all our expenses, allowing our cashed out assets to grow. Accessing already taxed cash won’t be a problem since the vast majority of our assets will be “just taxed” after the sale(s). If we retain the RE and lease it, that lease income would be at least half our expenses, allowing PT work to easily co er all our expenses.

For rough estimates, let’s say the business sells for $1M and the RE is valued at $800.

And let’s estimate that the RE lease income would be $5k/mo = 60k/mo. That lease would be for a building and about 1 acre of land. The remaining 3+ acres of land could be sold for approximately $300k. We’d likely cash that part out one way or another. So we’d be losing $500k of cash today for $60k/yr of (taxable) rent income plus retaining the asset long term. Typical lease term would be 10 years with several 5 year extension options for the renter. Rent would increase approximately 4% per year, maybe higher given current market conditions.

My question is how to decide to lease vs sell that part of the RE.

Lease quality should be very high and income reliable. Our industry is very strong and purchaser has deep pockets.

This seems to be a no brainer. 12% annual return on value plus we retain the asset and can cash it out when we’re older and closer to dead. Income would make early retirement easy to cash flow and thus retain the remaining assets to grow until spouse’s hours are reduced.

After the 2-3 year contractual requirement, spouse would be free to work elsewhere per diem/etc and could instantly find lucrative employment, so fall back plan is to return to or increase work.

Note: Yes, this is a bit earlier semi-retirement than the full retirement in a few years we had planned. No, we don’t want to delay if we can make it happen now. I have had an in your face interaction with death, and we’ve decided we don’t want to delay being able to have lots of time together. Taking a bit of downside risk longterm is acceptable to us in exchange for both having time NOW and also locking in the value of our largest asset. Spouse’s ability to readily return to work relieves much of that downside risk.

There may be tax consequences— good or bad — to selling both large assets the same year vs different years vs never sell the RE (leave for legacy.) I will dial that in with the CPA before a final decision.

Any insights or guidance on how to make these calculations? What an I missing?

Thank you!
desiderium
Posts: 1111
Joined: Sat Jan 04, 2014 11:08 am

Re: Lease income vs cash out of RE

Post by desiderium »

Consider the value of the property without the current tenant. If they left after 10y or went bankrupt? Location, building attributes, etc, how hard would it be to lease it to someone else and could you get the same price? How liquid is the asset, i.e. could you sell it in 3 years with reasonable ease if you changed your mind about owning the property? Maybe consider consulting a local commercial real estate agent.
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