My client Frank Durkin (not his real name) was tired of being a landlord. Although he liked collecting the rental payments from his 34-unit apartment complex, he did not enjoy dealing with tenant turnover and the round-the-clock stream of calls for repairs. He was also worried that the real estate market in Dallas, where the apartment complex was located, was overheating. So he put the building on the market and waited for a buyer.
A year and a half later, Frank’s property sold. He walked away with $7 million cash after selling expenses and taxes. To keep his money working, he reinvested the cash in several instruments designed to replace the rental income, including partnerships that invest in distressed properties and triple net leases. Now Frank’s monthly income is higher than it was when he was collecting rents from dozens of tenants, and his phone is silent in the middle of the night. He couldn’t be happier.
A year and a half later, Frank’s property sold. He walked away with $7 million cash after selling expenses and taxes. To keep his money working, he reinvested the cash in several instruments designed to replace the rental income, including partnerships that invest in distressed properties and triple net leases. Now Frank’s monthly income is higher than it was when he was collecting rents from dozens of tenants, and his phone is silent in the middle of the night. He couldn’t be happier.How long will it take to sell?
Frank’s transition from a rent-collecting, apartment-fixing landlord did not happen overnight. Once he made the decision to sell the building, he had to prepare the property for sale, work with realtors to price it properly and present it to prospective buyers, and wait for the right buyer to come along. The whole process took about a year and a half.
Anyone holding a major asset, such as a piece of real estate or a business must take into account the amount of time and effort that will be required to convert that asset into cash. Certain liquid assets can take several years to sell. Even if you hold a liquid asset, such as a block of stock, it may not be wise to dump all your shares at once; a more strategic method of selling may be called for where you liquidate portions over time.
What are the selling expenses?
In estimating your sales proceeds you may have mentally subtracted any encumbrances against the property, such as mortgages, but don’t forget to consider commissions paid to real estate agents or business brokers, fees paid to attorneys and other advisors, and all the miscellaneous fees charged by escrow companies, title companies, and others. If you are listing a piece of real estate or a business with a broker, get an estimate of your selling expenses so you will have a realistic idea of the net proceeds you may expect to receive.
How much will you owe in taxes?
This is a biggie. If you have realized substantial appreciation on the asset, you could end up writing a six- or seven-figure check to Uncle Sam. If you’ve owned the asset a while and have been claiming an annual depreciation deduction or you’ve deferred capital gains taxes with 1031 exchanges, the tax bite could be worse than you think. Make an appointment with your tax advisor as soon as possible to understand the tax impact of the sale and to consider certain strategies, such as an installment sale, that may lessen the bite.
How will you replace the income?
If the asset you are thinking about selling generates significant income, consider the amount of replacement income you will receive from reinvesting the proceeds. The partnerships that Frank Durkin invested in pay a generous income. These investments do involve some risk, but Frank has decided he can live with those risks in exchange for the higher income. Be sure you fully understand all the risks in any investment that promises high income.
How should you proceed?
Selling a major asset often requires the expertise of professionals from several disciplines. Gather as much information as you can from the great minds around you. Your tax advisor can help you understand the tax impact of the sale and give you advice on the timing and structure of the sale for minimal tax impact. Your real estate agent or business broker can help you prepare the asset for sale and advise you on how to price it and market it to buyers. Your business attorney can help you complete the actual sale, while your estate-planning attorney may assist with trusts or other mechanisms designed to achieve your estate-planning goals. Your investment advisor can help you invest the proceeds of the sale in a manner consistent with your need for income, growth, or capital preservation.
Bambi Holzer, president of Bambi Holzer Financial Group, is the author of four books on personal finance. She is a Certified Specialist in Planned Giving (CSPG), a Certified Estate Advisor (CEA), an Accredited Investment Fiduciary (AIF) and a Registered Representative with Brookstreet Securities Corporation, member NASD, SIPC. She can be reached at 877-905-3100. This document is for informational purposes only and should not be regarded as a recommendation, an offer to sell, or a solicitation of an offer to buy any securities. Specific recommendations are made only based on review of a client’s individual investment portfolio upon request. This document is the opinion of the authors and does not reflect the opinions of Brookstreet Securities Corporation. Past performance is not a guarantee of future results. Investing in narrow economic sectors involves its own characteristic set of risks including, but not limited to, the risk of loss due to the inherent lack of diversification associated with concentration of assets in a specific, sometimes, emerging field.
