Q: I finally sold my home after 2 years on the market. A couple of months ago, I purchased and paid cash for a new home for about $400,000. I am 70 years old with no debt. I own two commercial properties in Augusta, GA and I receive rent from each of them along with my social security check.
I have been a real estate agent in Atlanta for the past 40 years, however, my income in this field is now limited. I have about $300,000 to invest and don’t know where to put my money.
Also, would you advise me to do owner financing on my commercial buildings as my tenant is interested in buying them from me. I worry that my tenant might pre-decease me and I’d end up without monthly income.
A: Congratulations on your successful real estate investments and the management of your finances. I’m not a registered investment advisor so I can’t tell you specifically what to do with your money.
What I would suggest is you make an appointment with a fee-only financial advisor. You want to hire someone for a flat fee that you pay separately from any investment commission the advisor may make down the line. That way, you know the advice you receive won’t be based on the advisor’s self-interest.
The stock market is quite volatile these days and if you place all of your money in a single stock or even in an index fund, you might find that you’ve lost a considerably amount of money at the point where you need the income to live on.
And if you want to put the money into bonds or treasuries and you don’t want risk, you’ll find that the interest rate paid on the highest quality income assets is quite low. In addition, you take the risk that bond values go down if interest rates go up. While it does not seem that interest rates will go up in the near future, they do fluctuate from day to day and if on a given day you need your money, you may find that the value of your bonds have gone down.
Given all of this, you should discuss your monthly income needs with a financial planner and come to agreement as to where you should put your money and over what term to keep it safe for future use.
Given the current state of real estate, you’d have to tell me that the value of your commercial buildings is rather high to want to sell them now. If the value of the buildings is based on the income you are receiving and that value is in line with what you’d expect to get for them now or over the next couple of years, you could consider selling them.
However, if you sell them with either seller financing or on an installment basis, you have to consider what the sale will do to your federal income taxes. If you sell them outright and you have a huge profit, you might have a huge tax liability to pay the federal government. On the other hand if you sell them on an installment basis, you can spread out the pain of the sale from a federal income tax perspective over the years.
However, it’s always wise to get a sizeable amount of cash up front when you either sell a property with seller financing or on an installment basis. If the buyer can put down 30 percent or more, you have less of a risk that the buyer walks away from the purchase and you then have the costs of foreclosing or getting your property back.
Given your financial picture, if you did get that kind of money from the sale, you’d have to decide what to do with the money. If you put it in the bank and get no interest, that money isn’t working for you. From an investment perspective, if the return on your cash in the buildings is higher than what you would get with that money in the bank, invested in stocks or in bonds, you could say that you might be better off invested in the buildings so long as they are rented.
If you believe there is a high risk that you could lose this tenant and would lose your rental income, then you’d have to consider how fast you could replace your tenant. If you think that replacing the tenant would be easy, your risk of keeping this investment goes down. If the risk of losing the tenant is high or finding a replacement tenant would be difficult and take a long time, your risk of keeping this investment goes up as you would continue to have expenses and no income coming in.
Those are all issues you should discuss with a financial planner. Please find one that you can work with and, preferable, that charges you on an hourly basis. At this point, you don’t need a financial planner that may have an incentive to sell you financial instruments and make a commission on those sales. You need someone who is objective and can see where your money is now and where you should keep it to protect you on the downside while giving you some revenue down the line.
You may find that he or she may tell you to keep your buildings, keep a fair amount of money in money market funds and invest a bit in some bonds and risk a small amount in equities. That’s my guess, and I’d love to hear from you on the advice you get.
Leave A Comment