Author Topic: Should we sell or rent our industrial property??  (Read 1530 times)

keepingmobens

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Should we sell or rent our industrial property??
« on: July 12, 2013, 02:06:06 PM »
Hello, was wondering what the mustachian thing to do here would be. We own a 9200 sq/ft industrial (warehouse) property. It is owned free and clear, we have about 1M invested in the purchase price and improvements made. It's been for sale for six months now, with zero interest. Originally we listed it for 750K, after three months we lowered the price to 699K, still no interest.

Someone is interested in doing a 3 year lease. It's an ambulance company that has contracts with the county, so it seems like it would probably be a reasonably reliable client. The lease is at .50 sq/ft (not a bad market rate for the area) with 3% annual increases, and a 6% commission for the realtor. It would bring in a total of $159,962 net (after commissions) over the three years.

The property is in California and we live in Nevada, so this brings up two problems. One, I cannot manage it myself, nor do any maintenance. The management will cost $2,753/yr, plus any maintenance/repairs will be expensive (or at least standard labor rates), because the management company will probably just call local service people to do the work. I am figuring 3-4K/year for maintenance/repairs under this situation. Secondly, because this will be California income, it will require filing a CA tax return (with associated extra costs of about $800, my CPA also handles my business as well and he's not cheap and I can't switch to someone else for just this portion of my income) and paying super high CA state tax (<10%) on the income, plus I will have to open a CA corporation with their franchise fee of over $800/yr, and get a business license with the city (about $150/yr). Property taxes are about 9K/yr, and I'll have to pay for insurance on the property, which I'm sure will be in the neighborhood of 3-4K/yr. All this will be necessary just for this one rental property. If you do the math, I might end up with $32,817 per year, which would then be subject to state and federal taxes.

On the plus side, theres a pretty good chance that in three years, once this lease is over with, the commercial market might be in better shape, and it would be easier to sell, and I could possibly even get more for it at that point --- (or not?).

The alternative would be to sell the property even cheaper. Let's suppose we kept the property on the market and it sold sometime within the next year, and I could end up with 600K cash in the bank after commissions, etc. Dumping that into VTSAX (total stock market Vanguard fund), lets assume (very conservatively) that I make 5% on that. That's 30K per year, which would be subject only to 20% taxes on the dividends (as opposed to almost double 39.6% on the rental income, plus the 10% state CA tax) and no state taxes (remember I live in Nevada which has no state tax.) I also really like the idea of the simplicity of not having to do all the above CA business related things.

Any thoughts on the mustachianism of this situation would be greatly appreciated. Thanks!



« Last Edit: July 12, 2013, 02:09:42 PM by keepingmobens »

nedwin

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Re: Should we sell or rent our industrial property??
« Reply #1 on: July 12, 2013, 03:30:43 PM »
Is it possible for the property to be leased on a "triple net" lease, where the tenant pays property taxes, insurance and maintenance?  this is pretty common where I have experience - CO and AK.  This arrangement might also eliminate the need for a property manager, because you would only have to collect rent.  It probably won't eliminate the need to have a CA business license or whatever else is required, but it may make leasing more attractive.

Also, would it be less expensive (or possible, for that matter) to register your Nevada business entity (assuming you have one) as a foreign entity in CA?  The fees may or may not be the same.