Hi there from the bottom of the world. I'm a kiwi from New Zealand and I'm after a bit of advice.
I have a question that's been circling my mind for some time and don't know the best option.
I have around $400k in my super scheme for retirement which I'm paying $2k toward each month. And yeah it's a Vanguard fund.
I also have a commercial property valued at around $1.6mil and returns $75k a year from the tenant. All overheads are paid for by the tenant.
Do I keep the commercial property and use it as my income base when I stop working or do I sell the property and stick the sum into my Vanguard fund?
Any and all advice received with open arms.
Cheers Bret from NZ.
I'm a commercial real estate appraiser, though I don't know much about the NZ market and of course nothing about your particular property besides the bare facts you've shared.
Just on that information alone though I'd sell the commercial property. If your net operating income is only $75k on a $1.6 million property that's a 4.7% capitalization rate which is very low for a commercial property. That's the kind of yield investors are willing to accept for a Class A office building in New York City or San Francisco. Where I'm at a large office building might have an 8-12% yield, though it's a lot risker since it's a smaller market. A very stable property like a McDonald's restaurant with a long-term lease might only have a yield of about 4% because it's essentially like buying a corporate bond from McDonalds. Your yield might be higher if you're leveraged but probably not high enough to offset the risks inherent in real estate. For one it's illiquid. Not a big deal if you've got plenty of other more liquid funds but what if we're in another global recession six months from now and it takes you a few years to find a buyer willing to pay $1.6 million? It's also a depreciating asset. The land value may continue to rise but the building needs maintenance and eventually some large capital items like a new roof cover, repaving the parking lot, new HVAC, etc. The current tenant might be responsible for all that but if they leave you might need to spend quite a bit to get the property ready for another tenant. There's also environmental risk. What if the tenant dumps some toxic waste on the property and the goes bankrupt, you'd be on the hook for the cleanup. No worries about that with a broad market index fund.
