Distant Investments May Not Be Such a Good Idea
QUESTION: My wife and I are thinking about investing in apartment buildings. We have looked at several which have nice positive cash flows with about a 20% cash down payment. But the problem is these properties are located about 900 miles away. The agent who showed us these properties will manage them for us at only a 2% fee. What do you think of this idea?
ANSWER: Forget it. The real estate agent obviously wants to make a sale to an out-of-towner like you. Once the agent begins managing the apartment for a very low 2% fee, you will probably soon see either poor management or the so-called professional manager will quit. Typical professional management fees are in the 5% range for larger properties and as high as 10% to 15% of gross income for single-family houses.
I strongly recommend not buying property more than a maximum one-hour drive from your residence. Out-of-town real estate investors can’t possibly know what is happening in a distant real estate market, such as in the situation you describe.
Easy Sale Terms May Be Solution
Q: For about 10 years three other physicians and I have owned some vacant land where we expected to build a medical office building. But our plans have changed, since one of the doctors left town and the rest of us have nice offices near a hospital.
The land is zoned for commercial development. As you know, there isn’t much commercial building.
Two of us want to badly sell this land, as we have a large amount of our cash tied up in it. Do you have any ideas to help our situation?
A: I often say vacant land is the riskiest investment of all. It can be virtually impossible to sell, even when the seller will help finance the sale by carrying back the mortgage.
In your situation, offering easy terms to a responsible buyer is probably the best way to get out of a difficult situation.
I realize you wanted to hear how to get a cash sale, but I doubt anyone can tell you how to do that in today’s difficult commercial property market.
No Exchange for Property and Stock
Q: I have considerable profits in several common stock investments, but I am reluctant to sell because of the high tax I would owe on my profit. Can I make a tax-deferred IRC 1031 exchange of my stock for investment real estate?
A: No. IRC 1031 is available only for trading “like kind” real property, such as investment real estate for other investment real estate. Trading common stock personal property for real property is a taxable “unlike kind” exchange. Ask your tax adviser to explain further.
