Three Great Outcomes - Which One Would You Pick?

Question

I'm reposting and expanding this discussion because somehow I posted to the wrong area, and I'm hoping to get some advice.

We in the process of settling this estate where we have inherited 1/6 of a commercial building, and have the opportunity to purchase another 2/6 from our siblings, and I was hoping for some additional help with my next step. We have obtained 2 broker opinions on the property and have settle on an average value of $850K based on these opinions. 50% of the property is owned by another family. On our side, both of our siblings have stated an interest in selling their interest, so it would cost us $283K out of pocket to obtain a 50% interest in the property. The gross rents collected are $4,400 per month for both leases, so our monthly income would be $2,200. Since both leases are triple net, the only expense we would have is insurance and maintenance for the building exterior for which we will set aside $307 / month. I calculate a cap rate of 5.34%, and a cash on cash value of 8.03%. Any thought and opinions on the value of this deal are appreciated. The property is located in a very desirable neighborhood, bordering the fab forties in Sacramento.

We have a meeting set with family owning the other 50% for this evening to help us evaluate the group we would be partnering with if we decide to go through with the purchase. I am trying to compile a list of questions to ask them without sounding like an inquisition. Keep in mind that this history of ownership has been congenial and informal, maybe some would say unsophisticated in terms of real estate technical standards. Any advice on how to approach this meeting?

From reading and discussions I understand having an operating agreement between the multiple owners is advisable, but the history of ownership never had such a document. Any advice on how to create one, and how to convince other owners this is a good idea would be very helpful, in addition to any advice on if we are looking at a good deal, or if we should cut bait and run.

Another option available to us would be to throw in with our siblings and try to find a buyer for the 50% of this property that we control. This would bring us approximately $140K for our share.

A third option would be to purchase the other two shares of the residence that is also part of the inheritance. This would require a purchase price of $255K and have operating expenses of about $865 per month (Taxes, insurance, Prop. Management, Maintenance, utilities and vacancies. I calculate the I calculate a cap rate of 3% and the cash on cash of 4.3%. This would require a minimum to $60k of rehab work. This is located in a desirable neighborhood (River Park) in Sacramento and we could expect $2K per month in rent.

Any thought on which investment would be better are helpful:

A) 50% of the commercial property

B) Single family home

C) Cash out, sell our portion of the building and the SFR and invest another day.

Thank you.

Paul

Paul Post · Answer

Account ClosedYes I agree, if we decide on the building, I think there is room for the rents to increase when we renew the lease. Thank you on the advice for seeking an attorney for the agreement. I think that will be a hard sell but we will find out on Sunday afternoon when we meet with them. Are you a real estate attorney?

Account Closed · Answer

I understand your wife's emotional attachment. When my father passed, us kids couldn't imagine keeping his home. As for the commercial property, I would simply bring up the agreement issue just as clearly as you did here. As long as you're polite and professional, your request makes total sense. If they agree in concept, I would hire an attorney to draft the agreement and split the costs between all those involved. It wouldn't be more than a couple hundred bucks. I must disclose that I am an attorney, but I am not here to seek your business. It also seems like you may be able to increase the rental rates (if they are not at market rate) for your prospective commercial tenants. That's a win-win whether you keep or sell! Good luck on your meeting! We look forward to hearing about your journey, whichever way it winds up!

Account Closed · Answer

Notwithstanding the death in the family, this sounds like a great problem to have.I would lean towards sticking with the commercial property. How much time is remaining on the term of the existing leases? Assuming the tenants in place have a good payment history, the biggest variable here is the other family. If they are professional and polite, you may be able to keep a highly desirable asset in a great area. However, without a written agreement between your family and theirs, I would run from even this option. The single family home seems perfect for you and your siblings to split the $60k in rehab work and sell the property. Your purchase price is $255k, but what's the market value of the home now and with the $60k in rehabs? Since I don't have those numbers, I'd guess that rehabbed, the home is worth far more than $310k. I would love to drink from that faucet instead of the slow drip of rental income.

Carrianne Mucho · Answer

@Paul Post is curious to know what the value of the SFR would be after the improvements have been made. I understand where your wife is coming from - there is at least one property in my family for which I will have difficulty making that decision when the time comes. Like Embert said, not a terrible problem to have with the exception of your loss. P.S. user TIP: when you are replying here, be sure to use @theirname so the person you wish to address will get a notification that you have commented. Otherwise, that person may not think to come back to check the thread. You can also "vote" for posts you like using the green button under their photo (sort of like facebook or other social media sites).

Paul Post · Answer

Thanks for the tip @Carrianne Mucho!

Paul Post · Answer

Greetings Embert.Thank you for sharing your thoughts.There is about 18 months left on the current lease, but has long time tenants (decades) so we are assuming they would stay. I am anticipating the meeting with the other owners as being polite, but with no history of a written agreement I am struggling with how I would be able to convince them it would be a good idea. Also, I'm not sure how I would create one. Any suggestions on this would be appreciated.Flipping the SFR is off the table. My wife grew up in this house and has an emotional attachment. Realtors have suggested that it would take $100k to make if flip worthy, and the return would not be worth the time and effort expended. I'm estimating the minimum it would take to fix it up enough to make it rent-able would be $60K, but costs could very well go up from there.Paul