For Baby Boomers nearing retirement, selling your commercial real estate investment property or portfolio can seem like an ideal way to provide the cash needed for a long and enjoyable retirement. However, successfully navigating this crucial, and often complicated, process requires careful planning and consultation with experts to ensure your retirement dreams don’t become a nightmare.
The ownership of a commercial real estate property can happen in many ways. Perhaps it is a long-held family property passed down through the generations or it could be an investment property that was purchased more recently.
No matter how it was acquired, commercial real estate ownership can be a fantastic source of stable, long-term and, hopefully, passive income. Unfortunately, for some owners, maintenance, leasing and continued economic uncertainty often make commercial real estate ownership a far more active endeavor than they hoped.
The involved process of owning investment properties can become a burden for someone nearing retirement age who would much rather enjoy well-earned time off than fix a leaky roof or find a new tenant. At this critical juncture, it’s critical for anyone contemplating a sale to ask themselves these three key questions;
Depending on the market and asset type, competition for tenants can be fierce and continual investments must be made to properties to stay at the top of the market. It often takes time to see a return on investment from a large capital investment into a property. If your ownership strategy centers on deferring needed maintenance or avoiding regular capital improvements, then it might be time to look at a sale.
A tenant vacancy can happen at any time. During that time, you won’t receive income from the property but are still required to pay taxes, utilities and maintenance costs. In today’s competitive leasing environment, finding a new tenant can be a lengthy exercise. For someone looking at retirement, the lack of regular income and effort needed to find a new tenant is far from ideal
People retire to not work anymore. It’s important to evaluate whether you want to be dealing with emergency maintenance issues or tenant complaints in your retirement years. As any property owner knows, management can often be a full-time job.
If the answer to any of these questions is “No” then it might be time to explore a sale. However, when exploring a sale it’s important to take a strategic and careful approach by following the steps below.
Before diving into the sale process, it's important to define what you hope to achieve with the sale of your commercial real estate property.
Are you looking to maximize profit, minimize taxes, or simply relieve yourself from the burdens of property ownership?
A firm understanding of your goals and priorities will help guide your decision-making throughout the process.
Selling a property can inevitably affect your income and might require additional capital investments. It’s important to carefully assess how this decision will impact your financial stability during retirement and plan accordingly.
Contact an experienced commercial real estate professional
A commercial real estate broker can conduct a thorough analysis of the current real estate market conditions and the value of your property. This will help you determine a realistic selling price and understand the potential returns you can expect from the sale.
In addition, selling commercial real estate is a lengthy and involved process. An experienced broker can lead the marketing, negotiation and sales process to take the heavy lift off of our plate while ensuring you receive fair market value for your property.
To attract potential buyers and maximize your property's value, it's important to prepare it for sale. This may involve making necessary repairs, improving curb appeal, and staging the property to showcase its potential. A broker can help you determine what needs to be done to ensure your property is prepared to stand out in a competitive real estate market.
Work with an accountant to better understand your potential tax liabilities
Undoubtedly, taxes represent a significant concern during the real estate sales process. Capital gains taxes, which range from approximately 20% to 25%, take into account the duration of ownership and the depreciated value of the asset at the time of sale. Additionally, states like New Jersey impose a Realty Transfer Fee, ranging from 0.04% to 1%, and a Mansion Tax of 1% that can come into play. To reduce tax liabilities, someone nearing retirement age may choose to delay selling profitable real estate until after they have stopped working.
Even if you are transferring a property to a family member, it’s critical that each party understands potential tax liabilities to limit headaches and large tax bills at a later date.
By carefully evaluating these factors and following a strategic approach, Baby Boomers can place themselves in a great position to successfully sell their real estate investments and ensure their financial stability during retirement. Whether it's traveling the world, playing golf, or moving to a warmer climate, taking a strategic approach will allow Baby Boomers to enter the next chapter of their lives with confidence and peace of mind.