Inherited Commercial Property - Should I Sell?
Hey Everyone,

I'm admittedly quite new to this sub and still trying to learn even the basics, but I have a somewhat imminent decision to make and I was curious your thoughts.

For context, both my grandfather and father passed away last year and I'm on the tail-end of finishing a dual probate process. Important to this discussion is that there was some commercial property my grandpa owned, which my dad then inherited, which in turn my brother and I inherited. As it stands, I own 1/8th of the property, my brother 1/8th, and my aunt &amp; uncle 1/4th. The other half is owned by the family of my grandpa's former business partner, whom I've never met but seem quite reasonable and manage all details of the property for a 10% fee. 

As we approach the end of probate, my aunt and uncle are asking to buy my brother and I out of our share of the property for an all cash amount.  Specifics are below:

Location: Boise, ID  
Appraised Value: $1.2M as of July 2017 (thus my share is effectively $150k at this cost basis)  
Monthly Rent: $8,400  
Monthly Management Fee: $840  
Additional Retention: $1,500 (this is for insurance, taxes, repairs, etc.; anything not spent for the year is prorated back to everyone at EOY)  

Ultimately we're renting at an annual rate of 0.84%, which is obviously below the 1% rule I keep reading about. However, I'm unsure if that rule applies to all properties or just residential. The building is fully paid off, and we have a tenant who rents the entire property. I understand we've kept them at a lower rate to ensure their stay because historically they've been great. I believe their current lease is through the next two years. All in all, it's a steady cash flow to me of around $9k a year after all taxes and expenses. 

Personally, I view this property as a passive asset for myself in a city that's growing at a strong pace, and as a diversifier to my already quite liquid portfolio. I'll literally do nothing but collect the cash each month.

My question to everyone here is how you would you approach this situation? I don't think I'll have much say in upping the rental amount (in large part because I'm not majority owner), so I'm anticipating a somewhat deflated rate for the tenure of my ownership. As such, I'm effectively receiving a 6% net return on my investment ($9k/$150k), which may be below average equity returns, but it's also somewhat fixed and I personally believe the market's entering a low-return environment. This 6% return also doesn't take into account potential property value growth.

I welcome absolutely all advice and education (please correct me if I'm mistaken in my views of anything above!). I told my aunt and uncle I'd have an answer for them sometime next week, and if I need to get more info I'm sure that's possible. Lastly, family dynamics are not something I'm interested in bringing into the discussion unless necessary. We have an amicable relationship and I've been very generous with them on other fronts. I solely want to make the decision to sell or stay in the context of what's most business savvy. 

And as a bonus question, if you were in my seat do you think it's worth approaching my brother to buy his portion for $150k? That's a possibility and I have the cash to pay it in full.

Thank you!!
[{"id": "dyh7mum", "text": "If I understand correctly if you buy your brothers share, you would receive a 6% annual return after all expenses?  Lots of risk with only two years of term left of the tenants lease.  \n\nWas the appraisal for market value of the real estate or based on income?  \n\nIf the tenant is paying below market rates, you really should do some serious research about your local market and determine if your getting hosed.\n\nI\u2019d also scrutinize every operating expense, considering your new business partner is charging you 10% to manage the property and there could be potential conflicts of interest.  Have a couple property management firms provide you with management proposals.  \n\nUltimately, do as much research about the local market.  Talk to brokers, your cpa and attorney.  Might be worth getting your own appraisal done.  \n", "replies": [{"id": "dyhnx4b", "text": "Thanks for the response. Yeah, so I receive 6% net now and/or if I buy my brother out; it would just be on a larger base. As for the tenants, I must not have provided enough color, but they may only be on the lease for a few more years, but have been in the building for the past 20. I understand commercial real estate typically has higher lease times than residential, but I believe this tenant has extended their lease multiple times over these years. They seem like a safe bet, and the city is booming now relative to all years prior. Occupancy risk isn't something I'm terribly worried about, but perhaps I'm naive.  \n\nHmm... the appraisal was on the market value of the property; I don't think the income was accounted for. Do you mind clarifying the difference?  \n\nI appreciate the idea of justifying the 10% management fee, but even if I find it too generous, I doubt I'd be able to raise much of a fuss considering my minority holding. Truthfully, even if it is high, it's not a huge deal to me because I don't live in Boise, I don't have knowledge of the property or being a landlord, and the setup effectively just cuts me a check without taking an ounce of my time. That's attractive, and feels worth 10% of my income, but again, I could be naive and be receiving such treatment for far less.  \n\nThanks again for taking the time to respond. It sounds like if I'm serious about staying in, I need to perform much more of my own due diligence.", "replies": [], "depth": 2}], "depth": 1}, {"id": "dyh8lks", "text": "Basically this is a stream of income and to give a present cash value for it you will need to come up with a discount rate. The discount rate will basically be how much you think you could earn with the money if you had the cash. If you could do better than 6% with no effort and the same amount of risk then it might be worth it. If you could do better but it takes more effort or more risk on your part then you'll have to decide you want to deal with that.", "replies": [{"id": "dyho7ot", "text": "Thanks, I think this would be helpful to determine both the value of staying in, but also the present value of selling. On the selling side, and if I understand you correctly, that means the $150k they're offering for my share is solely for the property value, but doesn't take into account the present value of cashflow, correct? And if so, I should be asking for more?  \nPerhaps it should be mentioned I'm also considering this holding a diversifier in my overall portfolio. Considering it's more a fraction than large portion of my net worth, the idea of having this slug be an effortless 6% return (excluding appreciation, too) doesn't seem too shabby.", "replies": [], "depth": 2}], "depth": 1}, {"id": "dyh8y8r", "text": "10%? That seems steep. I am in the same exact situation. I pay a trust company 1% to manage it. I would suggest doing the same. ", "replies": [{"id": "dyhoehs", "text": "The 10% seems to be what most people are getting hung up on. I'm curious, what all does the trust company do for you? Are they taking care of repairs, speaking with tenants concerning problems, adding new tenants, drawing up paperwork, paying taxes, etc.? That's really what I'm getting to where I'm simply cut a check at the end of each month not having to worry about any aspect of the property and management, and that's that. Seems decent to me, but I admittedly could be mistaken, or receiving the same amount for less.  \n The 10% honestly is my least concern - I'm primarily curious if the ROI is decent per my main post and the added context of my peripheral comments.", "replies": [{"id": "dyhsqqz", "text": "The commercial buildings I co-own with my family are on triple net leases which for the most part are care free leases so no repairs. We had to re-do a parking lot for a tennant and we had a franchisee of a major chain who wanted to move but instead we spent 250k renovating the building at the end of the lease and re signed them on a 25 year lease.. The tennants pay the bank and the bank pays us. However, they keep rent and roll the rent into stocks and bonds and keep it in case of major repairs and make periodic dispursements. I would check your leases to see what repairs maybe required in the lease so you are prepared to pay for upkeep if any. The trust company basically handles rent, investing rent, and any problem to comes up with tennants is passed to us but there isnt to many issues since its a 25 year care free lease.  As for roi, I am no expert on that but I will say commercial properties are essentially cash printers. Id try to own as much as you can if the numbers make sense. Good luck.", "replies": [{"id": "dyi8uuh", "text": "Agree. NNN is a much better set up and essentially management free. Personally, I would sell my share and get into NNN once cap rates start going up (starting to rise somewhat already now that interest rates are going up). ", "replies": [], "depth": 4}], "depth": 3}, {"id": "dyn75vl", "text": "It is rare in my market to see a property managed for anything over 5%. The property management firms will do everything you mentioned above for this rate. I believe the reason people are getting \"hung up on this\" is it appears to be a fairly alarming red flag as you have partners in the project charging significantly more than they should which is bleeding your return while maximizing theirs. This in turn is making us all wonder what else may be going on that has not yet seen daylight - we've all seen how bad partnerships can tank a project fast as anything else.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "dyhc94m", "text": "I'd sell it.  Buy something you can manage and control yourself with the funds.", "replies": [], "depth": 1}, {"id": "dyhcedt", "text": "10%?! You\u2019re getting fleeced.", "replies": [{"id": "dyhkxnx", "text": "Not really it\u2019s $10K / year - sure it\u2019s 10% but that\u2019s a function of the low nominal $ rent ", "replies": [], "depth": 2}, {"id": "dyhm4wl", "text": "100% this. ", "replies": [], "depth": 2}], "depth": 1}, {"id": "dyhj8id", "text": "How old are you? 9-10k/year is essentially 150k over 15 years. That\u2019s a nice passive income for no work. If they want your share, they\u2019re thinking long-term investment. They should pay more, 200-250k to account for long-term return lost and the likely increase in property values you mentioned. And they also could bring in a new tenant after you and your brother sell for double the rent. There\u2019s really no way of knowing. DickJeff comment in thread is spot-on. Sounds like there are a lot of unknown variables.", "replies": [{"id": "dyhp5ds", "text": "I could be completely ignorant on this (I certainly feel as such), but do most people when selling cash flow properties sell both the value of the real estate in addition to the surrendering cash flow? If so, you just brought to light something I hadn't yet considered, which I truly appreciate.  \n\nAnd yes, I'm also curious what the climate is for increasing rent further down the line. I feel there's a lot of potential here, but need the info to make an educated choice. Thanks again for helping me reach some of that insight.  \n\nOh, and I'm 28. My aunt and uncle just retired, so they're looking at this as some solid passive income for their stage in life. I'm looking at it as a supplement to my already decent income that can be rolled into buying other property, potentially.", "replies": [{"id": "dyhswet", "text": "I\u2019m not sure why I got downvoted on here. I\u2019m not a commercial broker so my advice might not be completely accurate. Although I do help manage a commercial building with three tenants for my parents. If you\u2019re only 28, I would tend to look at it like you\u2019re giving up realistically 10k+ per year for the rest of your life. Yes people here are accurate in that you can reinvest that amount and get possible more than a 5% return on that amount. But the way I see it is you\u2019re losing a potential long-term return that really should only go up. The rent will inevitably go up and it sounds like the property value will too. So long as the property split is legally sound, it sounds like you have a great situation in place that shouldn\u2019t be given up so easily.", "replies": [], "depth": 3}, {"id": "dyhyv24", "text": "If you\u2019re looking to buy another property, I would 100% sell out, and use that 150k to buy your own property that you own fee simple (real estate term for the most complete ownership structure).  With 150k you could probably get something worth 600k, like a duplex or quadplex.  It will be more work, but you\u2019ll have a better return.\n\nOr, if you have another $150k sitting around ready to be invested (300k total), go buy your own building worth $1.2M and own it 100%.  If you want to do this, PM me.  I have experience in this realm.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "dyhll4h", "text": "I'd sell. Who wants to own 1/8 of an asset to make a 6% return and have no say. Possibly if rent is substantially under market value, I'd stay in, but otherwise sell as soon as you can get a long term gain on it. ", "replies": [{"id": "dyholjd", "text": "Thanks for the response. Personally, I have no experience in this field, although I have a gaining interest. I'm much more familiar with stock markets and that's where most of my money is held, do this is simply a diversifing piece of my portfolio (at least as I perceive it).  \n\nSounds like I need to get more information on the tenant history and potential rent raise later down the line. Also, per your holdings comment, the appraised value was $1.2M, which coincides with the cost basis, so if I sold at the $150k amount there's no tax at that rate, fortunately. ", "replies": [{"id": "dyi1opl", "text": "I figured that may be the case on the cost basis after a private but wanted to bring it up to be sure. If you're interested in real estate, you could take that 150k and buy a single tenant triple net asset and should make better than 6% cash on cash. I personally like to control my own destiny and not just be along for the ride. Good luck!", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "dyhm8r9", "text": "Yes, I would sell, for many reasons: \n\n\n-Having just inherited, now is a good time tax-wise. \n-You can get a better return elsewhere. \n-Being a minority partner can get messy. \n-Its a lot of risk.  Could go up or down a lot 2 years from now. \n\nAll of the benefits of this property can be had elsewhere with less of the downsides. ", "replies": [{"id": "dyhozsy", "text": "Thanks for the points you lay out. If you don't mind opining further, I have a few questions:  \n\nTaxes: You're right, it's a great time tax-wise. The cost basis was set at time of death, and they're looking to buy from me at what is effectively cost basis. I shouldn't have to pay any taxes here, per what my attorney said.  \n\nReturn: What kind of return would you be looking for in a similar situation - that being any property return. My main concern on the post is whether the 6% net is decent or far under value relative to other traditional situations. Note, this also doesn't include appreciation of the property, which in the past five years has gone up around 4% annually... so this perhaps could be considered a 10% ROI, or 12.5% gross?  \n\nMinority Partner: Do you mind clarifying how this could get messy? Half is family, and the other half are pretty chill people who have been very accommodating during this whole probate process. I don't have much reason not to trust anyone involved, albeit I do understand politics are always a potential issue.  \n\nRisk: What's so risky? If it's the tenants potentially leaving I'm only on the hook for annual property taxes until new ones are found, which I don't think is much of an issue. Since it's paid off I don't see this as a very risk asset, but I could be mistaken.  \n\nI totally get there could be more upside elsewhere, but as someone completely new to this scene, having a passive income stream with no effort on my part and all the infrastructure of setting something like this up already done, it seems like a good gig barring my ROI being too low. Thanks again for your comment!", "replies": [{"id": "dyl82um", "text": "Return - returns vary based on multiple factors, but I'd shoot for more like an 8% return with less risk, or maybe accept 6% with significantly less risk.  Compare it to buying bonds - if you could get 6% (you can't, currently) from a terrific company that's financially solid, lots of great product lines, no looming threats (competition, regulation, etc.) who have good reserves but are borrowing to fund growth in exciting new areas, that's as close to risk-free as you can get outside of US Treasury.  For a higher return you'll go with a still great company that doesn't check every box, and so forth. \n\nAppreciation- an important part of RE investing, but consider that most everything will appreciate, at least keeping up with (and usually slightly outpacing) inflation. Is your property appreciating faster than others?  \n\nMinority partner - all is well now. Do they want something from you now (e.g. to buy you out, keep them on as managers)?  How about when they don't want something from you?  Maybe it will still be great.  But what about when the majority partner(s) has another part of their business not go so well and need to do something with this property, e.g. sell?  You're along for the ride. While the ride is good, that's fine. But it has risks. So does any other investment, but being a minority partner means your investment is completely illiquid. \n\nRisk - again, no liquidity.  You're in a jamb and you can't sell your share. Or you have a fantastic opportunity and can't sell our share. Or the other partners go a direction you disagree with and you can't sell your share. \n\nSay when the lease is up they don't renew. What if it takes another year or two to fill the space?  You aren't losing much with the property tax, etc. but you have a big chunk of money earning nothing when it could be in another investment. What if you need to front significant capital for the new tenant's buildout?  What if that happens at the exact time that something else is going on in your life and you need to sell?  The majority partners are the only people you're likely to sell to, and they just put hundreds of thousands into tenant improvements, so they can only pay you 50k for your interest in the property. ", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "dyhmz2d", "text": "Seems ownership is messy, which can get super weird when real decisions need to be made. There are some other factors worth considering however they are minor details compared to the big picture. Sorry for your loss. ", "replies": [], "depth": 1}, {"id": "dyi7izy", "text": "Why don't you buy everyone else out ?", "replies": [], "depth": 1}, {"id": "dyi8yn4", "text": "Sell it, but only after having your own third party appraisal done by a commercial appraiser. Here's why: you have no control. I don't know Boise but I know that without control you'll always be in a bad spot. Take your $150k and move it to something you can control. ", "replies": [], "depth": 1}, {"id": "dyk3mrx", "text": "\"Ultimately we're renting at an annual rate of 0.84%, which is obviously below the 1% rule I keep reading about.\"\nForget this silly metric or at least learn what it means.  At 1% the market rents at $1,000 are ONLY worth $100,000 to investors.  In a .8% market that same rent is valued at $125,000 by the market.  Wonder why?  My experience is that the .8% market appreciates more so each $100,000 in appreciation gain will also result in a rent increase of $800.  Usually the higher the Price To Rent ratio the less appreciation and rent growth.  Scammers use the higher PTR ratio to sell crappy properties to novices.", "replies": [], "depth": 1}, {"id": "dyky9v6", "text": "First, so sorry.  I can't imagine losing both dad and grandpa at once.  Second, don't make any decisions for a year.  Losing both patriarchs in the family can be emotionally devastating, whether you've processed it yet or not.  Leave everything AS-IS for a year, at least.\n\nWhat to do over the next year?  I would start a 'discovery' process. Perhaps attend a local CCIM networking event (message me if you want tips for these events.  They're very helpful).  Definitely allow yourself time to grieve. Imagine your grandson inherited the property and speak to him.  Also, imagine your best friend inherited the property and speak to him. I think you'll find your answer somewhere there. \n\nIf you decide to meet CRE professionals, find someone you feel like you can trust and ask them the future value of the property, what they would do, etc.  The reason you'd want to find someone is because there will be a lot of questions in the near future and it will be nice to have a sounding board.\n\nGood luck and remember the secret to happiness is low expectations! ", "replies": [], "depth": 1}]