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Here is a situation I ran into concerning investing in Real Estate versus stocks. I would love to have other people's input in this. What would you have done?


My wife has one piece of investment real estate, which she bemoans whenever she gets the chance. It is a house with a small basement apartment in a very desirable area. I do 80% of the management for her and it has pretty good cash flow. It has doubled in value in about 5 years and has made her about 150k on an initial investment of less then 10 grand.

Sounds terrible, doesn't it?

Anyway, she decided to sell. Even though it's been a great investment, for all the equity that she has in it the return is not that great anymore. In other words, given you had 150k in cash to invest, you definitely could do better then buying this house.

So I was all in favor of selling and we got it under contract. Here is the problem…what to do with the money?

Since she is tired of dealing with managing real estate, the obvious choice is index funds. The big negative to this is paying taxes on the gains. If she rolled it over into real estate using a tax-free exchange, she would not have to pay any taxes. To give her an alternative, I looked around for a commercial property that would have less management headaches – parking lot, billboard, free-standing building long-leased to a big company, something like that.

Here is what I found:

I found something called office park condominiums. They were only about 2 miles from our house and in a great area. Further research determined that there has not been a vacancy in the building we were looking at in many, many years. There are 2 offices, and the current leases go through 2002, with built-in rent increases.

The association fee handles the management, so the most you would have to do it take a phone call and tell them what you want to do. Most of the repairs are handled by the tenants (successful doctors) anyway.

I'll skip all the details and give you the bottom line on the numbers. If we went with a 15-year fixed note and put all the proceeds from the sale of the house into the office condo (thus avoiding any taxes) we would have a break-even cash flow for the first 15 years. This is making generous allowances for repairs and not counting rent increases. At the end of 15 years, the tenants would have paid off the note, so the 150k would be worth 450k assuming no appreciation. At that point, we would have over 50k a year in rental income. Again, allowing for repairs and ignoring rent increases (and inflation).

My question is this: can the stock market beat this? Is this a no-brainer, or I'm I missing something?

If you are running numbers, remember to subtract at least 20% in taxes from the 150k. Also factor in the income, and the fact that it goes up yearly without touching the principal. Also close your eyes and imagine that you might like to retire in 15 years.

I'll post what actually happened later……
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