12-03-2021, 01:23 PM
When is it worth it to diversify $8m into commercial real estate instead of being 10
<!-- SC_OFF --><div class="md"><p>Hypothetical: net worth $100m-$250m</p> <p>(please spare me the point where somebody chimes in and the top voted comment is "go see a financial advisor". no duh. common sense. this is just hypothetical/to prove a point in a unique situation. if anything, i'm saying, hey <a href="/r/investing">r/investing</a>, let's pretend to be financial advisors and see how well we would do in this context)</p> <p>You already have a ton of exposure to stocks. ETFs/mutual funds, track the index, yada yada.</p> <p>If you can pull in ~$620k/yr gross, $450k/yr net (25% operating expenses), write off 2.2% depreciation of the purchase price from 5 years ago (about $3.7m-$4.5m), and also benefit from the compounding appreciation of roughly 3% a year on $8m ($240k/yr the first year)... does this make sense?</p> <p>Context: the buildings are paid off. No financing/mortgage/interest.</p> <p>I am not sure if this is wrong but... running a cap rate calculator based on the <em>current</em> market value of the properties is 5.6%.</p> <p>To me... that's bad. But is this all an example of how "what you read online doesn't really apply all of the time/it depends on other factors". You could do better by <em>not</em> being a landlord, not having tenants, not having to maintain buildings, sell the buildings for $8m, clear $7m after fees/closing costs, and put it in the market at 10% (before inflation).</p> <p>But... is this proof that... high net worth individuals are willing to take "less return" in the name of diversification?</p> <p>I would say the returns are relatively neck-and-neck when you take into account tax deductions (net about $30k in the 37% bracket), appreciation added to net income (another $240k on top in appreciation of $450k is a big deal. That's generating almost $700,000/yr net on $8m in capital being tied up, plus the $30k in tax deductions makes it about $730k/yr).</p> <p>Is it a no brainer to do commercial real estate instead of stocks in this case? Am I reading too heavily into "5.6% cap rate is bad". Is cap rate for people who don't have the buildings paid off? Could I (in this hypothetical situation) command higher rent given the cap rate? Is cap rate supposed to be on purchase price, not market value?</p> </div><!-- SC_ON --> submitted by <a href="https://www.reddit.com/user/waltwhitman83"> /u/waltwhitman83 </a> <br/> <span><a href="https://www.reddit.com/r/investing/comments/r7irbb/when_is_it_worth_it_to_diversify_8m_into/">[link]</a></span> <span><a href="https://www.reddit.com/r/investing/comments/r7irbb/when_is_it_worth_it_to_diversify_8m_into/">[comments]</a></span>Kind Regards R
<!-- SC_OFF --><div class="md"><p>Hypothetical: net worth $100m-$250m</p> <p>(please spare me the point where somebody chimes in and the top voted comment is "go see a financial advisor". no duh. common sense. this is just hypothetical/to prove a point in a unique situation. if anything, i'm saying, hey <a href="/r/investing">r/investing</a>, let's pretend to be financial advisors and see how well we would do in this context)</p> <p>You already have a ton of exposure to stocks. ETFs/mutual funds, track the index, yada yada.</p> <p>If you can pull in ~$620k/yr gross, $450k/yr net (25% operating expenses), write off 2.2% depreciation of the purchase price from 5 years ago (about $3.7m-$4.5m), and also benefit from the compounding appreciation of roughly 3% a year on $8m ($240k/yr the first year)... does this make sense?</p> <p>Context: the buildings are paid off. No financing/mortgage/interest.</p> <p>I am not sure if this is wrong but... running a cap rate calculator based on the <em>current</em> market value of the properties is 5.6%.</p> <p>To me... that's bad. But is this all an example of how "what you read online doesn't really apply all of the time/it depends on other factors". You could do better by <em>not</em> being a landlord, not having tenants, not having to maintain buildings, sell the buildings for $8m, clear $7m after fees/closing costs, and put it in the market at 10% (before inflation).</p> <p>But... is this proof that... high net worth individuals are willing to take "less return" in the name of diversification?</p> <p>I would say the returns are relatively neck-and-neck when you take into account tax deductions (net about $30k in the 37% bracket), appreciation added to net income (another $240k on top in appreciation of $450k is a big deal. That's generating almost $700,000/yr net on $8m in capital being tied up, plus the $30k in tax deductions makes it about $730k/yr).</p> <p>Is it a no brainer to do commercial real estate instead of stocks in this case? Am I reading too heavily into "5.6% cap rate is bad". Is cap rate for people who don't have the buildings paid off? Could I (in this hypothetical situation) command higher rent given the cap rate? Is cap rate supposed to be on purchase price, not market value?</p> </div><!-- SC_ON --> submitted by <a href="https://www.reddit.com/user/waltwhitman83"> /u/waltwhitman83 </a> <br/> <span><a href="https://www.reddit.com/r/investing/comments/r7irbb/when_is_it_worth_it_to_diversify_8m_into/">[link]</a></span> <span><a href="https://www.reddit.com/r/investing/comments/r7irbb/when_is_it_worth_it_to_diversify_8m_into/">[comments]</a></span>Kind Regards R