SMART MONEY: Out-of-state property is more burden than benefit
DEAR BRUCE: I have a widowed, elderly friend with two adult children who owns a commercial rental property out of state. The property consists of a 2,000-square-foot building built 30 years ago on five acres.
Currently her taxes are $4,000 a year, and the property insurance on the building runs about $950 a year. She gets $1,200 a month in rent on the building and land. Her net, after taxes and insurance, is about $10,000 a year.
The building needs a lot of repairs. The property is on a well and septic system. The well pump will need replacing at some point, and the septic has to be cleaned out periodically. The lease is coming up and, with times as they are, it is doubtful that an increase is possible. The tenant pays like clockwork.
We are trying to decide whether to sell or continue the lease another five years. If it was sold, the market value may not be over $150,000. Carrying the mortgage might be an option. Based on my experience, the interest rate on a mortgage would be in the 5 percent to 6 percent range. What are your recommendations as to whether to lease or sell? — A.L., via email
DEAR A.L.: You have a couple of choices. One option may be that you look for a new tenant. It may be the property is worth more and you can get more from another tenant. But why does a widowed, elderly person have to contend with a commercial property out of state?
This is a no-brainer. The building is only netting $10,000, which is well under a reasonable percentage.
On top of that, there are all sorts of things going bad that will have to be replaced, and the tenant is apparently not able to pay more. I would prefer to get the $150,000.
It would easily bring in a minimum of $8,000 a year income with absolutely no effort on her part and no concerns about the well, the septic tank, etc.
If she is going to keep the property, I would have her sit down with the tenant and explain that it is necessary to increase the rent by a modest 10 percent or so and show the tenant why this is necessary.
In the absence of that, suggest that the tenant is welcome to stay, but you will be looking for another tenant who can pay the additional rent.
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