Done Being a Landlord?... Become The Bank!
Are you ready to retire from the landlord business? You may think that there’s only one way to move on from a rental property when it comes time to sell. However, there are actually two paths one can take when selling a piece of commercial property. Which is the right choice for you?
1. Outright Sale – A standard or outright sale is the most common method used when selling a piece of commercial property. Once the buyer and seller agree to terms and the transaction closes, the seller receives his/her revenue from the sale and the buyer receives the property. This is fairly straightforward and also applies to residential property transactions as well. However, this type of transaction for a seller comes with a heavy price.
As you may or may not be aware, selling a piece of real estate other than your own residence triggers what’s known as capital gains tax. This tax varies based on the seller’s income but typically falls in the range of 15% - 25%. For instance, say you have sold a commercial property during the current year for a profit of $60,000. Once it comes time to pay your taxes, you could owe as much as $15,000 to the government on that transaction alone! You may be fine with paying these high rates all upfront, but if not, there is another way to sell that just may be of interest to you!
2. Seller Financed Sale – In a seller finance scenario, the seller is essentially trading his/her position as owner of a property to bank of the buyer. Upon sale, the buyer assumes ownership of the property while the seller receives periodic "mortgage" payments according to the terms defined and agreed to by the parties. This type of transaction can have terrific benefits for the seller, including:
A higher sale price as the buyer spreads out payments over the course of the loan.
Income generated from the interest charged on the loan principal.
Capital gains tax is spread out over the course of the loan.
The first option described above is often the chosen route of sale for commercial property owners, but if you’re willing to finance the buyer and “become the bank”, you can expect to see greatly improved profits and tax benefits.
We hope that this brief article has helped open your eyes to what options are available and the best course of action for your specific needs. Having built a great team over the years capable of handling any sale path, we would be glad to work with you or answer any questions you may have on the journey to sale.