It goes without saying that I think owning commercial property is a sound investment. I have spent nearly three decades helping people make the right decisions when it comes to real estate.
Believe it or not, sometimes the right decision is to sell.
So whether you are seeking to make changes in your overall investment strategy or simply ready to cash in, here are 6 reasons why you should sell your commercial property.
1. Short Supply of Available Properties = Huge Demand
Due to market conditions and limited availability, buyers are being forced to pay higher prices. I rarely have to list the investment properties I handle. Any single property already has 10 buyers lined up and each of those buyers are part of extensive networks of like-minded investors.
2. Deferred Capital Gains Tax – 1031 Exchange
Maybe you have purchased a property but didn’t anticipate the responsibilities. Maybe the property has fully depreciated or you have maximized its earning potential. If you are seeking to reinvest the profits from your initial investment, buying a “like-kind” property can be a valid option. Because of its vague language, a 1031 exchange can allow you to defer the capital gains from the sale on your initial property if choose to use the profits by reinvesting in a different, but “like-kind”, piece of real estate. You should seek the advice of your tax professional regarding the details of a 1031 exchange.
3. Property Management
Having tenants can be a source of consistent income. But managing, or paying to manage, an apartment complex or trailer park is leagues away from overseeing a retail property. Why have 50 tenants who have access to you on-demand, when you can have 5 or 6 business owners solely interested in making their future a reality? Is it worth the hassle if you can make the same, or higher, return?
4. Your Property has Fully Depreciated, or You’re Playing the Waiting Game
In spite of what you may have heard, writing off a depreciating property isn’t your best option. Consider an example from the residential realm. We have been raised to think that carrying a mortgage is beneficial for tax and credit purposes. In reality, your financial power is tied to a single entity. If you paid off your mortgage, you wouldn’t need the tax advantage it carries because your biggest wealth building tool, namely your income, is freed up to invest in whatever it is you please – which also carries its own tax benefits. Tying this back to the commercial world, you are basically letting a property lose value so you can hedge against your other investments and/or sources of income. Why would you hold on to a broom to sweep up the pieces when you can grab a hammer and build something? Do you need a plan and the right counsel? Sure. Being wisely proactive with your money is always the better answer.
5. Depleted Earning Potential
At times, circumstances such as changing economic factors and a changing local environment can cause direct harm to your investment. If you have your ear to the ground and foresee on a turning away from the niche of your tenants’ businesses, it might be time to sell. It’s also important to have the foresight to understand the local atmosphere of the neighborhood surrounding your property. If the desirability of the neighborhood starts to tank, it could be time to exit.
6. Maximized Earning Potential
The last reason I want to discuss is something you won’t often hear. Once you are at the point in time when you are charging the highest rent possible, your property has reached the point of its highest earning potential. It’s here that you have three options: sit back and collect, renovate and/or update to increase earning potential, or sell. Depending on your investment goals, selling can be a great option. Because you have proven the earning potential of your property, you can sell your property for the highest possible price.
If you are looking to build wealth and diversify your portfolio, now is the time to sell.