Selling Commercial Property
When an investor purchases commercial property, they buy the property based on the benefits within an anticipated time period. The investment performance is bases itself on various measures for expectations at the time of purchase. An educated investor understands many things can change over time, some of these can be :
- Tax rules, lease rates,and..
- Economic changes to a specific market.
Because of this, an investor should consider whether they should be sell their commercial property during their hold period.
Factors than impact the sale of your property
When should an investor sell or retain the commercial property they own? Even if an investor’s forecasts are accurate, other factors can influence an investor selling a commercial property after a specified number of years. One important factor is the potential benefit associated with leverage.
Assuming the commercial property’s mortgage has positive amortization, the interest of the mortgage decreases each year. Hence, the investor’s equity will build as more time goes by. However, over each year the commercial property is held, the more cash ties up in the respective property. Equity build does represent funds that an investor may place into another commercial investments.
There is a g
reater portion of capital that remains invested with relation to the cash flow being received from continuing to operate the property. An investor owner can refinance to solve this.
Total mortgage payments (debt service) is the same with the interest portion decreasing each year resulting in a lower tax deduction. An investor loses the benefits of financial leverage each year.
Should I sell now or later?
Evaluating what the future performance of the property comes into play. An essential question is should the commercial property sell so that those funds can be put into a new investment property? If the commercial property is sells then an analysis must be made is how much cash will be available for reinvestment?
The sale of the property will have the investor paying capital gains taxes (unless it 1031 Exchange Defined) and selling expenses (commission, closing costs etc). Sale calculations should be figured on tax laws that are in place at the time of the sell.
The bottom line? Can the sales proceeds be reinvested at a greater rate of return versus the return that would be earned from the current investment?