3 Strategies To Pull Cash From A Commercial Real Estate Property
And Put It To Better Use
Once you have owned a commercial real estate property for a length of time, and presumably built up some equity in it during that time, it is likely that you will begin to consider ways in which you can access some or all of the cash that is "just sitting there".
Now, even if you are just starting out as a commercial property investor this topic will be of great relevance to you as well. Why? Because it's important to have a game plan in place eve before you begin investing that enables you to continuously leverage your equity over time to ensure you achieve your greatest returns. I hope that doesn't seem too vague or confusing. Nonetheless, let's look at a real life example that I am actually faced with at the moment.
"Liberating" Equity From Commercial Real Estate Property
I currently own a 23 unit apartment building that is worth about $1 million. I bought it for $625,000 and the current mortgage balance is about $500,000. This little building is humming along like a dream right now. It is an out-of-town investment so my daily involvement is next to nothing, if not nothing. It cash flows well and continues to pay down the mortgage each month. The building is in great condition, with very little up-keep required. In addition, I recently had the property manager increase the rents, which has added about $125,000 to the value of the apartment building.
Summary: There is currently about half a million in equity in the property, and really no other way to increase the value of the property other than from market appreciation forces. In a situation such as this you may face several options to pull equity from your commercial real estate property.
|By the way, when I first started out in this business almost twenty years ago, finding educational information (that wasn't just "text book theory") was difficult. Today you have options. Here is one e-course on commercial property investment that I recommend. It's a great "hand's on" resource as it is written by a 31 year veteran of the industry.|
Sell The Property - An obvious choice would be to sell the property, take the cash left over and purchase another, likely much bigger property. If I transfer the same equity into a more expensive income property my returns from market appreciation will be improved. As well, a new building will present new opportunities for "forced appreciation" that I have exhausted in the above apartment building. Of course the downside of selling is that you pay tax on the gains, which eats at a chunk of your equity. If you hire a commercial real estate broker this will also eat up 3%-5% of your equity.
Exchange The Property - A 1031 exchange (in the United States) allows a property owner to "exchange" his commercial property for another one without paying taxes. There are of course rules that must be followed in order to accomplish this. One such rule is that there is a time limit within which you must purchase a new investment property after you have disposed of the old one. This restriction may put you in a position where you end up purchasing a property that you probably would have taken a pass on simply due to the time pressure. Of course the benefit is that you avoid paying capital gains tax on the profits.
Refinance The Property - Although it is unlikely that you will be able to pull all of the equity out of your commercial real estate property using this technique, it does have some definite advantages. The cash you pull out is tax deferred (not tax free), meaning you will pay tax on it if and when you sell the property. You can then take this cash and plop it down on another property. Now you have two properties that are appreciating for you. This is a technique that I have used many, many times. It allows you to keep leveraging your equity and build a stable of investment properties at the same time.
Hold On To That Commercial Real Estate Property - Not a bad option. Just continue to sit back, collect the cash flow and let the property appreciate.
Of course, if you are in the acquisition stage of your commercial real estate property investment plan, you will likely want to explore one of the first three options in order to maximize your returns.
Although there are many different types of commercial properties, the reality is that most first time investors tend to stick to apartment buildings over office buildings, warehouses, etc. If you are interested in getting started in the apartment building investment business I recommend that you get yourself a good course or book on the subject (or a few courses/books for that matter). Here is one I recommend.
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