It can be tempting to sell your commercial investment—especially when we are told it is a seller’s market. We may feel an urgency to place our commercial property on the market—reaching for the best possible price.
Just as there are really good reasons to sell when the market is hot, there are also reasons not to sell.
Here are the top 10 reasons a commercial property owner should NOT sell:
10. Your property is not yet fully depreciated.
Some investors feel they have plenty of depreciation left in their property, but they will need to hold onto it for 39 years to realize the full amount.
9. You have favorable loan terms.
This not only includes a good interest rate. Be sure you do not have a prepayment penalty triggered when you sell as this could affect your bottom line.
Having a high loan-to-value ratio is a good wealth-building strategy. As long as the investment cash flows, financing a large portion of the value and maintaining a small equity position can be good. It is thought that your equity can be used to acquire additional real estate rather than sitting idle in one investment.
8. Changes in your municipality’s infrastructure are coming.
Anything improving the infrastructure of your area (extended utility service to your area, fiber optics, new roads) can improve the desirability of your property and therefore its value.
7. Changes to the general plan or zoning.
If your local government is in the process of making changes this could have a significant positive (or negative) impact on the value of your investment.
6. Unable to find another property suitable for your business.
If you happen to operate your business from your investment property it can be difficult securing a suitable replacement location as well as costly to move.
5. There are indicators the market is going to turn.
If you have an investment that is not performing well or is performing well, but could do better when _________ occurs (you fill in the blank), then hold on. Changes occurring in your locale such as new companies coming in (jobs) or new commercial developments breaking ground could bring your investment value up as well.
4. The investment is not yet fully stabilized.
It is always good to have a plan and a strategy to implement. Don’t sell too soon. Wait to capture the full potential of your property.
3. Unable to find a replacement property.
If you plan to perform a 1031 tax-deferred exchange, it can oftentimes be difficult to find suitable replacement properties as required.
Capital gains taxes of up to 20 percent, plus California taxes of up to 13.3 percent, plus the Affordable Care Act tax of 3.8 percent (if it applies), plus a depreciation recapture tax of 25 percent all add up quickly.
And the No. 1 reason you should not sell?
If you are emotionally tied to your property. When this happens, you inevitably feel it is worth more than the market will allow and price it too high.
It happens for good reason as you have put your heart and soul into creating a trophy property. Unfortunately, not everyone will see your property as you do.
Many investors look at an investment objectively, which is the way they should. Price your investment property as the market will allow.
Stay tuned for my next article where we will highlight the top 10 reasons why a homeowner should not sell.