Strategy #1: Choose your investment wisely
In the case of investment properties, it is difficult to make lemons into lemonade. Therefore, it is important that you choose a wise investment property to begin with, as this will make your profitable exit strategy much easier to execute.
The first thing an investor should do before purchasing an investment property is to fully consider the risk of the purchase, as well as the potential financial return. Do you as an investor want to purchase and manage commercial real estate? If so, what type? Are you more suited to owning retail, office, apartments, warehouse, etc? Or do you prefer single or multiple family dwellings and rent to residential tenants? Are you suited to be a landlord and accept all the responsibilities that come with it? And most important, what is your strategy for profit in these investments? Owning and renting? Renovating and selling? Developing land?
Once an investor has a firm grasp of the type of property and responsibilities he or she wants to own, then deciding the strategy for profit is easier. When the plan for purchasing, owning, renovating and/or renting has been properly executed and the time for selling is ripe, there are many considerations for maximizing the profit on the sale of a commercial or residential property.
Strategy #2: Execute the sale with tax considerations
• Avoid Capital Gains - If you purchase residential property and sell it within 24 months, you will have a hefty capital gains tax liability of 5% to more than 25% when combined with state and federal tax rates. However, if you make the home your primary residence for at least two years and then sell, then you will owe no capital gains tax, ensuring you can keep more profit.
• 1031 Exchange - A 1031 tax-free exchange allows owners to sell an investment residential or commercial property and acquire another replacement property with equal or greater value and defer owing taxes. The tax burden is deferred until the sale of the next property, or another 1031 exchange can be performed to further defer tax liability. However, timelines are strict for a 1031 exchange and new properties must be purchased within 45 days after the closing of your current investment sale.
Strategy #3: Carry the mortgage
If you are in a position where you do not need a lump sum amount of cash at closing for your investment property, consider carrying a first or second mortgage for the new owner. You will hold a promissory note for the full value of your equity and receive monthly payments, including a good interest rate for your investment. Oftentimes, sellers who carry a mortgage can earn a return of 10% or more on interest.
Strategy #4: Build equity in your properties
• Distressed properties - If you purchase a distressed commercial or residential property, you can take advantage of building equity starting with the sale price. Distressed properties are often sold below market value because of the deferred maintenance issues clouding the property. An investor who can negotiate a purchase price well below market value and fund renovations to improve the distressed property can reap huge profit potential when selling.
• Added value to investment properties - An owner of commercial or residential property should always consider adding value to the property that will increase the selling price. For instance, a residential home with a renovated kitchen and outside landscaping has a much higher potential for an above-market selling price. An apartment complex with minor improvements to each unit, which can command higher rent rates, will show a greater valuation at the time of a sale.
Real estate investors can make great profits from the sale of commercial or residential property. A sound strategy for adding value and deferring taxes on a sale will help maximize the final selling value, and with the end in mind before purchasing a property, an investor will enjoy the rewards of maximum profit.
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