The best time to start thinking about your long-term plans for a piece of property is as soon as you buy it, if not before you even make the purchase, says Alec Pacella, managing partner and senior vice president at NAI Daus Property Management.
“Most investors don’t do this because it seems counterintuitive,” Pacella says. “You just bought a property, why would you want to think about selling it already? But this is not about doing a quick flip. You should have certain gates or periods of time that you have set up to say, ‘OK, I’m going to look at this asset in two years and again in five years and seven years.’ Have a plan in place upfront before you buy the asset.”
The benefits of being proactive are obvious: Few things in life or in business ever go exactly according to plan.
Smart Business spoke with Pacella about best practices to consider when evaluating the future of your property assets.
What’s the best way to approach the long-term plans of a property investment?
One of the keys to your approach is an understanding that managing the investment will likely be a fluid process. You can change your mind if the marketplace shifts and your original plans no longer make financial sense.
The key is to have that strategy or road map in place that keeps you connected to what’s happening. When you have a disciplined evaluation process, you know when a new interchange is being built a few miles down the highway from one of your assets that will likely become the next big development hub.
People often characterize real estate investors as being lucky, but it would be more accurate to say that luck is when preparation meets opportunity. The key to being a savvy investor is to recognize that opportunity and react appropriately.
If you’ve made a decision that you’ll sell when you have a chance to move up and acquire a bigger property, it becomes an easier decision to make when that opportunity arises. The acquisition is simply the next step toward that goal.
How does your investment base affect your thought process on property assets?
Let’s say you own a shopping center and you decide that in three years you’re going to take a look at where you’re at with the purchase. Any disposition decision that you make revolves around your investment base. If you bought the property for $1 million and believe that you could sell it today for $1.3 million, after you pay closing costs and taxes, you’re going to walk away with $1.2 million.
If you choose to do nothing at that point, you like the shopping center and its tenants and you decide to hold onto the property, you’ve re-bought it for $1.2 million. It doesn’t matter that you paid $1 million for it. That was three years ago. You’re foregoing that $1.2 million in your pocket and instead choosing to own the property for another three years. This is a critical thing for investors to try to understand.
Once you have that number, you can make an apples-to-apples comparison with other disposition options. What if you refinance it? What if you sell it outright? What if you sell it and buy another piece of real estate? What if you refinance and take the refinancing proceeds to buy another piece of real estate? If you take this option, you don’t have to worry about paying capital gains taxes.
What are the pros and cons of doing a trade?
You are able to push that tax consequence off to a future time period, which can be a good thing. You’re also getting into a new property if that’s what you’re looking for. One drawback, however, is that you get 180 days to close the deal from the IRS. That’s it. You also need to keep in mind that you’re postponing your tax consequence, not eliminating it. If you do multiple trades, that recapture keeps going up and can be massive when you finally decide to sell. ●
Insights Real Estate is brought to you by NAI Daus