Real estate investors are increasingly choosing to buy a building occupied by tenants, which increases the value of their investment. Of course, the return on that investment depends on the structure of the leases and the quality of building. Given the strength of the Northeast Ohio real estate market right now, there are compelling opportunities for landlords.
“In this market, there is tremendous opportunity if you’re a landlord or property owner,” says Eliot Kijewski, senior vice president at Cushman & Wakefield | CRESCO Real Estate. “Prices are at their peak. Nonetheless, investors see rising rents coupled with very low interest rates and decide to keep putting their money to work.”
Smart Business spoke with Kijewski about the real estate investment market in Northeast Ohio and why landlords interested in selling should act sooner rather than later.
What opportunities exist for property owners given the state of the NEO market?
The market is tight: many years of record occupancy and strong demand from investors looking to buy have created a ‘seller’s market.’ The best opportunities to capitalize on the current market are for landlords who own an occupied single-tenant building. If the tenant has quality credit and has more than four years left on the term of a market-rate lease, the landlord could sell the asset for far more than it’s worth vacant.
Industrial properties offer an added benefit. In addition to capitalizing on a tenant with a market-rate, long-term lease, the investor could still own a useable asset at end of the lease term.
While it’s a good time to sell, landlords should consider, among other things, the buyer’s history. Not everyone is capable of being a good landlord, so sellers should ask about the buyer’s record as a landlord if they’re at all attached to their tenants.
What is it that investors are looking for in the Northeast Ohio real estate market today?
Some of those who are investing in the current market are those looking to diversify their portfolio by getting into another category of real estate. A popular target for diversification is also experiencing peak demand and broad investor interest: multi-family properties.
Also capturing interest are investments that match investors’ estate-planning strategies. Selling now may reap the best gains while values are high and tax treatment is favorable. One strategy for this investing purpose is to use a 1031 exchange, which allows for the deferral of capital gains on certain types of properties when a buyer upgrades to a higher priced investment property.
What’s important for sellers to know about financing in this circumstance?
Interest rates are expected to stay low for the foreseeable future, so money is still ‘cheap.’ Banks are eager to lend and are competing for business. Real estate investors can’t use an SBA loan with a financed property, so they need to use a 1031 exchange and available capital to deliver a significant down payment. Another option is to make an upfront payment, much like a conventional loan, of 20 percent or more.
How soon should a property owner to act to take advantage of these conditions?
Those who intend to use a 1031 exchange should act now because there are specific dates by which the buyer needs to identify another property for purchase — the buyer needs to specify the property to which the capital gains will be deferred. That next property has to be of equal or greater value to the original property to qualify under the 1031. More specifically, the seller is required to identify three properties and close on a property within the mandated time period. The proceeds go towards a 1031 exchange via the title company.
Connect with a real estate broker to determine what options exist before the sun sets on this opportunity.
Insights Real Estate is brought to you by Cushman & Wakefield | CRESCO Real Estate.