If you spend more than you earn on your investment property, there is a caveat, if you just invested in this property, it may be too early to see any benefits, but if it's been more than 5 years since you saw a return on investment, it's probably time to sell your investment property. Real estate investment trusts (REITS) and other commercial real estate investment companies often target properties with a five-year perspective potential. Whether they are looking to develop these investments or keep them, these companies aim to maximize returns for their investors in the shortest possible time. If you look at the typical 5-7 year lease terms of the Tampa office market, you could say that in this particular market your retention period would be 3 to 5 years.
A significant portion of the richest men and women in the United States have earned their money through real estate, and have tended to hold real estate for a long time; sometimes they never sell. Wealth is created and accumulates over time. If you look at long-term real estate withholdings compared to the stock market, long-term real estate retention outperforms equities in terms of profitability and also exceeds inflation. It's about playing the game for the long term and creating wealth through the “get rich slowly” scheme.
Aside from a few years here and there during recessions, the cost of replacing office properties has grown steadily over the past few decades. What this means is that real estate generally tends to increase in value, despite some fluctuations over time, and the cost of replacing a building also generally always grows over time. By adopting a purchase and retention strategy, the original cost of the building will, over time, always end up being lower than the cost of replacing (rebuilding) the building. It is important to note that inflation will also have a compound effect on rents.
As time goes on, rents will inevitably keep pace with building replacement costs. Therefore, if your cost base is below the replacement cost, returns will, over time, grow to be disproportionate compared to the average returns in the market. This also serves as a hedge against competition. New buyers in the market who pay the current prices of a building have to demand current rents to cover their debt and pay dividends to their shareholders.
The long-term player in a market has a competitive advantage over the recent participant because they can afford to compete on rental rates more aggressively, reducing rents while continuing to pay debt and paying dividends. This helps to ensure that the long-term office building investor has lower vacancies than recent market participants and, more importantly, has more flexibility to maintain occupancy and rental income during economic crises. Having quality tenants is also a factor driving success in owning and managing office buildings. A landlord with a long-term perspective can negotiate better terms with high-credit customers for longer leases because they have greater flexibility to offer competitive lease rates.
Having long-term leases with high-credit renters serves as a bulwark against recessionary pressures during economic downturns, helping to preserve wealth and build it. From an investor's point of view, long wait times are also better in terms of cost friction caused by transaction fees and associated costs. As a general comment, investors should be very careful about the cost of transaction fees. Over the past 10 years, billions of dollars in real estate investments have been sold to investors through a network of stockbrokers.
These brokers usually charge the investor 7% upfront. Often, syndicators who have sold these investments through brokerage networks charge 2-3% upfront acquisition fees, plus additional fees related to lending and administration. By the time the investor has deposited his capital and has seen the acquisition of a building, his capital could be worth only 88 cents for every dollar he invests. Feldman has chosen to take a different path through crowdfunding.
The fees paid to the crowdfunding platform are usually less than 2% and Feldman has charged an administrative fee that is normally less than half of 1% (50 basis points). There will always be some costs associated with buying and selling. Brokers and lenders will not go unpaid, so a prudent investor will watch out for sponsors who limit the fees they charge and will monitor the impact of transactional costs on buying and selling a building in a short period of time. When a property is sold, all tax cancellations that have benefited the asset can be transformed into taxable profits for investors.
Losses incurred during the withholding period will be recovered and treated as income on tax returns. The longer a homeowner postpones the sale of a property, the longer investors can postpone tax recovery. If a building is maintained indefinitely, tax recovery is also delayed indefinitely. Another tax benefit of the long-term real estate retention strategy is borrowing against the capital of a building.
Banks lend based on revenue sources, and as they increase over time, banks will lend more. In addition, lenders will provide more loan income because the value of the building also increases. At some point in the lifecycle of a long-term retention, banks are willing to lend more than the full cost of the project to investors. In some cases, the mortgage surplus can far exceed the investor's original capital.
When this happens, investors can enjoy tax-free capital gains because any excess indebtedness against the building is considered debt, not capital gain. This capital can be invested in other assets to grow and the investor's overall portfolio and to generate wealth in a substantial way. The fiscal climate is very favorable for real estate developers at the time of writing (we have a property developer as president), but many of these benefits are lost at the point of sale. The greater the landlord's relationship with tenants, the more likely they are to renew their tenancy.
Every time a lease expires and an office building moves take place, the building encounters downtime and vacancies. In most cases, the landlord will incur significant construction costs associated with tenant improvements for the next tenant. The landlord will also incur brokerage costs to compensate brokers for bringing in new replacement tenants. Therefore, it is highly desirable to retain existing tenants when their lease is submitted for renewal.
Maintaining a property for the long term can help build strong landlord-tenant relationships, ensuring a higher likelihood of renovation. With an eye on the long term, the owner of an office building can afford to become familiar with tenants and learn everything they can about them, know them by name, when their birthday is, build relationships that can help a building owner provide accommodations more and more individualized for tenants. This can have a lasting impact on tenant satisfaction and increase the likelihood of lease renewals. At Feldman Equities, we have a policy of taking our tenants to lunch at least once a year.
In many cases, these lunches occur many years before the lease expires. Also from a technical point of view, owning a building for the long term allows the investor to know the building itself. Spending more time in a building improves overall operational efficiency because building engineers can understand the equipment, building systems, and nuances of building operation. As maintenance issues and upgrade opportunities arise, their in-depth knowledge of the building serves to facilitate efficient strategies to manage all contingencies.
Developers tend to have the mindset of buying, fixing, and changing as quickly as possible. The goal is to flip as many buildings for profit as possible without sticking around to see if they can retain their value, and this can be a riskier approach than maintaining them for longer periods, as we have discussed. That said, there is certainly merit in seeking quicker exits in some circumstances and an experienced sponsor will always be on the lookout for such opportunities. For example, if investors have already seen the growth they wanted from an acquired building, a liquidity event does allow them to migrate to the next investment or go out and enter something completely different.
In the event of a recession or a market crash, the rapid liquidation of a building can allow the property to anticipate losses on a low-performing asset, ending up on a high note for an investment and leaving a “war chest” of cash to deploy during the recession season, when prices fall. Overall, however, the instant gratification and satisfaction from a profitable sale after a short-term hold is not worth the disappointment of seeing how much others earn on the assets in the years to come. Looking Back, Feldman Regrets Many of His Past Building Sales. When you look at the investment with a 20-year look back, an early sale almost never leads to the biggest profits.
At the end of the day, extended retention periods have proven to be the best for building resilient wealth, with steady and increasing passive income streams, while taking on fewer risks. When investing in an income-generating asset, it's important to know how much money you'll make and when you'll receive it. A Booming Market Makes Real Estate Investing Look Easy. Investors chasing quick returns flood the market, bidding properties to the point where the return isn't there.
While it might be very “sexy” to get a giant corporate tenant, this could be a terrible mistake for the landlord. Many office building owners will do their best to get a major corporate tenant to lease all or most of their properties. At first glance, this may seem like a great idea. Before making an investment decision with respect to any offering, prospective investors are advised to carefully read the documents related to the underwriting and offering memorandum and to consult with their tax, legal and financial advisors.
Feldman does not provide investment advice or recommendations with respect to any offer posted on the website. Many buy-and-hold properties produce a return on investment (ROI) of 4% to 10% of rental income alone, depending on market location. If your property appreciates in value, you may be able to sell it at a profit (when the time comes) or borrow against equity to make your next investment. Creative financing allows investors to quickly grow their portfolio and invest in properties that traditional lenders don't touch.
There is no finite holding period for the property to automatically qualify as “held for investment”. If you're going to keep your properties for the long term, hiring a property manager could take a lot of hassle and hassle out of you. From an IRR point of view, my real estate investment 11 years ago has been by far the best investment I have ever made. Consider these factors to set realistic expectations for property value and cash flow to ensure that your investment turns out to be a big deal.
Yes, I understand your point of view: if the cash flow of your investment already covers everything you need and more, then it doesn't matter what you invest in. If you want to own a rental property but don't want the hassle of owning, a real estate investment group may be the solution for you. The most speculative investors can invest in a family of real estate mutual funds, tactically outperforming certain types of properties or regions to maximize returns. If you hire a large rental property management company, purchase and hold investments are reliable sources of passive income through consistent cash flow.
This method, also called “buy and hold,” involves (as you might guess from the name) buying a property and holding it as a long-term investment. . .
