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Exit Strategies For CRE
Commercial Real Estate: A Sensible Investment
- Which single asset class has historically generated the most wealth for its investors, is secure and relatively low risk? You guessed it, real estate. And commercial real estate forms a large part of real estate investments.
- Traditionally, commercial real estate has been an asset class which has evaded the grasp of regular investors, as they require quite a substantial investment threshold to acquire any high end commercial property. A huge chunk of commercial real estate, be it retail, or office, or industrial, has been only available to institutional investors or companies or individuals with a high net worth.
However, all of this has changed with the advent of alternative investment in commercial real estate.
- A recent Knight Frank report on how Indian real estate did in Q3 2023 states that the office market saw a positive 17% year on year (YoY) growth.
- In addition to that, this is the sixth quarter in a row in which YoY rent growth has not only been stable, but also positive for India’s commercial office market.
Paving The Way for a Profitable Exit Strategies For CRE
Alternative investment has made commercial real estate much more accessible and investment friendly for regular investors by lowering the threshold required to invest in commercial properties.
But acquisition of commercial property is just the beginning: it is imperative to figure out the right exit as well.
Crafting an effective exit strategy for commercial real estate is not just about ensuring preservation of your invested capital. What’s the point of investment if you’re not looking to maximise your returns?
In this article, we’ll look at some key exit strategies, and look at insights to optimize your commercial real estate investments.
Timing Matters: Some Optimal Exit Strategies
In every profitable investment ever made since the beginning of time: timing, is everything. Timing plays a huge role in optimizing your exit strategy as you have to carefully consider market driven factors when proceeding with the decision to exit.
Some Practical Exit Strategies for Good Returns
- Rental Income
One common approach for investors is to generate leasing or rental income from their commercial real estate investments. This way, you can keep earning a steady cash flow: and if your property is in a high demand area with a bustling company culture, you are bound to receive some very attractive rental yields.
As per recent industry estimates, commercial properties provide a yield of 8-9% and even higher when it comes to rental income, which is much higher than the residential property yield of 2%. This means that along with appreciation, you can ultimately achieve overall returns of 15-16%, which are very good returns.
Thus, rental income is a great strategy for investors looking to invest long-term in commercial real estate and seeking to benefit from both capital appreciation as well as regular rental income.
- Hold, then Sell
Long-term investors, especially those seeking to capitalize on appreciation and cash flow; commonly utilize this strategy as an exit plan for commercial real estate.
Through this approach, you retain ownership of the property until market conditions turn favourable. Then you can sell it at a profit to another investor or customer.
Benefits
This strategy offers several benefits: consistent income enjoyment along with tax advantages derived from depreciation, furthermore allowing control over timing your sale for maximisation of capital gains.
Disadvantages
While you hold on to the property, you must grapple with the ongoing property maintenance, management costs, vacancy costs, and so on. You also might have to deal with any market risks or institutional uncertainties that might confront you.
- Using A Lease Option
In this strategy, you lease the property to the tenant wherein the lease agreement also has an option to buy the property. The option to buy consists of a predetermined price and future date for the sale of the commercial property.
Things to Keep in Mind
As an investor, you should make sure that at least your monthly costs are covered by the amount of monthly rent being paid by the tenant. Also, you should always ask for nonrefundable deposit requirements which are necessary for exercising the right for purchase under this specific contract.
Benefits
This is a great strategy for when the market is going through a down period. If you’d sell the property otherwise, you might have to suffer a loss.
Lease tenants who have potential stake in the property take much better care of it than tenants who might leave after a period of time.
Disadvantages
If the market value of the commercial property escalates, you are bound to sell your property below its value because of the predetermined agreement with the tenant which gives him the first option to buy the property.
- Seller Financing Exit Strategy
As the name suggests: The seller financing exit strategy is as creative as it gets when it comes to disposing off your commercial property: the property owner or the initial investor, acts as both a vendor and financier, and facilitates the sale to the buyer.
In this arrangement, the owner/investor still receives the monthly payments. The seller provides a more flexible arrangement for the buyer than what one would get from financing through an external lender.
Real Estate Portfolio Exit Strategies: Tips To Keep In Mind
Investors with diverse portfolios should approach their exit strategies while keeping in mind their entire real estate portfolio. It is important to navigate the rugged terrain of commercial real estate investments with foresight, adaptability, and good strategy.
For a savvy investor, it’s not just enough to make back your initial investment value. It’s to maximise the returns from your commercial real estate investment.
The key to having a good exit strategy for commercial real estate is not to be married to one. The market is dynamic and ever changing, be aware of that and make changes accordingly.
It is also wise to have more than one exit strategy at a time, depending on market considerations and how the commercial market is doing. If you’re not sure about your exit strategy, it is better to get help from seasoned investors and industry experts instead of freestyling an exit strategy.
Assetmonk: Elevating Your Real Estate Investment Experience
Assetmonk is an alternative investment platform that goes beyond the conventional and into the unknown. By leveraging technology, market expertise, and economic foresight, Assetmonk scouts high-end commercial properties and locations so you don’t have to; and provides investors with a multitude of opportunities to diversify their portfolios with high-potential real estate projects.
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FAQs
Is commercial real estate a good investment?
Commercial real estate is one of the asset classes in real estate which provides a high investment return, with low risk and more security. It is considered to be a great choice to invest in for investors looking to create a diversified portfolio.
What is the hold and sell strategy?
The hold and sell strategy means to retain ownership of the property until market conditions are at a high and then sell at a favourable moment. It is considered to be a good exit strategy for long term investors in commercial real estate.
What is the lease option strategy?
The lease option strategy allows the property owner to lease out the property to a tenant; with an option to buy at the end of the lease for a predetermined value and at a set date.
What are the benefits of using rental income as an exit strategy for commercial real estate?
Rental income provides a steady cash flow, and with high demand in prime locations. It can yield attractive returns, and it often surpasses residential property rental rates.
