What is the optimal holding period for a commercial property investment?

1 Investment objectives

Your investment objectives define your goals and expectations for your commercial property investment. For example, are you looking for steady cash flow, capital appreciation, or both? How much risk are you willing to take? How diversified is your portfolio? How does the property fit into your overall investment strategy? Depending on your answers, you might have different preferences for the holding period of your property. Generally, if you are seeking long-term income and stability, you might want to hold the property for longer than if you are looking for short-term gains and flexibility.

3 Property performance

Property performance refers to the financial and operational results of your commercial property investment. For example, how much income does the property generate? How much does it cost to maintain and manage? How competitive is the property in terms of location, quality, amenities, and tenant mix? How stable and loyal are the tenants? How long are the lease terms? Depending on the performance of your property, you might find it more profitable or costly to hold or sell your property. Generally, if your property has a high occupancy rate, a strong cash flow, a low operating expense ratio, and a loyal tenant base, you might want to hold your property to enjoy the returns and minimize the risks. However, if your property has a low occupancy rate, a weak cash flow, a high operating expense ratio, and a high tenant turnover, you might want to sell your property to cut your losses and reinvest elsewhere.

4 Tax implications

Tax implications refer to the tax consequences of holding or selling your commercial property investment. For example, how much income tax do you have to pay on the rental income? How much capital gains tax do you have to pay on the sale proceeds? How much depreciation do you have to recapture on the sale? How can you defer or reduce your tax liability through strategies such as 1031 exchanges, opportunity zones, or charitable trusts? Depending on the tax implications of your property, you might find it more beneficial or detrimental to hold or sell your property. Generally, if you have a low tax rate, a high basis, and a low depreciation, you might want to sell your property to realize the gains and pay less tax. However, if you have a high tax rate, a low basis, and a high depreciation, you might want to hold your property to defer the tax and avoid the recapture.

5 Exit strategy

Exit strategy refers to the plan and process of selling your commercial property investment. For example, when do you want to sell your property? How do you want to sell your property? Who do you want to sell your property to? What price do you want to sell your property for? How do you prepare your property for sale? How do you market your property to potential buyers? How do you negotiate the terms of the sale? Depending on your exit strategy, you might find it more feasible or challenging to hold or sell your property. Generally, if you have a clear and realistic exit strategy, you might want to sell your property when the timing and conditions are favorable. However, if you have a vague and unrealistic exit strategy, you might want to hold your property until you have a better plan and execution.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?