Common mistakes to avoid when you retire from your commercial real estate investments
What are common mistakes to avoid when you’re ready to retire from your commercial real estate investments?
What are some of those mistakes that retiring owners are making? Well, here’s one that I see all the time. Mr Owner has had his property for 40 years, bought it back in the 1970s or 1980s, has operated the property, paid it off, and today is ready to retire and sell the building.
Managing a low-occupancy or break-even building
The mistake the owners made though is they haven’t prepared the property for the sale, and what I mean by that is they’ve had the property for such a long period of time that they have just kind of managed a low-occupancy rate or a break-even occupancy rate. They’ve paid off the debt and they just maintained the building. But what they want is they want a buyer to come and to pay full market value for a property that’s not performing at full market potential. So that creates a big problem.
How do you solve that? Well, this is an issue we see frequently in our business. The owner comes in and says, “Well, I want to sell for full market value. Here’s what I’m doing. I’m renting at 60% of market. I’m not full and I need someone else to figure it out.”
Shift the perspective on the property
So what do you do about it? Well, typically you need to shift the perspective on the property. The first thing that that owner’s probably thinking is I need to find an investor who will pay me the right price for this building. That investor’s going to come in and they will do what I didn’t do over the past couple of years.
They’ll take it over.
They’ll raise the rent.
They’ll find new tenants.
They’ll fill up the spaces.
They’ll renovate the building and they’ll make it pay.
The challenge there for that new investor is they have to invest time and money to carry the building, pay the mortgage, pay the operating expenses, and then improve the spaces to then attract the tenants to get the property to full performance. And when they go to do that, they expect to make a profit for taking that risk.
Who else could use the building?
A lot of times what we see is we need to move the perspective over to the owner-user. That’s the company that would occupy the building for themselves. And what they would do with the building is they would take the existing tenants and say, “Great, I can pick and choose who I want in the building. They’re already paying rent. I can collect some of that to offset my overhead. But what I can really do here is take control of the property and have full say in how much I charge and who’s here.”
So, a lot of times the problem isn’t solved by finding the investor to replace you, but rather finding someone who’s going to use the building differently than how you’ve been operating it, who will value it and take the risk to fill that gap and pay you the right price.