Instances Where Taking a Commercial Real Estate Investing Loss Makes Sense

If real estate investors and property owners were honest, some would admit they erred when making certain purchases. Yet many of these groups and individuals refuse to sell such “mistake” properties. It makes sense to sell these “losers” yet few property owners are willing to take a loss. Therefore, they hold on with hope that the local market will rebound and the property price will bump in unison. The truth is there are several instances when selling a losing property makes sense.

The Property Requires too Much Capital

If the only way to boost a property’s value is to invest considerable amounts of capital, it makes sense to sell. This is especially true when the additions can’t be billed to tenants. Perhaps the lease does not permit such billing to the tenant. Maybe it is not realistic to pass on the bill for such massive expenses. Whether the cost is a major parking lot renovation, improvements to the facade, massive painting projects or anything else of significance, it does not make sense to invest the enormous amount of money necessary if you bear the entire cost. The sensible commercial real estate investing solution is to sell, take the loss and move on to another investment that does not mandate such a gigantic capital outlay.

Consider the Risk Versus the Reward

A property purchased in an environment with record low cap rates and a fantastic economy should hold its value in most instances. If it loses value in such a favorable environment, the odds of it jumping back up in value are quite low. In fact, the property will likely stagnate or decrease in value as the economy cools off. It is prudent to sell such a property and reinvest the proceeds in a superior property that is more likely to increase in value.

Possible Tax Benefits

True commercial real estate investing experts understand the nuances of tax laws. Taking a loss on one property could offset losses on a separate investment. This loss might prove to be especially valuable in one year versus another year. Do not hesitate to reach out to your tax adviser to discuss this complex accounting matter. You might find that selling your “losing” property below what you paid proves valuable to off-set another property’s gain. Do not feel ashamed or regretful of pulling the trigger on such a sale. Adopt a long-term view and come to the terms with the fact that some properties will be winners and others will be losers.

Prevent an Even Greater Loss by Admitting That Mistakes Happen

Do not let your ego get in the way of a property sale. Recognize that it is acceptable to make a mistake. Selling a property for less than what you originally paid is certainly an admission of a mistake. However, selling the property now could prevent an even greater loss. Keep your ego in check, admit that losing money on real estate is a reality of the business and move on. It just might save you a pile of money in the long run.

If you would like to grow your greater Boston office market portfolio, contact Jeremy Cyrier at jeremy@mansardcre.com or by phone at 617-340-8520.

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