Commercial Properties - Leasing vs. Selling

If you've got great commercial property investments, you may be wondering what the best way to make a profit is: leasing or selling. While selling a commercial property brings you some real cash up front, rentals can bring in consistent profits year after year, while still allowing you to hold the property. If you're seriously considering rentals, you really need to know what you're doing.

First, you need to understand the way law works for rentals. Every state and city has different rental laws, and all of these could impact your rental's profitability. It's critical you research your own locality's laws on rentals; for instance, some areas require several months' worth of litigation to evict a nonpaying lessor, while others take very little time. If you don't want to worry about the renting of a property yourself, you can always go with a management company to take care of the details for your investments.

You should understand how difficult your property would be to rent out. For the right price, you can rent almost any property - but can you sell it and get cash up front to invest elsewhere for more money than rent is worth to you? Check the prevailing rent levels in your investment property's area. If other rentals are not going for much, you may want to consider selling instead.

Environmental clean up may be an issue on your property investments. If you will have to invest in environmental cleanup before you can sell the property, it might be better to lease it to a tenant who will not worsen the condition, rather than sell it. For instance, if you own a rentals that functioned a gas stations, you could convert them to machine tool shops or a car repair shops for far less expense than the EPA would have you spend in order to sell the land. Even if you give your new tenants a great deal on the rent, you may be saving yourself money.

If you use a management company to run your rentals, make sure they have a great track record in collecting rents, and find out if they can help you screen potential renters as well. A good management company can mean the difference between success and failure with your investments; a single bad renter can cost you not just their rents, but the potential rent payments of others, and can put a real dent in your cash flow. Your managers can help you ensure your renters are all reliable.

If you decide against commercial rentals, selling a commercial property may lead to its own problems. Think about taxes. If you sell a property, you will be liable for capital gains on it. If you rent a commercial property out, your tax liability should be much less. You should speak to a financial analyst or accountant to see exactly what you can expect for taxes on your property investments in either case.

Also, if you sell your property investments instead of turning them into rentals, you'll almost certainly have to pay a percentage of the sales to a real estate agent. This may not be much, but it could be enough to eat up profit you've realized on the properties, and together with tax liabilities and any environmental cleanup you're responsible for could have you netting a loss, not a gain. In this case, it's probably a wiser idea to work with a management company to rent the properties out.

If your property investments are in an area where it's harder to sell, you can anticipate paying a higher percentage to the real estate agent, as well as waiting a longer period to realize your profits. Look at the properties near your own. If their rentals are low-priced and it looks like there are a lot of vacancies in the area, you can expect the property to be harder to sell as well. There are a number of things you can do to make your property easier to sell - improvements, signage, and offering cash for renovations after the sale, for instance - but a creative thinker can make a hard-to-rent property an attractive one, and turn a better profit than the sale would have given you.

If you do sell your property investments, you'll also have to find the right price point: the price range in which you'll be able to make your properties too tempting for a buyer to turn down, yet still have you turning a good profit. In residential real estate, this price point is easy to locate by looking at nearby properties. In commercial real estate, it's significantly harder to determine that exact spot, primarily because commercial properties are all different. It may require an expert opinion from a broker or agent to find it.

In the end, your decision to convert your property investments into rentals or sell them is a very individual one, depending on many variables. Your decision for one property may be different from your decision for another one. Take all the factors above into consideration before you make your decision.