For the most part, investors in commercial rental properties are focused on the present and future cash flow. After all, that’s the name of the game. But at some point, you also have to be focused on the long-term game plan and consider your exit strategy. Because when you do choose to cash out, factors like resale value start to matter a whole lot more.
Developing a Long-Term Exit Strategy
Investing in a commercial property is a big deal. In all likelihood, it’ll instantly become one of your largest financial assets. And while you have plenty of short-term goals for the property, you can’t afford to ignore the big picture.
Anytime you purchase an investment – whether it’s an individual stock or a commercial property – you need to have a long-term exit strategy in place. That strategy may change over time based on different circumstances, but you need to enter into a deal with a plan.
When you have a long-term exit strategy in place, it helps you maximize your return on the investment. For example, you’ll make different decisions based on if you’re planning to sell the property in 10 years versus passing it along to your children as part of your estate in 20 to 30 years. Knowing the direction you’ll be moving in is critical.
Smart Ways to Improve Resale Value
Armed with a long-term exit strategy, it’s time to focus on ways you can enhance your commercial property resale value. Here are several of our favorite approaches:
1. Reconfigure Space
You may be able to quickly enhance the value of a commercial property by reconfiguring the space. For example, adding a wall to divide one large open space could help you create two distinct spaces, allowing you to bring in two tenants instead of one.
2. Finish Unfinished Square Footage
Is there unfinished space on the property? Finishing this space off can allow you to add square footage to the property and directly increase the property’s value. Let’s say, for example, that you have 2,000 square feet that are currently unfinished. You find a contractor who is able to finish it for $200k. If the price per square foot is $200, you’ll effectively be increasing your property value by $400k. That’s easy money!
3. Perform an Exterior Facelift
Curb appeal is extremely important for some commercial properties, like retail stores. Something as simple as an exterior facelift could increase the property’s perceived value. Options include painting, landscaping, replacing windows, and adding common areas.
4. Hire a Property Management Company
Here’s something you may not have considered. Did you know that hiring a property management company in the present may actually increase your property’s value in the future? Here are three specific ways:
- Preventive maintenance. A property management company knows how to perform timely preventive maintenance to prevent future issues that would cost a lot more to fix. This keeps your property from depreciating faster than it should.
- Financial record keeping. Savvy real estate buyers always look into the building’s maintenance history. If you have good financial record keeping, you’ll have accurate documentation of maintenance. This allows you to justify a higher asking price than if there weren’t proper records to verify.
- Fetching market rents. Excellent management ensures every unit brings in the highest market rent possible. And since rental properties are sold primarily based on cash flow, this allows you to sell at a higher price point.
Sometimes it’s all about getting the small details right. Hiring a property management company allows you to do just that.
5. Apply for a Change of Use
Changing the use of a commercial property is one way to dramatically alter the value. For example, let’s say you own an industrial warehouse. When you purchased the warehouse, the area around it was largely industrial. But over time, some new condos and residential amenities have cropped up. You figure someone could eventually buy the property and turn it into condos or apartments. By applying for a change of use, you could potentially pave the way for this to happen. In this case, other investors will be more interested in the property because of its versatility.
Adding it All Up
While present cash flow may be the primary metric of value for a commercial rental property, you should also keep your eye on future resale value. By making investments into the property over the life of ownership, you can position yourself well for the day you decide to sell.