YOU BUY COMMERCIAL REAL ESTATE FOR APPRECIATION…

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PART II…

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We have far from exhausted the fact that we buy commercial real estate for cash flow, and I could probably go on and on and on about cash flow.? But we also buy commercial real estate for appreciation, and we do that for a number of reasons.? As a general statement, you can always say that you buy commercial real estate to make money, and you make money by generating cash flow, riding the wave of appreciation, and taking advantage of income tax benefits.? ?But the prize, the REAL prize in commercial real estate is the appreciation that you get from owning a building or two or more and watching them go up in value every day.

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There is an expression that you should make money when you are sleeping.? Well, you might get some cash flow while you are sleeping, but your property is definitely going to go up in value while you are sleeping, and that is the joy of owning commercial real estate.? How do you generate appreciation from owning commercial property?? It’s basically the same way you do it when you have a primary residence.? There is inflation; all in all, there is always inflation over time.? But you want appreciation over and above the inflation rate and you want it for a number of reasons.? First, it’s nice if the value of your assets goes up; it’s just a wonderful feeling.? That means that we made the right decision, and we are gaining wealth.? But let’s look at appreciation from some different viewpoints.

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First, appreciation will bring equity to your balance sheet, widening the gap between the market value of the property and the loan, if any, against the property.? A number of methods can realize that equity.? Of course, you can sell the property and put the profits in our bank account or pocket or, preferably, into another property.? There are so many dumb expressions out there, and one of them is that you did not plan to fail; you failed to plan.? I have talked to so many people who own different forms of commercial real estate, and they bought them at different times, and they have absolutely no plan in mind as to what assets they will need to fulfill their goals, needs, wants, and desires and they absolutely did fail to plan.? And, when I bring up the fact that we need to have a plan before we can do anything else, it’s like that light bulb goes on over their heads, and they realize how important planning is!!!

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Then you can refinance or remortgage the property and pull out cash; I said CASH, which is tax-free because you did not create a taxable transaction; you just borrowed against your asset.? And, in all of my more than 50 years as a practicing Certified Public Accountant that has hardly ever been a taxable transaction.? But be aware!!!? You may have a situation where the equity that you have in your business, especially real estate, is lower than the amount of cash that you pull out of the business, and you may have just created a taxable transaction.? You have absolutely no idea of how many different things there are that you can do that could create a taxable event, and you have to; I MEAN IT’S ABSOLUTELY NECESSARY to have a competent CPA prepare your income tax returns because it’s NEVER as simple as it seems!!!

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I have never written this before to you, and I always say that you need a good, experienced, and knowledgeable tax preparer. However, as I just wrote this, I realized just how important it really is. If you withdraw monies in excess of your taxable basis in the entity, you have created a taxable event, and maybe one of 100 tax preparers will be alert enough to spot that because it rarely happens!

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Also, property appreciation is taxed at capital gain rates and not ordinary income rates, which are higher. In fact, you have a cost segregation study done when you sell the property, in addition to when you purchase the property, to turn ordinary income, again, taxed at higher rates than capital gains, into those wonderful capital gains taxes at a lower rate.

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