Monthly Archives: August 2022
How do you increase cash flow on an investment property? The value of every income-producing property is greatly affected by small changes in certain aspects of the property. The cash flow of any property, either before or after taxes , is one of the important criteria to your investment. Your specific goal may not depend or even require an increased cash flow. Yet, because cash flow sets the cash on cash yield (the return on your actual cash invested in the deal), anything that increases the cash flow will generally increase the value of your property.
What to Consider
You can increase cash flow by doing any of the following. The items shown below may be combined or acted on individually. It is possible that the result will be immediate with some, and slower in coming with others. To accomplish some of these, such as increasing rent, you may have to spend money in improvements and maintenance to upgrade the property. Each of the following four items may be within your control.
• Increased collected revenue
• Reduced operating expenses
• Reduced fixed expenses
• Reduced cash invested
Increase Cash Flow by Increasing Collected Revenue
• Increase monthly rent. If you study your competition closely, you may discover that your rents are lagging behind. Stay up with the market whenever possible.
• Increase occupancy. Be aggressive in looking for good tenants, even when you don’t have a vacancy. You may help a would-be tenant plan ahead for a scheduled vacancy you will have coming up in the near future.
• Introduce “added income”. In commercial properties these extra services might include security alarms and service, janitorial, executive services such as found in executive suites with conference rooms to rent out and professional services for administrative support.
• Enforce rent penalties. Many landlords overlook or forgive the penalties that are built into the lease. When tenants are late, or damage a property, they should be held accountable. Failure to collect can come back and punch you in the notes by encouraging people to get way with more than they should.
Increase Cash Flow by Reducing Operation Expenses
• Ge competitive prices. If you have a lot of services then get competitive pricing from different providers
• Charge the tenants for some of the “free” services. If you don’t have a common area maintenance (also called CAM), then add it. It is always quoted extra from rent, watch our for tenants requesting a CAP on “operating expenses” often times tenants will request a 3-5 percent cap on controllable expenses. This is also true in NNN leases where a tenant can request a Stop expense on HVAC, where as any costs above a specific amount would be the responsibility of the landlord for repair and maintenance and even replacement of HVAC units.
How to Reduce Fixed Expenses
• Reduce annual real estate taxes. Appeal to the taxing authority and request a reduction in the tax assessment. There are companies you can hire who will charge you only a percentage of what you save.
• Reduce your debt service. This may be nothing more than refinancing to a lower interest rate, or if your existing loan is two/thirds into its term of years, then a new longer term loan may reduce your monthly payments even if the interest rate is higher than the existing one. Remember, it is the constant rate that you need to look at.
Investing In Commercial Real Estate?
At ICRE, we are the premier advisors on commercial real estate in the greater Phoenix area, and we can assist you with how to increase cash flow on your investment property, choosing your ideal investment location, and much more.
Are you looking to invest in Arizona Commercial Real Estate? At ICRE Investment Group, we work with commercial investors, property owners, companies, banks, and commercial loan servicers seeking the highest quality of services in the greater Phoenix, Scottsdale, Mesa and Tempe Arizona regions. We are also affiliated with CORFAC International, with access to commercial in vestment properties across the globe. Contact us for more information today!
The IRS Code 1031 says that if you make a like-for-like exchange, you don’t have to pay the gains tax at the time of the exchange. This is true as long as you have done everything properly, have not received any boot, nor had net mortgage relief. Let me explain this one of many 1031 exchange benefits.
“Like for like,” in this context, simply means “Investment for investment.” You can’t exchange part of your inventory as a builder for an investment, or part of your parking lot for an investment, and have a 1031 exchange. Investment for investment is the major thing for you to remember. The major benefit of the 1031 is its ability to postpone any gains tax, towards the ultimate goal of avoiding it.
How 1031 Exchange Reduces Taxable Income
“Gain” on property is the sum of everything you get in a sale (or exchange) less your adjusted cost. In any sale or exchange, the primary number you will need is your tax basis.
The tax basis on a property is like book value. When you buy a property, it has a value. You can add to the value by building something on the property. You can take away from it by certain deductions, such as removing part of the improvements, or depreciating the assets over the years as allowed by the IRS.
In the tax law revision of 1986 the depreciation rules were revised drastically to reduce real estate as a major tax shelter for investors. The tax laws also revised the method calculations for adjustment of basis.
In essence, when you depreciate a property you artificially reduce its value, and reduce the Babis accordingly. In reality, of course, depreciation has little effect on actual value. The IRS allows depreciation to be treated as an actual expense (even though no money was spent) and, as such, in the year-end tax accounting it will reduce actual earnings or profits.
As earnings are automatically reduced each year, you pay tax not on actual earnings but the reduced amount. Depreciation, as an allowable expense deducts for income producing and investment property, reduces the taxable income from that investment.
1031 Exchange benefits include allowing you to shelter income because while the taxable income has been reduced, the actual income has not.
Investing In Commercial Real Estate?
Looking to invest in Arizona Commercial Real Estate? At ICRE Investment Group, we work with commercial investors, property owners, companies, banks, and commercial loan servicers seeking the highest quality of services in the greater Phoenix, Scottsdale, Mesa and Tempe Arizona regions. Contact us for more information.
We are also affiliated with CORFAC International, with access to commercial real estate investment properties worldwide. Reach out to us for all of your commercial real estate needs!
You may see a clause in the landlord’s lease entitled Estoppel Certificates or “estoppel Letters”. You could read it over and not understand what this clause means, and depending on what happens during your lease, you might never encounter this clause. Essentially, it usually comes up only if your landlord sells or intends to refinance the building.
Suppose your landlord wants to sell the property. All the leases will convey with the property. The buyer will want an assurance that the tenants are living up to the terms of their leases, and are not owed any money from the landlord, such as tenant improvement allowance.
A buyer or lender can get answers to these questions by looking at the lease and talking to the landlord. They will also reach out to the tenants in the building to make sure that the leases are being followed.
An estoppel certificate is normally completed by the tenant, a signed statement certifying that the tenants and the landlord are following the lease and are current with any financial obligations including security deposits. Often times the landlord can complete the estoppel certificate on behalf of the tenant if the tenant fails to complete one, but it is always better to have this come from the tenant themselves.
How Estoppel Certificates work
Most lease clauses give you a short amount of time, typically five to ten days, to sign and return an estoppel letter, and most likely after the earnest money has already gone non-refundable. Whoever has requested the letter will use it to reassure any intended lender or buyer that neither party to the lease is in serious default.
Accuracy is Important
If by chance you receive an estoppel certificate prepared by your landlord, be sure to read it carefully and compare it with your lease; the terms and conditions should match. The consequences of signing an estoppel that you know is inaccurate could be significant, so read it carefully.
The biggest discrepancies I have come across in an estoppel certificate is the security deposit amounts reflected on the estoppel certificate that don’t match the lease. Or the lease indicates a security deposit will be collected and never is. This is important to confirm the accuracy of as the security deposit(s) amounts also convey with the property, and used on the settlement sheet at closing as a credit to the Buyer.
There is nothing wrong with a clause requiring you to provide an estoppel certificate. You have every interest in helping the landlord to verify and confirm the accuracy of your lease. It’s not uncommon to ask for a two-way clause, and the landlord should agree to furnish an estoppel letter for you, upon request. You may need one as a tenant in the event you sell your business. If the landlord refuses to agree to a two-way clause, understand that your ability to easily get a loan, merge, or sell your business could be difficult.
Be sure to read the estoppel clause carefully in your lease, some clauses specify what will happen to you if you refuse or fail to sign an estoppel certificate, you could be in default of your lease by not signing, remember the point of signing an estoppel certificate is to reassure the lender or buyer that you’re not in default.
Let me know what you think, and if you have other questions about your lease or estoppel certificates, you can find other related blog articles on https://investingincre.com/news-case-studies/ or you’re welcome to reach out to me directly.
At ICRE, we’re the foremost commercial real estate advisors throughout the greater Phoenix region and beyond in Arizona. ICRE is also affiliated with CORFAC International and have access to real estate investment properties throughout the world. We’re well familiar with the area, its traffic patterns, tax rates and more, and we can help you find the ideal location for your commercial property investment. Reach out to us today to get started!