When achieving cash flow from the purchasing of commercial real estate, depreciation, 1031 exchanges, appreciation all play a role for the wide range of commercial real estate investors that all are in different age brackets and have different reasons for the investments.
Let me list a few of the diverse reasons and thoughts that run through the mind of potential commercial real estate investors.
Older commercial real estate investors want to preserve their wealth and receive a steady income that has a tax benefit. Younger commercial real estate investors would prefer to take more risk get higher returns with larger appreciation in their future.
The depreciation, of course, helps both parties pay less tax and keep more dollars in their pocket. While the 1031 exchange vehicle allows the sale of the investment property, if a capital gain occurs, to delay the tax by purchasing another replacement property of equal or greater value if the equity and debt are provided in the next purchase is the proper ratio.
Younger commercial real estate investors mostly at their peak of earnings during their life, look more to the future growth and retirement than how much cash flow they gain presently.
Older commercial real estate investors needs more steady income currently and thinks less about appreciation while both take advantage of the depreciation. This plays a significant role in determining risk/reward when deciding which property to invest in. Value-add investment risk is for younger commercial real estate investors, while Triple Net retail with a high-quality tenant and a lower cap rate attract the older investor.
Loans come into play for younger commercial real estate investors and all cash with no or less debt are for the older investors.
Tolerance of management and leasing duties lean toward the younger crowd, while no responsibility for anything the older ones.
Both sets of commercial real estate investors need experienced real estate attorneys, CPA and professional real estate brokers guiding them or mistakes will be made along the way. Many pieces have to fit such as price per sq ft paid, rent per sq ft by a tenant, location, lease guarantee and its format, tax ramifications and a host of other variables too detailed to go into with this blog.
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