There are two ways to increase the returns on your CRE investment: increase your sales price (for flippers) and/or rental income (for buy-and-hold investors), or reduce your expenses.

The increasing popularity of real estate investing tax strategies shows that many investors now recognise the importance of reducing expenses to increase return on investment.

With declining property values, the likelihood of higher capital gain taxes, and the uncomfortable fact that US investors pay twice the property tax that OECD countries pay on average, smart investors must focus on reducing investment expenses.

In what follows, we consider four broad strategies you can use to reduce CRE investment expenses as a CRE flipper or buy-and-hold investor.

4 Simple Ways to Reduce CRE Investment Expenses

Focus on relevant renovations

When renovating a property, the tendency is to focus on aesthetics. But spending money until the property has met your taste can lead to overspending.

A better strategy is to focus on only those renovations that will improve the property’s value in the eyes of the final customer (the buyer or the tenant).

“You know that something increases value if it increases the rent that tenants are willing to pay, reduces or eliminates expenses, speeds up your leasing efforts, makes tenants want to renew, and/or reduces the perceived risk a buyer might have when you sell,” according to Mike Sowers, a commercial real estate investor and author.

You might be surprised that some of the renovations you are prioritising are not even important to the final customer while the ones you are ignoring are more germane. For example, a bigger parking space may not be as important to them as changing the HVAC systems, for example.

Consider smart technology

Smart buildings are usually considered a luxury for rich people. However, according to J.P. Morgan, the global financial firm, the technologies that smart buildings use can help “reduce operating costs” and “achieve operational savings.”

How so?

Integrated water management can provide analytics on water usage which can help reduce waste. HVAC systems can provide precise temperature control and improve energy efficiency.

Furthermore, the predictive maintenance and early leak detection that these technologies offer can help significantly reduce maintenance costs and improve operational efficiency.

Reduce closing costs

Closing costs can add up to 3%-6% of a property’s purchase price. Reducing them can be an effective way to reduce your investment expenses and increase your ROI.

If you are financing a commercial property with a mortgage, ensure you evaluate and scrutinise the Loan Estimate sent by the lender. You might discover some padded, repeated, and unnecessary fees that have been added to the closing costs.

You can also shop around to select lenders with the lowest closing costs. And when you receive a Loan Estimate, negotiate the fees to get a better deal.

Reduce tax liability

With US investors paying twice the property tax as the OECD average, minimising tax liability should be a big concern for property investors.

Some of the real estate tax strategies that you can use include:

• Deduct depreciation on properties
• Use cost segregation studies to accelerate depreciation deductions (over 5,7, or 15 years instead of the traditional 39 years)
• Deduct operating expenses on rental properties
• Deduct mortgage interest
• Get tax credits and abatements when you use public funds for construction
• Pass-through deductions when you establish an LLC or S-corp
• Defer the payment of capital gains tax by reinvesting it into another property(1031 exchanges)
• Defer the payment of capital gains tax by reinvesting it into undercapitalized communities (opportunity zones)

As you seek to maximise the ROI of your CRE investment, remember that the use of earnest money deposits continues to be a norm in the US.

With Duckfund, you can get the earnest money deposit you need for multiple CRE deals within 48 hours. You can complete the application process in just 2 minutes as Duckfund does not request for a credit report.