What are the basic rules of investing in any commercial property?
This question is often asked but the answers could vary.
I believe that the ability to service mortgage, the strength of the tenant and prospects of growth would be the primary criteria that any investor should consider before investing in a commercial property.
Although there is no winning formula, some basic investing knowledge would be useful in ensuring the success of your venture.
You hope the return on your hard-earned money would accrue with least risk.
However, in the investment market, as in property, higher the risk would mean higher the return.
We have all heard of the horror stories plastered over the media about finance companies that failed and how investors lost their money.
This would be a prime example of chasing a higher return from a finance company than a bank, which pays a lower rate of return on your funds.
Property investment works in a similar fashion; however if your tenant vacates, you are at least left with a building to salvage and would have the ability to find another tenant.
Purchase in a location that is strong and in demand with growth.
A good indicator for this is to follow the food chains. For example, if a strong supermarket or a blue chip coffee retailer is opening in an area, it will show that they have done their research in a location which is growing or about to grow.
We call this in the industry ‘a sleeper.’
Try to purchase a high profile site on a corner position. This is my favourite as it ensures a stable cash flow and demand of tenants.
Multiple tenants are a good way to invest in a group of retail shops, as this will spread the risk of having one tenant. With retail, it is all about foot traffic; therefore ensure that you have enough people coming through, which will benefit your tenants in the long term and your ability to find an alternative tenant.
You can improve the cash flow through billboards or cell phone towers.
There is no harm in ringing them to find out if your site is suitable.
Be a little creative and make some enquiries if another shop or office can be added or developed on your site.
Strong tenant covenants will demand low cap rates even in the most challenging times because most people are looking at safe bets with higher capital growth in property.
Knowledge is money
We do not have inflation at high levels in New Zealand currently. Therefore, the best way for creating capital growth is to invest long term and try to add value along the way. Reading books on investing and surfing the Internet would keep you well informed of the market trends.
Smart investors look after tenants and maintain their property and have the ability to add value.
Today’s commercial market could be harsh and unforgiving to those who make mistakes in their acquisitions. It is therefore important to choose wisely and research well. Try to talk to as many people as you can, especially real estate and leasing agents as would they have an in-depth knowledge of the property.
Consulting with existing tenants is a good indicator of how the property is performing. You could also obtain a Land Information Memorandum (Lim) Report and a property CD, which would be available on the City Council web site.
I cannot emphasise enough the need to have buffers in place, including funds and credit facilities to cope with difficult times.
Mahesh Ranchhod is a Director of the Ranchhod Group of Companies based in Auckland. Phone: (09) 3031353 Mobile: 021525569
Email: firstname.lastname@example.org Website: www.ranchhodgroup.com
The Group incorporates New Zealand and Australian Companies and Trusts designed to invest in commercial properties and manage them in Australia and New Zealand. The above article should be taken only as a guideline and not specific advice. Mr Ranchhod absolves himself along with the management and staff of Ranchhod Group of Companies and Indian Newslink of any responsibility or liability that may arise from the above article. Readers should seek professional advice before acting upon any information contained above.