That is a million-dollar question every investor asks and hopes to ‘get the right answer by getting everything right.’
Commercial property entails long-term investment with a vision to improve the cash flow, leading to increased value of the property.
Securing long-term leases will also encourage banks to take a more lenient view of their lending policy.
Properties with a ‘substantial upside’ can work to your advantage, a good example of which is securing the sale of a building in a mortgagee situation.
These types of sales are becoming more evident in today’s property climate, both by auction and tender. Usually, the vendors of these properties expect quick sale.
Sometimes, such properties bring with them risks such as unsecured lease and high cost repairs.
Yield matches Risk
As in the case of any business deal, higher risks can lead to higher yield in property investment. Banks will, on occasions, sell a mortgaged property even below the expected price, to recover their dues.
I was once involved in a transaction in which the lender had placed a property under ‘Mortgage Auction.’ The auction was not successful but the property was sold immediately thereafter through another deal, with the lender insisting on payment to cover the loan and other costs.
Furthermore, the lender also financed the deal by leaving in funding.
Under such circumstances, it would be advisable to ask the lender directly if leaving funding is an option. This would make the transaction easier for a purchaser since finance is a crucial part of most property deals.
Such distress sales are common during periods of economic recession.
The Time Factor
This is indeed the best time to purchase commercial property. With supply far in excess of demand, it would be comparatively easy to strike good bargains. You would be in a dominant position if you have established credibility in the market with a pre-approved credit. You would be able to make a cash offer, enabling you to purchase the property at the best price.
The best way to change the value of your commercial property is to change the rent. This can be achieved through rent reviews and purchasing a commercial building, which could be partially tenanted. This will enable you to lease the remaining vacant areas and increase the rental.
However, it is not as easy as it appears but not impossible to achieve.
Timing is one of the most crucial aspects in purchasing properties. Try to become a long-term investor and buy when the market is in recession or downturn.
You should be patient while others purchase with the fear of missing out. Have a stable mind and be prepared to walk away from a deal if it becomes too hard. Try not to get emotional and stick to the basics.
If you work hard, take proper advice and maintain your property with timely repairs and renovations, your property will enjoy good market value.
Commercial property is a specialist area and hence it is important to be well informed of the issues and risks involved. Apart from reading and discussing issues with experts, it would be useful to appoint a qualified consultant to advise you of the market trends and projections.
Partnership Option
If funding becomes an issue, try to look for investors or a partner with capital. This will enable you to spread the risk and reduce your cash burden. You would of course be obliged to share your income with the investor or partner.
In his regular Newsletter as Chairman of Berkshire Hathaway, American investor and philanthropist Warren Buffett once said, “You will find out who is swimming naked when the tides goes out.”
As an investor, you will be obliged to take risks but have buffers in place so that you would not be unduly hurt in difficult times.
Mahesh Ranchhod is a Director of the Ranchhod Group of Companies based in Auckland. Phone: (09) 3031353 Mobile: 021525569
Email: m.ranchhod@xtra.co.nz 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.
