Monday, April 1, 2013

Rental Property Investing - "Non-Performing Properties"

Is buying a ‘Non-Performing Property’ (NPP) as an investment a good idea?  Well that depends on a couple of key factors – primarily what type of re-development plan for the property do you envision – and how do you plan on financing it in the interim? Suffice it to say, this type of investment is higher risk, but potentially with a higher reward/upside.  

Consider the following examples:

·            Plaza with 50% vacancy
·            Vacant Commercial Building
·            Distressed Property Requiring Extensive Rehabilitation
·            Commercial/Industrial Land Site
·            Institution Lands (previous school or church)
·            Bank Sale (Foreclosure/Power of Sale)

In all of these cases, there is either no cash flow, or less than there should be.  Cost to carry properties is a serious consideration, and you need to factor it in for a period of transition – say 6 months to renovate a building for a new user.  In the case of a multi-unit development, you may also face a further holding period - assuming it takes another 6-12 months to find the right tenancies.  Cost to carry is a major part of your Due Diligence, in analyzing NPP opportunities.

If you are owner-occupant/user, looking at this type of real estate may make a lot of sense, given the value they can offer.  Re-purposing of NPP over the past few years, has been a popular theme in challenged markets across Canada.  By definition, this type of property continues to lose money daily for the current owner (Seller), and the Buyer leverage should only be strengthened in any purchase negotiation.

In every market, there are investors who make their living in this category and do so successfully. Take the time to not only examine these properties, but the background  of what was required to make them viable investments.

As always, seek out experienced commercial realtors within your market to assist in reviewing potential NPP investments.  For an example of a current NPP we have listed, please click here.

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