Rental Property Investing - Mixed-Use Properties

Another category that you will encounter in most markets, is the ‘mixed-use’ (MU) variety. By definition, this is a property that has a combination of both residential and commercial units. Typically the commercial are the lower floors (most often the ground level), with the residential component above.

In your own neighbourhoods you may have seen this type of real estate, but never having taken a view of them from an investment perspective. Let’s consider in what the advantages/disadvantages might be:

Advantages:

·    Income is diversified relying on both commercial & residential demand

·    Traditional downtown cores were conceived in this fashion

·    Design suits commercial users wishing to reside in apartments above

·    Built-In Business support for commercial tenants from the residents

(particularly in larger complexes)

Disadvantages:

·   Tenant needs can be different/unique, creating potential conflicts (ie. noise)

·    Mortgaging challenges (many lenders avoid this category)

·    Restricts the type of tenant (for either component), which you can attract

·    Physical issues as they might relate to parking/signage/basement access (being more of an issue in the case of larger complexes)

   

Is it a good or bad potential investment? As always it depends on many factors – but best practice is to do your homework (due diligence) and the answer should become clear.  Beyond looking at the financial details of the properties (ie. lease details/expense summaries), take a hard look at the neighbourhood, taking note of how many other MU properties are within the immediate area. Do they appear successful and well occupied? Are MU properties more or less the building standard on the street(s). How do the comparables look and with what sort of market time?

We are moving on from our review of  ‘ property types’…. next up management issues and considerations in buying commercial properties.  As always, seek out experienced commercial realtors within your market to assist with reviewing potential MU investments.

Press Release - Windsor Star April 4, 2013

FOR IMMEDIATE RELEASE

Local RE/MAX Team Lalovich Ranked #12 in Commercial Real Estate Sector

Mark and Russel Lalovich of RE/MAX Preferred Realty Ltd. have been ranked #12 in the International RE/MAX Network for Top Commercial Teams.  This honour is not one bestowed lightly. It goes to highlight the hard work and dedication to providing quality client service and a clear focus on promoting Windsor Essex as the place to find commercial real estate for expanding businesses from across Canada.

This Father and son team focuses on developing a broad client base that in the past year has included many commercial property seekers from Alberta and Saskatechewan.  Mark Lalovich attributes the success to his expertise in the market and his ability to create win/win situations in commercial negotiations.

“We have definitely benefitted from the out of town clients, including investors and commercial tenants alike  and see this trend continuing as the region continues to improve economically” says Mark.  He and Russel continue to post to their blog Commercial Real Estate 101, which also features videos of commercial properties that are current listings to assist potential clients in understanding available listings as well as get a sense of who Mark & Russel are, and how to work with them.  “Tapping into technology is the beginning of reaching other audiences, helping them to start a relationship with us while establishing us as an expert team in the local market” says Russel.  “The feedback we get on the blog, posts and especially the videos is really great. We know we are developing a following”. 

Glen Muir, Broker of Record of RE/MAX Preferred Realty stated “Team Lalovich continues to be the go-to group in our market, creating the opportunity to be recognized in this way.  They provide the highest level of professional service to investors, tenants and landlords alike in Windsor-Essex.”

RE/MAX has over 89,000 Sales Associates, in more than 6300 offices operating in more than 80 countries around the world.  Both Mark and Russel will be recognized at an awards ceremony later in 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.

Rental Property Investing - "Special Purpose Properties"

Is buying a ‘Special Purpose Property’ (SPP) as an investment a good idea.  If the cash flow is sound based on a long term lease, and it generates a good return, as an investment property, this might be the right move. But then again…maybe not.

Let’s first look at what a SPP is defined as – “a limited market property with unique design characteristics that may have been built with specialized construction materials or offers a layout that restricts its utility to the use for which it was originally built”. They often have limited conversion potential as built, without having to incur substantial retro-fit costs.  

Good examples of this type of property might include:

·        Bowling Alley

·        Church

·        Car Wash

·        Daycare (particularly larger centers)

·        Nursing Homes/Elderly Care Facilities

·        Marinas

·        Theaters

Basically – they are what they are. Should the use come to an end at some future point, can the building be re-purposed and at what cost?  For the investor, when the use ends, what are the implications regarding the lease and future cashflow. On the concept of re-purposing, in reality it is very much dependent on the calibre of the marketplace you are in and its future economic outlook.  It’s a clear risk and you do need to account for it, as a major part of your Due Diligence.

On a final note, lenders have their own criteria relative to the category of SPP, and best practice is to get their perspective on what sort terms are available, before proceeding on such an investment. Suffice it to say that the Tenant’s Covenant will be crucial to the Lender – as it should be to you.

As always, seek out experienced commercial realtors within your market to assist in reviewing potential SPP investments.

Rental Property Investing - Medical Properties

An attractive sub-group within the office category, are medical office properties.  Medical office properties can involve ‘single user’ formats, as well as ‘multi-tenant’ developments.  Multi-tenant properties are able to bring a variety of medical practioners under one roof, as well as offer various related services - such as pharmacy, laboratory/diagosotic, and physio/chiropractic, to name a few.  Locationally, they can be in established or growing residential neighbourhoods, busy commercial areas, or near primary care hospitals in a city.

Medical office properties have typically been characterized as being stable from both a tenancy and cash-flow perspective. Physicians do not generally move around, and at minimum can stay in one location for 5-10+ years.  Lease rates on comparable buildings, would likely fall in a narrower and more predictable range within any given market.

All of the same discussion points in evaluating retail and office properties would apply here. Economic performance would consider applicable cap rates for other medical property sales in the area, as well as a diligent review of the tenant summary to assess its overall stability.

Being a landlord of a medical office property presents some different challenges than you might see with other commercial centres. Firstly, parking availability is critical for medical users, and often commands a much higher ratio per square foot, in comparision with retail or business office uses.  A busy medical specialist occupying 1500’, can utilitze 15-20 parking spaces during his normal office hours.  This may be 3-4 times the need of a business office use (ie. insurance office).  Pay particular attention to the area of parking, because it must be adequate for all tenants and their patients/clients.  Best practice here, is to observe the site at busy times and get a good sense of how it functions on a daily basis. In addition, pay close attention to the standards of accessibility for elderly/handicapped, sound proofing needs, and restrictive convenants which preclude competing uses.

The best medical office buyers should be ‘physician-owners’, who are likely setting up practices for the long haul and would effectively pay the building off over a 10-20 year stay.  In today’s market, traditional real estate investors/landlords are drawn to well-tenanted medical properties across North America – and why wouldn’t they be?  With aging populations, health care spending on the rise, and the field of medicine expanding continually, it would seem to be a ‘sweet spot’ for real estate investment.

   

As always, seek out experienced commercial realtors within your market to assist in finding suitable Medical Property investments.

Rental Property Investing - Office Properties

Now let’s look at Office properties. Again, they come in many shapes, sizes, design styles, and for a variety of user types. Specifically on users, they can be categorized as follows: business office, institutional/government, medical or commercial service.

Multi-tenant office developments may be located near residential neighbourhoods, within business parks, or in established commercial districts within a city.  Tenant rosters could include accounting firms, law offices, personnel agencies, mortgage brokers, insurance offices, and chiropractors.  As in the case of retail, a development can be designed for a single user and within a freestanding building.    

In looking at successful office properties – same advice as with retail -- pay particular attention to not only the property’s current vacancy status, but what its historical pattern has been. Are current rentals on a per ft. basis, at or above/below the prevailing office rates within the area. It’s all about supply & demand, and lease rates are mostly dependent based on the realities of your particular marketplace.

As with other commercial properties, the value of an office building is very much tied to the amount of rent collected. Review applicable Cap Rates for recent office building sales, to give you a benchmark as to how your subject building relates. Also in studying the tenant summary, how dependent is the landlord on 1 or 2 units in order to sustain an adequate cashflow?  It’s the ‘What-If’ analysis – so if a tenant occupies 50% of your building (representing 50% of your rental income), what happens when they leave and how easily can the unit be re-tenanted and at what cost?  It is as we’ve said many times before, all about good Due Diligence.

Just a final word, on evaluating a property to see how it performs on a daily basis.  Visit the site during busy times and see how it functions – Is there really enough parking?  Is there a good/compatible tenant mix? Ease in visitors accessing the site?  Does it appear to be an operational success for tenants, their employees and visitors?  On site observations are always well worth the effort and can tell you a lot about the viability of the property.

As always, seek out experienced commercial realtors within your market to assist in reviewing viable Office Properties as investments.

Rental Property Investing - Retail Properties

Another decision you must make when considering rental properties -- what type of property to do you look to invest in?  Based on the market you’re considering, are retail centers preferred or do you see office uses as being more optimal?  Let’s first look at Retail.

Retail properties come in many shapes and sizes.  Think neighbourhood plazas which might include a fast food restaurant, laundromat/dry cleaner, variety store, beauty salon, etc.  These are viewed as convenience centres and for the most part, serve the immediate neighbourhood. The same can be said for freestanding buildings (serving a single tenant), but again, target the neighbourhood demographic as their primary customer.   

In looking at successful retail opportunities, pay particular attention to not only the property’s current vacancy status, but what its historical pattern has been.  In addition, you want to look at the availability of parking, neighbouring tenant mix, and the tenure of current occupants.  Bottom line – is it a quality development which results in successful and stable retail operations?     

In addition, you should examine general vacancy trends in your market.  Stronger lease rates typically go with higher occupancies and vice versa.  It’s again a due diligence exercise – but the data/information is out there and you need to make best efforts to obtain it.  Stay where the action is and look where retail tenants succeed.

As a final note, with respect to financing retail properties, certain lenders may prefer this area of real estate versus other categories (ie. office or industrial).  Keep this in mind as you consider financing options. 

As always, seek out experienced commercial realtors within your market to assist in reviewing viable Retail Property Investments.