Rental Property Investing - Confirming the Data

When we consider investment property options, doing the math is generally straightforward as we determine  ROI’s, cashflow projections, and the like. It’s how those numbers are arrived at and the ‘legitimacy’ of them, that is the next important exercise.

On the income side, we need to review the current lease agreements in place and confirm the rental amounts, in order to reconcile the gross revenue numbers which are represented.  The lease will contain the balance of the term(s) remaining with the lease - including future increases, balance of time  remaining, renewal details, and deposits which may apply. As a matter of best practice, time should be taken to review all leases in their entirety, to ensure there are not provisions which you may not be aware of (ie. early termination clause, additional rent caps, expiration of personal guarantees - just to name a few).

On the expense data, year end reports are typically provided and are ok for the initial review.  But best practice is to verify the amounts against the owner’s income tax return(s), depending on the corresponding years being considered.  Three years history is probably a reasonable period and again, we are looking for the figures to balance against what has been represented.

Just a further note on the tax return request – this would generally be something that would be incorporated in to the Offer to Purchase and form part of the Due Diligence process. The Seller needs to know that a deal is at hand and that the providing of such confidential details, is ultimately leading towards a sale of the property.  Strict confidentiality provisions may also be required by the Seller.

In any type of rental property investing, as they say -- ‘the devil is in the details’.  Make sure you verify those details, before proceeding to finalize any purchase.

Next up…discussing strategies and objectives with rental properties. Again, seek out experienced commercial realtors within your market to assist in finding the best rental properties available.

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Rental Property Investing - Establishing Objectives

Assuming you are considering rental property investing as a way to make money, then the next step is to establish a set of objectives. If you know what you want in terms of investment properties – you should try to focus your efforts on the best options within the market that fit.

Typical investment objectives should include:

• Type of Property – residential, commercial/office/retail, vacant land
• Types of Tenancies  – single/freestanding building, multi-tenanted
• ROI and CAP rate expectations
• Growth/Appreciation expectations
• Capital Available to be invested  (aka – down payment)
• Risk Issues – personal liability/financial guarantees/level of acceptable risk
• Locational Preferences – core district, new/growth area, transitional area
• Quality of the Buildings – older, newer, potential rehab and improvement costs
• Management – self manage vs. professional management
• Hold Strategy – buy & hold, buy/renovate/sell, buy&flip

This list should help you paint a pretty good picture of what sort of rental property best ‘fits the bill’. As with everything in the business world, compromises must and will be made. But this will allow you to search the rental property market from the outset, with a defined set of objectives.

Just a final note as you investigate your market of choice - all markets are local and operate based on their own local set of dynamics. Your investment objectives should be based in reality, to the market you are looking to invest in. It never hurts to review recent rental property sales, to see how likely you are to succeed - based on the set of objectives which you’ve established.     

Again, seek out experienced commercial realtors to match your investment objectives to the rental property market in your area.

Real Estate Insider: June 2019 News Report

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Rental Property Investing - Due Diligence on Yourself

Investing in rental properties can be a lucrative way to create wealth, by not only providing an income stream, but also by creating an opportunity for capital growth – AKA -- an increase in the property’s value during your period of ownership. Types of properties can include – residential (single unit & multi-family), retail/commercial buildings (single unit & strip centres), office buildings (single unit & multi-complex), mixed use (ground floor commercial & above ground residential), industrial buildings (single unit & multi tenant complexes), and even raw land that generates some level of income.

After assessing the various property categories, determine the type that best fits with your objectives and will best meet your criteria. It isn’t one-size-fits-all in considering rental property investments and you need to do some necessary due diligence on yourself before moving forward – due diligence on the properties/market will follow later. Markets throughout Canada are littered with investment property ventures ‘gone bad’ and the best advice here is to ‘walk before you run’.

Some key questions to ask yourself:

• Am I more interested in residential or commercial/industrial properties?
• What locations/neighbourhoods are of interest?
• Am I hands on, or will I require a property manager?
• What are my cash flow/return on investment objectives?
• What type of financing is required and what % downpayment can I put up?
• What sort of financial implications can I expect due to vacancies?
• What sort of maintenance & capital improvement costs am I willing to accept?
• Will I incorporate?  How can I best limit any liability?
• What sort of market am I comfortable buying in?
• Is liquidity an issue if I need to sell (quickly)?

Any investment comes with its share of risk and rental (investment) properties are no different. Good preliminary planning, starts with an honest self-assessment of YOU, your objectives, capabilities, comfort zone and so on. Once you’ve figured that out, it’s time to move on to the market in whatever direction best suits you.

Real Estate Insider: May 2019 News Report

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Commercial Leasing 101 by Josh Shepley

EVERYTHING YOU NEED TO KNOW BEFORE YOU LEASE YOUR FIRST SPACE

Windsor is known for being dependent on the automotive industry, but with the recent announcement from Chrysler about going back to two shifts, it is becoming more clear to everyone that diversification is essential to continue feeding the growth that Windsor- Essex has experienced in the last 3 years. One of the other major factors that drive this economy are small businesses.  

We personally get calls everyday from entrepreneurs who have a great idea and a plan to execute, however need help with one of the most important aspects of starting/growing a business; a place to actually run their business! This is why we have put together this step-by-step guide to commercial leasing to make it easier for entrepreneurs to get everything they need to bring their idea to life!

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STEP 1: LOCATION

Everybody knows location is everything in business, and to be in the right location for YOUR business can make or break new businesses, especially in their first few years. Are you a destination or a walk-in based business? Do you have to be on the 1^st floor? What demographics are you trying to target? Do you need to be on a public transportation route? Do you have a complementary business that you would like to be close to?  These are just a few of the questions that we ask when finding you that perfect location.

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STEP 2: ZONING

Every property has a zoning that has a list of specific permitted uses.  Before you spend too much time on a location, make sure the zoning permits your business to operate in the space

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STEP 3: NET LEASE VS GROSS LEASE

 

NET LEASE

A Net Lease is typically what we see in commercial real estate; this lease is broken down into net rent, additional rent (operating costs), and utilities. The net rent is basically how much the Landlord’s charging you to use their space, this is the only rate that can be negotiated when leasing. Operating costs are how much it costs the landlord to run the building even if it was empty, this typically includes property taxes, building insurance, common area maintenance, garbage and snow removal, building repairs and maintenance, etc. All of these yearly costs are added up and divided by the total leasable square footage of the building, and the Tenant is responsible for their proportionate share. Typically when you see this type of lease, each unit is responsible for putting utilities in their own name and pay based on usage.

The lease rates you see are usually per square foot in the unit, per year. To get your total monthly cost, you must add the net rent and additional rent together, multiply it by the total square footage of the space, and divide that by 12. Utilities are use dependent, but as an example, we typically advise office users to budget $2.50 per square foot per year on utilities. If the lease is “Triple Net” then the Tenant is also responsible for any repairs to major capital items (Plumbing, HVAC, etc) that may be required during the term of the lease. If you are getting into a Triple Net Lease, be sure to have all these items inspected.

GROSS LEASE

This is typically seen in older buildings and buildings where utilities aren’t separated. This means that the price advertised is your “all in” monthly rent and you have no other costs for leasing the building. However some landlords will still require you to pay for utilities on top of this amount, make sure this is clearly understood before signing the lease.

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STEP 4: TENANT IMPROVEMENTS

Chances are the space you lease is going to need some renovations to make it suitable for your business, if it doesn’t; this is what we call “Turn Key”. There are many ways to go about Tenant improvements, and it largely depends on the specific situation and preference of the Tenant and the Landlord, and is negotiated before signing.  Some of these methods include:

Rent Free Time – the first few months in your new space is rent free so you can spend that money on improvements and you are open for business and making money when your first rent cheque is due.

Tenant Improvement Allowance: - If the lease space is in rough shape or needs lots of renovations, sometimes the Landlord will give an improvement allowance so the Tenant can build out the space to their requirements and in exchange will sign a long term lease. The Landlord will reimburse the Tenant the agreed upon amount once renovations are complete and receipts are provided to prove the money has been spent in the unit and all proper permits pulled.

Landlord Build Out – This is where the Landlord will build out the space to the Tenants requirements, and typically in this situation we see Tenants paying higher rental rates so the Landlord can amortize the cost of the improvements over the Term of the lease.

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Overall, these are just a few of the things to consider when Leasing a commercial space.  Be an informed tenant and your lease transaction should go smoothly.  Also consider working with a qualified commercial leasing expert to make sure your interests are protected!