How to secure commercial property at wholesale prices and add value
Investors sometimes need to look beyond residential property to expand their portfolios - but if you're going to purchase commercial properties, make sure you're not overpaying.
Blogger: Harry Charalambous, director, Plan Assist
With commercial property, similar to other forms of real estate that you can invest in, you need to bear in mind why you are investing in this form of asset class in the first place. Are you looking for income, are you looking to build your assets or are you looking to do both? Perhaps you are looking to diversify your portfolio? It is important to ensure that commercial property will meet your investment goals.
There are several ways to secure wholesale commercial property. Firstly let’s define commercial property. To me, commercial property is anything which is zoned to legally house office or retail space. To define wholesale, we are referring to securing the property at a price below current market value and/or have the ability to manufacture growth in a very short time frame (less than 12 months).
How do we secure these properties wholesale?
This can be done based on either purchase price or the terms that we secure our property with or a combination of both. To secure a property at wholesale price is generally done when you are negotiating with a vendor who needs to sell quickly either to move onto other investments or to pay down debt. However, sometimes what is overlooked in this negotiation is the fact that the vendor may not necessarily need all their funds immediately and it is important to note how the purchase can be structured to meet the vendor’s needs and at the same time create a win as a purchaser by minimising up-front investment outlay. You should always ask as many questions as possible to try to find out as much as possible about the vendor and their motivation.
As mentioned earlier what is equally and sometimes more important are the terms that can be secured and in a lot of instances, owners of commercial properties are more open to terms such as options, due diligence periods and delayed settlements – more so than the owners of residential properties. Remembering that ideally our intention is to secure the property and be able to add value in the shortest possible time and then either purchase with minimum capital outlay or on sell the property at the increased value. Again this will be determined by whether your driver is cash flow or asset building.
Note that at the time we start to add value to commercial properties, in most cases the value of these properties will be based on the strength of the tenant and the lease and so we need to be very clear about who our target tenant is prior to purchasing the property. If your desired outcome is to sell the property, prospective purchasers of our property and valuers of our property will certainly gain a lot more comfort from a longer term lease, as opposed to a transient tenant on a short term lease.
Every suburb has commercial properties that are consistently doing well, with long term tenants and possible short vacancies. Every suburb has commercial properties that don’t do so well. In selecting your properties, there is a need for you to research at a macro level, factors such as zoning changes, and any changes within industries, coupled with micro research to identify under-supply opportunities for your chosen area. With a focus on rental income, try matching the rent you desire to the rental that the prospective business can sustain over the long term. Your research should also include feasibility analysis to understand if your prospective tenant will make money out of their business whilst paying you the amount of rental you want to achieve from your commercial property.
The beauty of commercial property is that the more your rents go up, the more your values go up and then that gives you more equity you can access for future property investments.
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