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Many of our clients didn’t necessarily set out to become property investors. Rather, good sense — and some luck — allowed them to keep existing properties rather than sell, when the time came to move on up in the world.
A common scenario looks something like this: a young savvy professional purchases a small starter home or condo. Love and marriage introduces another similar property into the mix, but neither is perhaps the right size for the lovebirds. This couple chooses not to sell, but rather turn these properties into income-generating investments.
Seeing solid returns and increases in overall property value, as the family grows — and outgrows their family homes — they continue to add these starter homes to their portfolio of investment properties. But what comes next?
At some point it’s prudent to take a look at your inventory and assess whether or not it makes sense to keep all of these real estate assets or sell a few. Looking at trends in neighbourhood property values, where you are with your mortgage, and what the free capital can do for you now are some of the things to consider.
The most astute investors look for opportunities to invest in new projects with the potential for greater payoff. For some this means commercial property.
In our experience there are two types of property investors who “fall” into the business. The first group keeps emotional ties to these places they used to call home. Memories of coming of age and striking out as an urban professional keep them from selling that first downtown condo.
Similarly, saying goodbye to the home where the children took the first steps and spoke their first words is harder still. As they head into retirement themselves, these folks often start talking with grown children about their interest in assuming responsibility for this roster of investment properties that they can’t yet bring themselves to sell.
The second group of ‘accidental’ property investors fundamentally understand that owning income properties is a business; emotion will only cloud rational judgement. For these folks, decisions are based on annual returns, on what’s happening in the market overall, and the bottom-line. For investors with sophisticated business acumen, making the jump into commercial real estate investment can make good sense and is a natural evolution for those seeking higher returns.
But commercial property investment is an entirely new ballgame. It requires a lot more capitol for one, and comes with greater risks. For instance, periods of long vacancy as you seek out the best retail or corporate tenant requires a significant budget, as do repairs and upgrades to a commercial building to make it appealing to high-value tenants.
But higher stakes also mean stronger returns. Commercial leases come with longer lock-ins and a premium price, especially when the property is located in an optimal location. And with the right anchor business as your tenant, your property can transform a neighbourhood and drastically increase both yours and the community’s real estate values.
While commercial real estate and commercial property investment involve a greater gamble, it can suit a hands-off investor just fine. The prerequisites are an experienced and shrewd investor who enjoys a little risk and has the necessary capital to do things right. But this investor should absolutely team up with a full-service, end-to-end property management company, especially if they hope not to be involved in the everyday minutiae.
If this is you, the team you’re seeking, is the one that can provide everything from sound investment advice, transaction execution, assistance with external professionals (like mortgage brokers and lawyers), to preparing the property itself, finding and on-boarding the right tenants, and of course management and maintenance of the day-to-day.
With this in place, the hands-off investor can reap all the benefits of owning physical property without more work than investing in a REIT (real estate investment trust).
Owning and managing real estate done right yields high payouts without a lot of headaches. Done wrong it can be a costly and frustrating undertaking, and no more true than in the case of commercial properties.
Source: Sabine Ghali, Special to Gulf News
The writer is Director of Buttonwood Property Management.