The income for a commercial Investment property will have a direct impact on the potential price that sale. On that basis the income needs to be fully understood and investigated as part of the preparation for listing.
Any agent or broker listing an Investment property should take the time to review everything that could have an impact on current and future property income. Look for the strengths and weaknesses that apply to the property income stream and the cash flow for the asset.
Strengths and Weaknesses
The buyers for any Investment property will always undertake a due diligence on the listing and the location; weaknesses will be found so make sure you understand where those weaknesses are and how to address them. They will be looking for things that will have an impact on property performance over time. Some problems in cash flow will have a direct influence on a negotiation for property purchase.
Here are some ideas to help you review income performance for the assets that you might take to the market for sale as an investment:
The gross income for the asset in today’s terms will always be the starting point of an income assessment. Look at the actual volume of rental created from the existing leases and the tenants in occupancy. Understand the elements of cash flow that make up the income stream. Those elements will usually include rental, rental by type, outgoings, special licensed areas in the property, casual rentals, and permanent tenants.
Look at the cash flow per month over a period of time. Understand the gross rental achieved each month over the last 12 months. There will be patterns to the income stream driven by the tenants in occupancy. If there are vacancy factors in the property to deal with, then that will have a reflection in the collective rental. Review the number of vacancies and the negative impact that those vacancies have on the cash flow for the asset.
Understand the vacancy threat that maybe upcoming in the property tenancy mix. Some tenants will be leaving or relocating within the property, and on that basis you should develop a full understanding of how those vacancies will be handled. Some vacancies will be harder to lease than others.
Property expenditure on a monthly basis will reduce the gross income to a net income. The age of the asset will have an impact on property expenditure and maintenance. Compare the expenditure in the property to other similar properties in the same location. Look at the averages, and in that way understand how your asset compares.
Some of the rentals in the property would have been determined on a market rental basis. Compare that market rental to other properties of similar type in the same location. Is your property correctly rented, or under rented?
From the examples provided you can see that there are many different elements of income to look into and review. Some of those income factors can be improved over time, and that’s where the skills of a leasing and or property management specialist are quite valuable.
As an agent or broker, develop a comprehensive investigation process applying to the analysis of the income stream in any investment performance. An income checklist will be very useful as part of that process.
It is one thing for your client to purchase a property with the tenant in occupation. It is another for them to purchase a high quality investment with an excellent lease covenant and a high quality tenant.
The fact of the matter is that lease documentation will support the investment and on that basis the lease documentation should be analyzed for opportunity together with the tenant(s) before your client purchases the property.
What do they want?
Most clients looking to purchase a property will focus on a property and its location first and foremost. They may look into the basic facts of the lease structure and strategy across the tenancy mix, but rarely will they read the lease document itself as it applies to each and every tenant. That is where you can add value and provide commentary relating to the investment over time as that investment may be supported from and through the lease documentation. In a complex property with plenty of tenants in occupancy, that is then a real service and something that should be provided to your best clients.
So the message here is that you can find the right property for your clients in your local area taking into account the complexity of the tenancy mix and the lease documentation. You can determine and understand the investment benefits that the lease documentation in any property will provide to your clients over time.
Lease Facts to Know
Here are some ideas to help you do exactly that:
RENTS: Understand the rental structures and strategies that apply to the lease document. Compare those rental structures to the prevailing market conditions. The type of rental will also have an impact on the outgoings recovery be that as a net rent or as a gross rent. Exactly how can the landlord recover the outgoings from the property given the prevailing market conditions and the existing lease documents? Should any of the existing leases be replaced with better documents when the next lease negotiations arise?
RISKS: Are there any risk exposures within the tenancy mix? Risk will usually be created through a future threat of vacancy, or an existing vacancy exposure. You can deal with these problems through planning tenancy placement and negotiating leases well in advance prior to expiry.
COSTS: Assess the levels of outgoings as they apply to the particular property under consideration by your client. How do those outgoings compare to the industry averages for the property type in the location? Look at the history of outgoings expenditure within the property over the last few years. Look for patterns of expenditure and make sure that the costs to run the building are genuine and real.
MAJOR CAPITAL COSTS: Whilst ordinary running costs will likely be recoverable through the various types of lease rental and documentation, major capital expenditure items will not be recoverable in that way; they are a property owner cost. On that basis you can review the property for upcoming items of major capital cost outlay. Will your client have sufficient funds to cover such a capital expenditure in the timeframe required for renovation or rectification?
So there are some good things that you can do here when it comes to helping your clients with lease documentation and property selection. You could help them understand the way each and every lease document will work as part of their overall investment performance and result.
Look for the strengths and weaknesses in lease documentation as it applies to investment property today. Show your client exactly how they can benefit from a well negotiated lease and a high quality tenant.
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