Investment & Financial Articles
Title: The Criteria That Determines Your Property Investment Success
Author: Chris Lang
Article:
In order to satisfy your Investment Objectives you will need to
set certain Buying Criteria - against which you will rate each
and every investment you undertake.
Again, these Criteria are ranked in what has (over the years)
become accepted as being their relative importance, for making a
sound property investment.
1. Tenant Calibre & Lease Term
By themselves, these two Criteria could prove to be the two most
important to you - if you intend to achieve any of your
investment objectives.
Ideally, what you'll look for is a strong corporate (or
government) tenant - with a minimum of a 5-year lease term. With
that in place, you're well on your way to making a successful
investment.
2. Recent Construction & Flexible Design
Generally, whenever a property has been recently constructed, it
means it will have ongoing appeal to subsequent tenants. And
again, this will help to ensure that many of your objectives are
met.
And it also means you'll start to enjoy significant Tax Benefits.
Likewise, a Flexible Design means that you are not left with an
inefficient floor layout, if your principal tenant were to
vacate at the end of lease term.
In other words, you'll have an easily adaptable layout - which
will allow you to draw from a wide market, when re-letting is
required. At that point, you can enjoy further Tax Benefits -
from depreciating any of the refurbishment works that may be
required.
3. Lease Structure & Absence of Competition
Lease Structure relates to things like ... the frequency and
method of your rent reviews, who pays the operating costs, and
to what degree a tenant is responsible for total building
maintenance ... all of which will impact upon many of your
objectives.
Absence of Competition relates to how many similar properties
there are, nearby to yours. This determines whether the market
could become over-saturated - which may affect your return from
the property, or make it difficult when it comes to re-letting.
4. Good Position & Emerging Trends
All other things being equal ... the better the Position, the
better your property will perform. But, as you've seen from the
earlier criteria, Position alone should not be your sole
determinant.
In recent eBulletins, you've already analysed some of the
investment opportunities emerging through demographic trends.
But equally, new trends are emerging in relation to
construction, design, energy conservation, security, lift
technology, automation and so on.
All of which can dramatically improve the performance of any
properties you may already own; plus enhance under-performing
properties you may be looking to acquire or develop.
Therefore, you need to keep a keen eye out for hidden
opportunities to (inexpensively) gain a competitive advantage.
5. Passing Yield & Zoning
If your Passing Yield (ie: the current income for an existing
investment) is derived from rentals that are "above market", it
means that you're unlikely to receive any increases from your
initial market reviews. And if your future reviews are fixed,
incremental reviews (or tied to CPI), then you'll only be adding
to (and deferring) your problem until the lease expires.
On the other hand, your Passing Yield may be at (or below)
market rentals. And this should mean you'll be able to enjoy an
improving cashflow; and maybe, even some Super Growth - if
you've seen an opportunity which other investors may have
overlooked.
6. Zoning relates to your property's present and potential
future uses.
Sometimes a property can have a Non-conforming Use Permit which
could allow a residential property to be used as an office.
While it can be used now for offices, it may only ever be able
to be developed for residential purposes.
If (historically) there has been a large number of these types
of non-conforming properties in a given locality, some
inner-city municipalities have been introducing "mixed use"
zoning to legitimise, and actually encourage, the co-existence
of such a rich diversity of uses.
It's something you need to be on top of, as there are specific
zoning and density changes occurring on a regular basis. And you
can often make windfall gains if you're astute.
7. Title Options & Vendor Motivation
If (with little expense) you are able to subdivide the Title for
a parcel of land, or an entire building, you are then able to
significantly enhance your property's value AND, therefore, it's
marketability.
You may still choose to sell the property as a whole. But any
new purchaser is attracted by the flexibility of being able to
sell off a portion of the property, should the need arise. And
people will pay you a handsome premium for that flexibility -
well in excess of your cost of creating it.
Vendor Motivation is important; but ought not be your principal
reason for buying a specific property. Having assessed all the
fundamentals, and satisfied your earlier Criteria, a motivated
vendor will invariably provide you with some additional
interesting benefits. And these can range from: leaving some
money in the property at a low rate, on second mortgage; to
allowing you to up-value all the Plant and Articles, so that you
can depreciate them from a much higher base.
With a motivated vendor, your prime focus quickly moves away
from the price and starts concentrating on how to structure the
most attractive contract terms.
About the author:
Chris Lang is the Managing Director of Gardner and Lang, a
leading Melbourne-based Commercial Property firm, Gardner +
Lang. Visit www.gal.com.au to find numerous articles on property
investment selection criteria, trends and case studies. Chris
has also produced a FREE E-book entitled "Negotiating Your Way
to Success". For a FREE copy, visit:
http://www.gal.com.au/rsl/private/negotiating.html.
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