Invest safely?
That was the response I got from the first customer I spoke to a few days after opening our doors to the public. The husband and wife were questioning my sanity because I was suggesting that the time was right to invest in a product that is secured by real estate. Yes, I have heard of investment firms in trouble and I see almost daily the number of articles published in newspapers, magazines and on the Internet that paint a pessimistic picture. In fact, the Calgary Herald just ran an article with the following bold headline: ‘Commercial Real Estate Takes Billion-Dollar Drop’. According to the headline, anyone thinking of investing in commercial real estate would be putting their investment funds under their mattress. The article was about how commercial real estate sales had been declining since 2008. What it failed to mention was that in 2008 and prior years, the number of sales inflated because Calgary was the “most popular market for commercial real estate in North America.” “. That market is getting back on track, which is good. One should not always take media hype at face value. By reviewing and completing your due diligence before investing, you will make informed decisions based on facts, and that will provide you with lucrative ways to increase your net worth even in these difficult times. So my answer to the question, are you crazy?, is a resounding NO!
What should we look for?
The investment promoter must be willing to give you its legal documents so that you can read and understand them yourself, or with the help of legal and/or accounting counsel. When an offer is made, they must give you access to the due diligence they complete. That should include current appraisals, engineers’ reports, environmental studies, a review of lease agreements, and title searches to ensure there are no undisclosed ties or issues. You will want to be sure that your funds are held in a trust account and that some sort of audit is completed on the account. After you’ve invested, you’ll want to know at least quarterly, if not more often, how the building you’ve invested in is performing.
Some investment companies still try to attract investors with projected returns that cannot be verified.
The only return that is real is cash flow. Therefore, you should keep the following in mind:
1) Who are the tenants and when do their leases expire?
2) Is there a good mix of tenants or does one tenant occupy the majority of the rentable space?
3) What is the basic rent you are paying and how does it compare to market rents?
4) What are the operating costs and is the amount collected from tenants sufficient to cover all operating expenses?
5) Who will be the real owner of the property and how will their interests be protected?
6) Is there a mortgage on the property?
7) What is the amount being mortgaged? What is the rate? Are there prepayment penalties? How receptive are lenders to renewals and refinances? If you have done your homework and are satisfied that the company promoting the investment has done its thing, real estate can be a safe investment in the short, medium or long term.
‘Are there any investment products I should consider?’
Commercial real estate syndications have been around for a long time. The newest syndication product on the market is the real estate collateralized private mutual fund trust. Some companies offer this product with debt, while others offer a debt-free property as collateral.
Why invest in real estate without debt?
1) Income is based on lease payments for a contracted amount and time period from long-term tenants with strong covenants.
2) Your capital is protected and will be there when needed.
3) His return is constant and is not based on predictions or tricks.
4) Income and profits are maximized by not having to pay a mortgage.
a) Being mortgage-free reduces the risk of loss.
b) Real estate consistently stays ahead of inflation.
c) Real estate avoids the volatility of the stock market.
5) Provides a secure and reliable income for retirement, a rainy day, or a child’s education. 6) This type of investment is ideal for products registered as RRSPs, RESPs, Liras and RRIFs. It’s also a great way to maximize tax-free returns on your tax-free savings account.
7) Buying real estate for cash often allows for a better purchase price since a quick closing puts cash in the seller’s pocket in a much shorter period of time than if mortgage financing were required. From the seller’s point of view, this is positive and often leads to a reduced purchase price. This, in turn, means that the potential for increased equity at the time investors sell the property is greater.
Summary
Investing in products secured by commercial real estate remains a safe and sound way to provide a positive source of growth in your investment portfolio. The key to investing in the right product is asking the right questions and making sure you feel comfortable with the company promoting the investment. Syndication is a popular way for everyone to invest in real estate, as groups of investors provide the funds for a purchase that would normally only be available to wealthy individuals. The newest form of syndication is the private mutual fund trust. Debt free real estate provides the best and safest security for investors.