Friday, February 22, 2013

Rental Property Investing - Retail Properties

Another decision you must make when considering rental properties -- what type of property to do you look to invest in?  Based on the market you’re considering, are retail centers preferred or do you see office uses as being more optimal?  Let’s first look at Retail.

Retail properties come in many shapes and sizes.  Think neighbourhood plazas which might include a fast food restaurant, laundromat/dry cleaner, variety store, beauty salon, etc.  These are viewed as convenience centres and for the most part, serve the immediate neighbourhood. The same can be said for freestanding buildings (serving a single tenant), but again, target the neighbourhood demographic as their primary customer.   

In looking at successful retail opportunities, pay particular attention to not only the property’s current vacancy status, but what its historical pattern has been.  In addition, you want to look at the availability of parking, neighbouring tenant mix, and the tenure of current occupants.  Bottom line – is it a quality development which results in successful and stable retail operations?     

In addition, you should examine general vacancy trends in your market.  Stronger lease rates typically go with higher occupancies and vice versa.  It’s again a due diligence exercise – but the data/information is out there and you need to make best efforts to obtain it.  Stay where the action is and look where retail tenants succeed.

As a final note, with respect to financing retail properties, certain lenders may prefer this area of real estate versus other categories (ie. office or industrial).  Keep this in mind as you consider financing options. 

As always, seek out experienced commercial realtors within your market to assist in reviewing viable Retail Property Investments. 

Thursday, February 14, 2013

Rental Property Investing - Single Tenant vs. Multi-Tenant

This is a debate that has gone on for years – do you opt for a Single Tenant property or do you consider only Multi-Tenant buildings.  Lots to consider here, and as with everything in real estate investing, ONE SIZE DOES NOT FIT ALL!

Look back at your objectives and confirm what you are trying to achieve.  Is it ROI? Is it minimal management? Best opportunity for price appreciation?  Risk tolerance? Income growth through lease rate expansion? Mid-long term lease commitments? Triple A Covenants Only?  These may be some of the key criteria which you have identified.

Now let’s look at which Property Type, each of the above tends to favour.

ROI                        -  Multi-Tenant more likely
Price Appreciation   -  Multi-Tenant more likely
Management           -  Single Tenant less management (if any)
Risk                       -  Multi-Tenant more likely (spread across multiple leases)
Income Growth        -  Multi-Tenant more likely (given multiple leases)
Long Term Leases   -  Single Tenant more likely
Triple A Covenant     -  Single Tenant more likely

You can see the benefits of each, given the criteria that we’ve set out – but it all comes down to what you are prioritizing. There are clearly advantages to both and again as we’ve said many times, it is a set of property objectives that must be aligned with your particular market. For those of you keeping score, the above comes out 4-3, in favour of Multi-Tenant investments.

As always, seek out experienced commercial realtors within your market to assist in reviewing the available Single Tenant vs. Multi-Tenant opportunities.

Wednesday, February 6, 2013

Rental Property Investing - Debt Coverage Ratios (DCR)

Since leverage involves debt, let’s discuss how we analyze the debt relative to the property’s cash flow. The standard measurement within the investing world, is referred to as the Debt Coverage Ratio (DCR). The math is pretty straightforward –the ratio measures the property’s net cash flow divided by the annual mortgage costs.

Consider the following examples:

Property 1                                                   Property 2
Net Operating Income - $75,000                Net Operating Income - $45,000
Mortgage Costs (Debt) –$50,000               Mortgage Costs (Debt) - $50,000
DCR – 1.5                                               DCR – 0.9

  • All Dollar Amounts are annual

Now in the case of Property 1, the cash flow comfortably covers the mortgage requirement with a residual leftover (AKA –return on cash invested). With Property 2, a deficit is created (of $5000), which in essence becomes an annual loss and generates a negative return on your cash invested.

The significance of this exercise becomes really clear once you look to arrange mortgage financing in either case. The 1.5 DCR will receive good support with the Commercial Mortgage lenders, as the cash flow of the property provides a cushion against the mortgaging costs you will be incurring. However in the case of the 0.9 DCR, the deficit will raise red flags with Commercial Mortgage lenders and certainly fall outside of their normal guidelines.

Standards will vary from area to area and lender to lender, in terms of DCR ratios required. But more importantly, it must fit with your own objectives for investing and in considering viable rental property options.

Again, seek out experienced commercial realtors within your market to assist in searching out rental properties with positive DCR(s).