Invest safely?
That was the response I received 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 it was the right time to invest in a product that is guaranteed by real estate. Yes, I have heard of investment firms that are in trouble and I see almost daily the number of articles published in newspapers, magazines and the Internet that paint a picture of doom and gloom. In fact, the Calgary Herald just ran an article with the following bold headline: ‘Commercial Real Estate Suffers $1 Billion Drop’. According to the headline, anyone thinking of investing in commercial real estate would be putting their investment funds under the mattress. The article was about how commercial real estate sales had declined since 2008. What it didn’t mention was that in 2008 and prior years, the number of sales was inflated because Calgary was the “hottest market for commercial real estate in North America.” “. That market is getting back to normal, which is good. One should not always take media hype at face value. By researching and completing your due diligence before you invest, 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 their legal documents so that you can read and understand them yourself, or with the help of legal and/or accounting advice. When an offer is made, they must give you access to the due diligence they complete. That should include current appraisals, engineering reports, environmental studies, a review of lease agreements, and title searches to ensure there are no undisclosed links or issues. You’ll want to be sure that your funds are held in a trust account and that some type 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 lure investors with projected returns that cannot be proven.
The only return that is real is cash flow. Therefore, you should be aware of the following:
1) Who are the tenants and when do their leases expire?
2) Is there a good mix of tenants or does one tenant take up most of the lettable space?
3) What is the basic rent they 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 actual owner of the property and how will their interests be protected?
6) Is there a mortgage on the property?
7) What is the amount that is being mortgaged? What is the rate? Are there prepayment penalties? How receptive are lenders to renewals and refinancing? If you have done your homework and are satisfied that the investment promotion company has done its job, 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-backed 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 period of time and amount from long-term tenants with strong covenants.
2) Your capital is protected and will be there when needed.
3) Your 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 safe and reliable income for retirement, a rainy day, or a child’s education. 6) This type of investment is ideal for registered products such as RRSPs, RESPs, Liras and RRIFs. It’s also a great way to maximize the 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 higher capital gains 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.