Making the leap to commercial investing from the residential pool can be daunting, but here's a checklist you can't afford to overlook, from cap rates to tenant lease review and corporate covenants. Jemima Codrington reports.
Video transcript below:
Jemima Codrington: So you want to make a move from residential to commercial investing. You selected the area, now how do you select the property. Find out in this week’s episode of Investor Insight on Crew TV.
Commercial real estate broker and investor, Chris Seepe says investors should look at specific criteria when picking their property.
Chris Seepe, Professional Real Estate Investor
Chris Seepe: The single most important consideration in the acquisition of a property is probably the net operating income. That’s the difference between the rent for the income that’s brought in, minus the expenses but before financing. That net operating income is then treated to what’s referred to as a capitalisation rate and that’s a long conversation of what that is, what that means, but the short version is that a cap rate represents a blended ratio of the return of investment and return on investment.
Jemima Codrington: But purchasing a commercial property requires different elements of due diligence than when purchasing residential.
Paul Kondakos, Professional Real Estate Investor
Paul Kondakos: You have to make sure to review all the leases for commercial tenancies, because you want to make sure that if you can try to get a triple A tenant, which means that they have a very high probability of paying you, you have to take into account if they are B tenant, if there is corporate covenants on the tenant which means that if it’s a franchisee and they go bankrupt, do you have a corporate covenant that’s in place. That means that, head office will end up paying, continuing to pay the rent for that commercial unit as long as they are there.
The other thing you have to remember about commercial tenancies is that, with residential tenancies it’s typically pretty easy to get a new tenant into a residential unit. However when you start looking at commercial tenancies, you have to remember that it typically is a lot more difficult to get a new tenant in a commercial property and when you are looking to get a new tenant in a commercial property, you have to take a couple of things into account, which is you might have the unit vacant for a while and you also have to entice the new tenant by either offering them free rent or offering leasehold improvements which are both things are going to impact your bottomline or might require to come up with some cash out of pocket.