Property investment is very often the next step that successful business owners take. It looks easy and seems to require less operational energy than starting another business. While this may be true, the figures involved in the property game are such that one small mistake can turn out to be very expensive.
Anton Roelofse, regional general manager of Business Partners Limited, provides the following eleven tips to business owners who are thinking about starting and growing an investment property portfolio.
He starts with the macro factors - those stemming from the broader environment in which the building is situated, and over which the property owner has little or no power to change:
This is the most important of the macro factors that determine the quality of a property investment. No matter how beautiful the building, if the area is bad, it is bound to be a bad investment. Rather buy a neglected building in a good area, or at least a rapidly improving area. If the area is bad or degrading, there is virtually nothing you can do as a single property owner to improve the area, and by extension the value of your property.
If you think you have discovered a hidden gem of a property, chances are that your prospective tenants are also going to struggle to find your property as they scout the area for lettable space. It is crucial for a property investor to try to see the property from the point of view of a prospective tenant. High visibility makes marketing a building so much easier, and will ensure that you have a much deeper pool of quality tenants to choose from.
The third macro factor that is beyond the control of individual property owners is how easy the property is to access. The availability of parking in the case of a shopping centre or office block, how close it is to public transport for workers in the case of factory districts, or road facilities for trucks in the case of warehousing are all accessibility issues that need to be considered.
4. Future developments
Investigate any development and planning changes in the pipeline for the environment around a potential investment property. There could be a significant upside to buying a quiet shopping centre if a major new residential development is planned right next to it. Similarly, there could be a serious downside to buying a successful petrol station, for example, if a competing station is going to open up down across the road. A simple change in municipal road layout can redirect traffic and dramatically impact the desirability of any retail space. The local municipal town-planning department is a crucial source of information about the area that you are interested in.
Once a prospective property investor has made sure that the macro factors are favourable, it is time to check the micro factors - those pertaining to the property itself, and over which the owner usually has some form of control:
5. Check the leases
Buying an investment property is essentially the buying of an income stream (in the form of the monthly rentals paid by the tenants). A property may be sold to you with seemingly high-paying tenants, but how many months are left on the leases before you have to start looking for new tenants, or how reliable are the tenants when it comes to paying their rent? This kind of information is not going to be volunteered by the property broker who is trying to make a sale. You will have to ask for the relevant documents and records.
6. Study the potential escalation rate
The growth in the value of a property is limited to the rate at which you can escalate the rent. If your annual rental increase is limited to, say, 6% before you start losing tenants, the value of your property can only grow by 6%. If the existing tenants are already paying high rentals compared to similar buildings in the area, you will probably have to come down in your rentals when leases come up for renewal and the value of your property will actually decrease. Conversely, if you can significantly improve the building so that you can start increasing the rent, the value of your property will grow – but only to the extent that you can increase the rent.
7. Can you increase the bulk on the property?
Find out if you are allowed to build another storey or two on top of the existing building, or whether you can get approval to build more rental units on the property. Sometimes an experienced property investor will buy a property based on the possibility that an application for its rezoning - and therefore that its bulk can be increased in future - will be successful. This is not recommended for beginner property investors who do not have an intimate knowledge of municipal zoning processes unless the services of an expert property advisor have been secured.
8. Check the infrastructure and facilities
Does the building have adequate facilities for its purpose? Again, think of the kind of tenant that you need to attract and think like the tenant. Does the building have enough power, or loading facilities, or even enough space for a certain size truck to turn around? If the facilities are not quite up to scratch, it might be worth improving the building and gain the upside of being able to charge higher rentals. However, ensure that your calculations take possible building, installation, and approval delays into account.
9. Sweat your assets
Make sure every nook and cranny of your property is working for you. Shrewd property owners create all sorts of income streams by renting out advertising space on their buildings, or selling the naming rights of the building to a tenant, or renting out unused space as parking or storage, for example.
10. Check the structure
A hidden defect can cost a lot of money. Ask for the approved building plans to make sure the structure falls within the municipal rules. If you have any doubt about the soundness of the building, ask professional advice. A simple step such as looking at a Google map image of the building from the top can reveal a rusted roof that might not be visible from the inside.
11. Work out the net income
This might sound too obvious to mention, but it is actually the most common mistake that beginner property owners make. They get excited about the existing rentals on a property, and forget to deduct the costs, ranging from security to water and maintenance, for which the landlord might be liable.