WITH THE Commercial property market now starting to gain some momentum, it might be worthwhile reviewing your current Investment Objectives — simply to ensure they align with your underlying investment strategy.
In formulating that strategy, you may choose to vary the specific order of importance for the following set of Objectives.
Basically, it’s up to you to decide just where they fit within your overall strategy going forward. Anyway, let’s review these key Investment Objectives, which seem to have stood the test of time:
- Enduring Value
- Ongoing Cash Flow
- Steady Growth
- Super Growth
- Lending Appeal
- Future Collateral
- Cost Control
- Tax Benefits
A property’s enduring value — remaining attractive even after many years, and after several changes of tenant — relates to an understanding of market trends (both cyclical and emerging). And just how they’ll affect different types of property, and in what time frame. Therefore, enduring value needs to be at the top of your list of key objectives.
Ongoing Cash flow
A well-located investment (but with no assurance of ongoing income), will be of little help to you in meeting your ongoing mortgage payments. So, you always need to look at the property’s leasing potential — well past the initial few years of ownership.
Although, in recent years, inflation has been under control, you still need to ensure that each investment will provide you with steady, predictable capital growth.
With a good consultant, you can uncover investments that provide you with a real opportunity for growth — well beyond what the market will normally deliver. Sometimes, this comes from a clever change of use. Other times, from simply being able to sub-dividing a larger property into smaller components.
This includes all the vital elements. Things like … a secure cash flow, long leases, low maintenance requirements and a good location — all of which keep your financier happy.
Thus, you need to start viewing each of your potential investments from a lender’s point of view.
Being able to borrow money at the outset is vitally important. However, you also need to look a little further ahead — to when a certain portion of your core portfolio should be viewed as being held long term.
This will give comfort to your financiers; and also underpin your capacity to borrow even more funds, down the track.
Even though your rental stream may be quite secure, you should strive for properties with net leases wherever possible. In other words: make sure your tenant pays the building outgoings.
Because, quite unexpectedly, your operating costs for a given property (rates, taxes, maintenance, service contracts and so on) may suddenly start to escalate. And obviously, this will affect your overall return.
Any likely tax benefits need to be viewed as a secondary (rather than as your principal) motive for making an acquisition.
There’s no doubt that you can obtain significant benefits (and shelter your income) through good depreciation allowances.But if the deal is not viable before potential tax benefits are taken into account, you ought not be making the acquisition in the first place.
Now for your 12 Buying Criteria …