Business to invest in question

[shalab]

Business:

      It is commercial property that has an initial yield of 8%. Increase in rent is about 5% per year. Leasehold improvements to be made by the tenant and the tenant pays all the utilities. Property tax is paid by the owner.

 

Risks

    Tenant vacates for lack of business

    If tenant vacates, difficult to find another one in a suitable time. So the return will go down.

    Some hands on work needed to find another person to occupy the place.

 

Opinions/comments?

[Yours Truly]

What are the commercial vacancy rates in the city/area?

 

What is the demographic in the area?

 

Does the local laws in place favour the renter or owner?

 

 

[CONeal]

Can the building be  re leased without much renovations from the owner if the current tennet moves out?

 

Can the owner manage the note payments while waiting for a new tennet?

 

Most properties are build to service the company it was build for.  Is this the case?  Might be difficult to find a new tennet

 

Who are you trying to rent the property to?  Is there demand from that segement?  can they operate a profitable business in your building?

[VAL9000]

What business is the tenant in?

 

[twacowfca]

Would you invest in the property if it didn't have a tenant?  If the answer is no, then the quality of the tenant is crucial to making your decision

[petey2720]

Hi Shalab-

 

The main issue with this type of investing is that you will probably not be able to replace the income the current tenant is paying to get to that 8% return (cap rate).  Therefore, you must really dig into the lease of the current tenant to clarify whether it is corporately guaranteed or franchisee guaranteed.  You must review the financials of the guarantor of the lease to determine its strength as well as review how many of the same units/properties are guaranteed by the same entity that guarantees your lease.  Then after all that you need to look at the location of the property including:  traffic counts, area anchor tenants, other anchors such as schools and hospitals and office buildings, easy access to the property as well as whether or not the subject property is good real estate.  Don't invest just to earn the 8% return, make sure its good real estate.  Hope this helps.

[thepupil]

Regardless of the property's invesment merit in terms of commercial real estate quality, I think the first question is one of personal asset allocation.

 

What % of your money will be concentrated in a single piece of real estate following the investment? What will your return be above more liquid, less management intensive publicly traded alternatives such as triple net lease REITs (not saing those are good investments, in fact they are probably overvalued with the rest of yieldy stuff)

 

As David Swensen points out in Pioneering Portfolio Management,  real estate combines both aspects of fixed income and equity. The fixed income component consist of the contractual lease oblications of the leasee and the equity being the residual value of the property left over from the lease.

 

Would you put the same % of your money in a bond of the leasee?

[Shawn]

Based on what you've posted I don't think I'd do it. Question I have is - how many units in the property ?