Selection of a suitable property to invest in follows some fairly basic steps, though one ought not to take any of them lightly or without competence to properly judge the evidence.
To begin, the country and jurisdiction should have strong economic potential with growth already proven or at least clearly beginning. If the country is not sharing in good growth, more local fundamentals must be very strong in order to compensate for the lack of national support. If these conditions are present then a closer look at the economics of the region and municipality are required to determine the viability of a location. Good GDP growth with signs of in migration are a good indication that the area has potential, providing a suitable property can be located.
After an area is determined to fit the requirements for investment, it becomes necessary to seek out specific properties and determine the viability of each one individually. Generally, it is good to locate a “B” or “C” building located in a “B” neighbourhood. “A” properties tend to be less profitable, though certainly more appealing to the eye. For investment purposes, the very best property is a “C” building that has not been well managed in a “B” neighbourhood. With good management this kind of property can be significantly upgraded and rents raised, which in turn raises the value of the property.
A basic question to ask in evaluating a property is “Do the tenants I want to cater to want to live in this neighbourhood and this building, or can I fix it so they want to live there?” We ask this question of the city, the neighbourhood, the “curb appeal” of the building, the common areas of the building and finally the suites individually. The answers must be positive to all aspects of the investigation, or we must see the possibility of “fixing” the problem.
Having passed all these hurdles, is the vendor of the property willing to sell it for a price we can pay and still expect reasonable profits? Even as I write this, I have received a listing showing a cap rate of 2%. While we won’t get into a discussion of cap rates and their significance, suffice it to say that it would be a complete waste of time to follow up on this property as the vendor has not yet had their date with reality. It will come. Once a building is located that meets all the criteria so far, a purchase contract is executed, providing the buyer a period of time to complete their diligence.
Diligence is what is done to avoid surprises later, generally unpleasant surprises. We do analysis and call in third party experts to review a host of items such as:
- Structural integrity of the building
- HVAC systems
- Roof systems
- Security and fire systems
- Existing contracts
- All active leases
- Search for outstanding health and licensing issues
- Environmental issues
- Zoning/planning issues
- Financing options and availability
- Potential exit strategies that may be used later
- Detailed inspection of every part of the building, including each and every suite in the building
- Analysis of landscaping and parking issues
- Detailed inspection of the building envelope
- Any number of subsequent inspections and analysis as may be deemed suitable following the steps already indicated.
- Upon completion of the Diligence phase, value is recalculated based on the now detailed knowledge of the property. The offer may be rescinded, amended or simply closed on.
Presuming we have closed on the property, the work of bringing it up to our standards now begins.