Your 8 Investment Objectives
IN FORMULATING your Investment strategy for Commercial property, you may choose to vary the order of this set of fundamental Objectives.
But somehow, you need to fit them within your overall strategy.
Anyway, let’s quickly 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), how they’ll affect different types of property and over what time frame.
Therefore, Enduring Value needs to be at the top of your list of objectives.
Ongoing Cash flow
A well-located investment, but with no assurance of continuing 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 good consultants, you’ll occasionally come across investments that provide you with a real opportunity for growth — above and 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 — that 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 — both to give comfort to your financiers, and to underpin your future capacity to borrow.
Even though your rental stream may be quite secure, wherever possible you should seek properties with net leases. That is, where your tenant pays all the building outgoings.
Because, your operating costs for a given property (rates, taxes, maintenance, service contracts and so on) can suddenly start to escalate — and then quite unexpectedly, 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 depreciation allowances. But if the deal is not viable before potential tax benefits are taken into account, you ought not to be making the acquisition in the first place.