Your 12 Buying Criteria
THE FOLLOWING Criteria are ranked in what has become accepted by most investors as being their relative importance.
Tenant Calibre & Lease Term
These two criteria alone could prove to be most important in achieving your Investment Objectives.
What you’ll strive for is a strong corporate (or government) tenant, with a minimum of a five-year lease term. With that in place, you’re well on your way to making a successful investment.
Recent Construction & Flexible Design
When a property has been recently built, it will generally have ongoing appeal to subsequent tenants; plus it will require less renovation to maintain its modern appearance.
This also means you’ll start to enjoy significant tax benefits, thanks to generous depreciation allowances early in the building’s life.
Likewise, a flexible design means that you are not left with an inefficient floor layout — if your principal tenant were to vacate at the end of lease term. In other words, you’ll have an adaptable layout — which will allow you to draw from a wide market when re-letting is required.
Lease Structure & Absence of Competition
Lease structure relates to things like the frequency and method of your rent reviews; who pays the operating costs; and to what degree a tenant is responsible for total building maintenance.
Absence of competition relates to how many similar properties there are (or could be built) nearby. This determines whether the market might become over-saturated – which could affect your return from the property, when it comes to re-letting.
Good Position & Emerging Trends
All other things being equal, the better the location, the better your property will perform. However, this also depends on the nature of the property, and includes items like … visibility, accessibility to public transport and its position within the surrounding suburbs.
Emerging trends can include demographic issues like population movements — which invariably lead to many new investment opportunities. But equally, new trends are emerging in relation to … construction, design, energy conservation, security, lift technology, automation and so on. All of these will affect the future demand for, and appeal of, your property.
Passing Yield & Zoning
Passing yield refers to the current yield for an existing investment. If it comes from rentals considered to be “above market” (ie: higher than the rents currently being paid by the tenants of similar properties), you are unlikely to receive any increase from your market reviews.
Alternatively, if the rental is below market and your future reviews are fixed – being incremental reviews, or are tied to the Consumer Price Index — then, you’ll only be adding to (and deferring) your problem until the lease expires.
On the other hand, if your passing rents are at (or even below) market level … you could enjoy some Super Growth — having identified an opportunity other investors have overlooked.
Zoning relates to your property’s present and potential future uses. This type of information is available from your local council.
It’s something you need to be on top of, as there are specific zoning and density changes occurring on a regular basis. And you can often make windfall gains if you’re astute.
Title Options & Vendor Motivation
A Surveyor will be able to tell you if (with little expense) you can subdivide the title for a parcel of land, or an entire building – in which case you are then able to significantly enhance your property’s marketability AND what it’s worth.
You may still choose to sell the property as a whole; but purchasers will be attracted to it, because of the added flexibility. And people will pay you a handsome premium for that flexibility — well in excess of your cost of creating that flexibility.
Vendor motivation is important, but ought not be your main reason for buying a specific property. Having assessed all the fundamentals, and satisfied your earlier Criteria … a motivated vendor can provide you with some additional interesting benefits.
With a motivated vendor, your focus quickly moves away from the price and starts concentrating on how to structure the most attractive contract terms.
One of the things I do is help Clients merge your 8 Investment Objectives and 12 Buying Criteria into a single matrix — which then allows you to quickly rate each of your potential investments.