That was the response I received from the first client I spoke with a few days after opening our doors for business. The husband and wife were questioning my sanity because I was suggesting that the time was right to be investing in a product that is secured by real estate. Yes, I have heard of investment companies being in trouble and note almost daily the number of published articles in newspapers, magazines and on the internet that are painting a picture of doom and gloom. As a matter of fact the Calgary Herald has just printed an article with the following headline in bold print: 'Commercial Real Estate Suffers $1-Billion Drop'. Based on the headline anyone thinking of investing in commercial real estate would be putting their investment funds back under their mattress. The article was about how commercial real estate sales had decreased from 2008. What it failed to mention was that in 2008 and years preceding the number of sales were inflated because Calgary was the 'hottest market for commercial real estate in North America'. That market is returning to normal which is a good thing. One should not always take media hype at face value. If you analyze and complete due diligence before you invest you will be making informed decisions based on fact and that will provide you with lucrative ways to increase your net worth even in these embattled times. So my answer to the, are you nuts, question is a definite NO!
What Should We Look For?
The investment promoter should be willing to give you their legal documents so that you can read and understand them yourselves, or with the assistance of legal and/or accounting advice. When an offer is made they should provide you with access to the due diligence that they complete. That should include current appraisals, engineer's reports, environmental studies, a review of the leases and title searches to ensure that there are no undisclosed liens or problems. You will want to be assured that your funds are held in a trust account and that some form of audit is completed on the account. After you have invested you will want to know on at least a quarterly basis, if not more frequently, how the building you have invested in is performing.
Some investment companies still try to entice investors with projected returns that cannot be substantiated.
The only return that is real is the cash flow. Therefore, you should note the following:
1) Who are the tenants and when do their leases expire? 2) Is there a good mix of tenants or does one tenant occupy the majority of the leaseable space? 3) What is the basic rent they are paying and how does that compare to market rents? 4) What are the operating costs and is the amount collected from the tenants sufficient to cover all operating expenditures? 5) Who will actually own the property and how will your interests be protected? 6) Is there a mortgage on the property? 7) What is the amount being mortgaged? What is the rate? Are there prepayment penalties? What is the lenders receptivity to renewals and refinances? If you have done your homework and you are satisfied that the company promoting the investment has done theirs real estate can be a safe short, medium or long term investment.
'Is There One Investment Product that I Should Consider?'
Syndications of commercial real estate have been around for a long time. The newest syndication product in the market is the private mutual fund trust secured by real estate. Some companies offer this product with debt while others provide a debt free property as security.
Why Invest in Debt-Free Real Estate?
1) Income is based on lease payments for a contracted period of time and amount from long term tenants with strong covenants.
2) Your capital is protected and will be there when it is needed.
3) Your return is steady and is not based on predictions or gimmicks.
4) Income and profit are maximized by not having to pay a mortgage. a) Being mortgage free reduces risk of loss. b) Real estate consistently stays ahead of inflation. c) Real estate avoids stock market volatility.
5) It provides a dependable, secure income for retirement, a rainy day or a child's education.
6) This type of investment is ideal for registered products like RRSPs, RESPs, Liras and RRIFs. It also is an excellent way to maximize the tax free returns in your tax free savings account.
7) Purchasing real estate with cash often allows for a better purchase price as a quick closing puts cash in the vendors pocket in much shorter period of time than if mortgage financing was required. From the vendor's point of view this is a positive and often leads to a reduced purchase price. This, in turn, means that the potential for an increased capital gain at the time the investors sell the property is greater.
Summary
Investing in products secured by commercial real estate is still a safe and sound way to provide a positive source of growth in your investment portfolio. The key to investing in the right product is to ask the right questions and to make sure that you are comfortable with the company promoting the investment. Syndication is a popular way for everyone to invest in real estate as groups of investors provide the funds for a purchase that would normally only be available to wealthy individuals. The newest form of syndication is the private mutual fund trust. Debt free real estate provides the safest and best security for investors.
David Humeniuk is a partner in Teluric International Investments Ltd. For further information or answers to questions you may have please visit Teluric's website at: http://www.realisticreturns.com/
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