Want to stretch your real estate investment thinking?

Consider Canadian commercial real estate investing. I hosted a seminar recently for a group of real estate investors, and we had that special experience of hearing a speaker who’s both knowledgeable and a great communicator. Our special guest was Jennifer Borzym, AMP, of Equitable Trust commercial mortgages. She was awesome; not only did she have tons of experience, but she was a terrific speaker too.

Our group ranged from people who’d never bought investment real estate before, to very experienced investors. Yet all of us took away nuggets of information that we will be able to use going to forward. Since it was such a great and informative session, I thought that would be worth passing on…

Why consider investing in Canadian commercial real estate?

Jen cited a 2012 study by Colliers International, the largest commercial real estate services company in the world. In their survey of global investor sentiment and opinions, they found:

• Canada is considered the second most attractive investment real estate market in the world
• 78% of investors planned to grow their portfolios in the upcoming 6 months
• People are looking for investments they can see and feel, AND which produce long-term income streams
• Canadian commercial real estate is considered very likely to produce an ongoing, reliable income stream, and a superior return on investment

How do you start? Look at the “asset classes”…

If you’ve ever thought about commercial investing, what may have come to mind is large-scale shopping malls, office towers, or perhaps strip malls and the like. Lenders and investors break down the types of properties into asset classes. Since this discussion focused on beginning investors, consider looking at the following (check commercial listing sites):

• Multi-residential properties (that is, any house or building with more than 4-5 residential apartments in it)
• Mixed-use properties (for example, a townhouse that has a retail space on the main floor, with one or more residential apartments above it)
• Small retail plazas, or single units within a retail plaza
• Retail/office condo units on the main floor of office buildings

What a lender looks for

The lender always focuses on the 5 C’s of credit, in both residential and commercial real estate. When buying a commercial property, there is more of an emphasis on the property’s qualities, not just those of the borrower. But the borrower is still important. The 5 C’s are:

• Character – the borrower’s reputation, track record, and previous repayment history (i.e. credit score)
• Capacity – borrower’s ability to repay, financial circumstances, and income. With a commercial property the focus is on the ability of the PROPERTY to deliver income that exceeds expenses – ideally by 10-30%
• Capital – down payment available or funds spent on an already owned property
• Collateral – the value and condition of the property are very important in commercial investing; a borrower will be expected to produce a detailed appraisal and possibly other reports such as environmental assessment and property condition reports.
• Conditions – terms of the mortgage and purpose of the loan

Tips for First-time Commercial Real Estate Investors

• Make your purchase offer contingent upon inspections and appraisals.
• Don’t be surprised by purchase costs – these will include lender and broker fees of 1-3%, legal fees ($2000+), and third party reports such as property appraisal ($1500+) and possibly environmental reports ($1500-2000+) and/or property condition assessment report ($2000+).
• Make sure that your expected cash flow from the property exceeds your total expenses. And make sure you don’t underestimate these – they should include your mortgage payments, property taxes, insurance, maintenance, utilities, and repairs.
• Have a list of trusted plumbers, electricians, handymen, etc. These will be worth their weight in gold if you have an emergency property issue to deal with.
• Research what the market rents are for the property type and area that you’re interested in.
• Get ample (translation: more than you think you’ll need) property insurance with plenty of liability insurance.
• Buy properties in good locations that are attractive to potential tenants. You want to attract them AND hopefully, keep them.
• Research landlord and tenant rights in the area you’re interested in. Make sure you know them inside and out.
• Consider hiring a professional property manager.
• Find what you like and go for it!

If you’re interested in reading more on real estate investing, check out my post 6 Steps to your first real estate investment. And feel free to get in touch to talk about your own specific situation.

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