Question: We continue to talk about how the Capital District is growing with property opportunities. Local investors may be more intuitive to the demographics and history of the area, such education may provide an advantage. What do you see with investors from outside the region? Is this where you, as the broker, do more leg work? What kind of resources do outside investors need to employee in order to better educate themselves on a future investment?
When working with investors outside of the area it is important to provide a comprehensive overview of business initiatives, major development projects in the planning stages as well as those under construction and projects which have been recently competed. It is critical for me to understand the real estate investment product which the investor is seeking to build or buy. I spend time doing site tours showing areas of the Capital Region to out of town investors who want to develop or purchase existing real estate so they can obtain a better picture of what is happening in those areas.
Sometimes we go to restaurants and local venues in the area so the investor can get exposure to what it is like to live and work in that geographic location. I will conduct thorough research on the area and provide information about Community Associations, educational institutions, the arts, and local businesses. I will also provide detailed reports on the demographics of the area, age cohorts and an over view of the work force and diversity of professional businesses in the neighborhood.
Question: Can you identify the most common mistake investors make that they can easily avoid before going into the process — and how?
The most common mistake an investor can make is NOT to have the right professional team in place. Serious and seasoned investors can make informed decisions because they have engaged key professional resources who are prepared to step in when needed. For example – if one wants to invest in real estate they need to identify a Realtor well versed in Commercial Real Estate who can help them identify the Commercial Property that best suits their investment goals. The investor should also have a conversation with their attorney and CPA and have these professionals “on notice” that their services might be required when the investor is ready to make an offer on a piece of property.
It is important for investors to conduct “due diligence” about where they want to be and what resources they immediately have versus the resources they will need to put into the project at a future date. Sometimes a business plan is required. Local lending institutions with the desire and wherewithal to help with financing should also be identified very early in the process.
Question: For the novice investor, what questions do you ask in order to understand the group’s needs and goals?
I start with a discussion about the various types of real estate. For example: land for development, mixed-use buildings where there is commercial space on the main level and office or apartments above, multi-family apartment buildings, industrial warehouses or a triple net leased property. After explaining the nuances of each type of real estate, I will ask the investor about the level of involvement they want to have in the management and ownership. Do they plan to manage the property? Do they plan to hire a professional management company to manage the property? These decisions will influence the type of investment which best suits the investor’s long term goals.
Next we talk about the investor’s desired level of Profitability. We talk about the (NOI) Net Operating Income which is the remaining profit after expenses are deducted from the income. We also look at Cap Rates for the various types of Commercial property. The Cap Rate represents the percentage return an investor would receive on an all cash purchase. Some investors view the cap rate as the inverse of the price/earnings multiple. Cap Rates and price/earnings multiples are inversely related because as a cap rate increases, the valuation multiple decreases.
Another discussion I like to have with both the novice investor as well as the experienced investor is centered on their short term and long term investment goals. How long does the investor want to keep the property? What type of Rate of Return do they expect on the money they have invested and over what duration? I will inquire about the amount of funds available to use as a deposit for the investment and if the investor has lined up financing. A separate discussion about financing vehicles will take place.
Michael Hallisey is Managing Editor of Spotlight Newspapers.