All commercial real estate deals have a factor of uniqueness that sets them apart from other investments.
That said, there can be times when commercial real estate is not only a real estate investment but also a business sale.
User specific investing
There are two types of business specific real estate that I’ve worked closely in during my career: multi-family and hospitality.
I would define multi-family as anything more than a single family home, which would include duplexes all the way up to apartment buildings.
Hospitality would be described as a hotel or motel, serving as one-night accommodation and up.
What makes these uses special is that the real estate involved with them can often only be attributed to their singular use.
They are constructed in a very purposeful manner which makes those improvements useless to most other businesses.
Zoning will have impact on future use for the site as well.
Multi-family can be situated adjacent single family homes. The odds of getting that rezoned to anything else is slim to nil.
Hospitality will typically be located in commercially zoned areas, so it would be less affected but may require re-zoning regardless.
As such, the health of multi-family or hospitality businesses is crucial to their saleability as real estate investments.
Multi-family real estate can be quite a lucrative investment if purchased wisely.
On the pro side, this real estate is some of the least risky to get into to.
On even small apartment blocks of 12 units, for example, you could expect to carry a little vacancy without struggling to make the debt servicing.
The other obvious con can be location; do you research.
A multi-family property in a gentrifying neighbourhood will have vastly different performance abilities over a declining neighbourhood.
The business of this real estate is keeping long term tenants comfortable at a rate the market will withstand.
Which means the due diligence in reviewing how the property has been run is so very important.
Buyers must be conscious of what they’re purchasing and if any deferred maintenance will have a long term impact on the investment.
Also, if no substantial renovations have occurred, how long will that be sustainable?
The review of a hospitality business should be thorough to say the least.
We advise clients looking at this type of commercial real estate to review a number of items, here’s just a few:
- Average Daily Rate (ADR) – what is the hotel/motel achieving for an average daily rate?
- Occupancy – what is the historical average monthly occupancy percentages?
- Renovations – what has been renovated, when was that done?
- Financials – where are the biggest expenses?
Most of the time we will recommend a reconstruction of the financials to give buyers a more accurate idea of typical expenses as it relates to the income.
Often owners may not be accounting for salaries appropriately, paying themselves too little or too much.
We will look at staffing requirements in general, seeing what is in place and what might be required by a new owner who will be operating at arm’s length.
This type of commercial real estate is not for the weak of heart.
It takes a lot of due diligence and likely ongoing guidance to be successful.
The biggest plus to hospitality real estate investment though? Some of the highest returns in our industry.
Posted by Kelly Macsymic