You’ve decided to leave one of the biggest investments of your life to the professionals. But before handing your capital to a property investment company, make sure you’ve done your due diligence.
Property investors don’t have to go it alone. Nowadays, they have the option to invest with a property investment company, like a syndicator, REIT or unlisted property trust.
But an investor’s first mistake could be thinking every property investment company is the same. There are strict criteria they should follow to ensure they’ve found the best investment business to suit their investment strategy.
Investors should know what to look for in a property investment company:
- Skin in the game
- Corporate governance
- History of success and stability
- Access to current investors
- Regular distributions
- Unit trust investment structure
- Compliance and licences
- Robust property selection criteria
- Fair fee structure
- Adequate reserve funds
- Understand you as an investor
Real estate is the biggest investment many Australians will make. When handing your hard-earned cash to a professional, you want to make sure they are the right one to invest for you.
1. Skin in the game
You’ve decided not to invest alone. So, find a property investment company who invests alongside you.
Whether a syndicator, a REIT or an unlisted property trust, your chosen investment company should believe enough in what they do to take part in their own investments.
You can expect more transparency, integrity and care from an investment company with skin in the game. Many investment businesses focus on income growth for their own benefit. But those who invest in their own investments want to ensure the property itself is fundamentally sound and their investors’ interests are looked after.
When decisions are made for the benefit of everyone in the investment, you might even see better returns.
2. Corporate governance
Accidents happen. So, look for property investment companies who plan for the worst.
If the Managing Director or CEO of the investment business jumps ship or is unable to stay at the helm, the business should have safety nets in place to ensure its investments continue running smoothly.
3. History of success and stability
Check if they publish their achievements. A property investment company’s investment archives should show you what sort of returns you can expect.
But don’t stop at returns. Have a look at the tenants they’ve had occupy their premises.
National and multi-national occupants are ideal, especially those businesses with a long history of performance.
They should also have added value to their properties. A ‘hold and hope’ strategy doesn’t apply to the best property investment businesses.
Also ask if the business knows their investors’ reinvestment rate. If investors have reinvested their returns back into the company’s investments, it’s for good reason.
4. Access to current investors
You might want to chat with the company’s existing investors.
Ask them about the returns, the communication and the feeling of exclusivity. You don’t want to feel like a number. You want to be in a partnership with your chosen property investment company.
5. A unit trust investment structure
A unit trust is one of the smartest ways to invest in Australian commercial property.
Each investment is effectively a property acquired under a corporate trustee as trustee of a unit trust. So, the underlying beneficial holding of the property is in the unit trust. Every investor can then purchase units in that unit trust.
Check out our How We Work video below for more info.
Say there’s 100 units on offer. An investor may be able to purchase 5 of those, which then gives him or her a 5 per cent holding in the unit trust.
It’s the most tax effective structure here in Australia. It also offers the best mechanism for asset protection and the most effective structure for distribution.
6. Regular distributions
Tenants will typically pay rent every month. Yet many investment funds will provide quarterly, half-yearly or even annual income distributions to investors. That’s a long time between paydays.
Look for property investment companies which offer more regular distributions. Monthly distributions are ideal, as they allow your cash flow to stay strong, stable and frequent for the lifetime of the tenant’s tenure.
7. Compliance and licences
A crucial aspect of a property investment business is that they have the correct licences in place. Here in Australia, they should at the very least have an Australian Financial Services Licence (AFSL).
Provided by the Australian Securities and Investment Commission (ASIC), an AFSL is usually required by any Australian business involved in the provision of financial services, including “financial investments”.
Investment companies jump through many hoops to stay compliant under their AFSL. This is only a good thing for investors: A compliant investment company is a safer investment company.
8. Robust property selection criteria
Three things your property investment business should hold as priority:
- Tenant quality
- Period and terms of the lease
A property investment business should also be willing to get their hands dirty after purchasing a property. Whether adding value through fit-outs, upgrades or repairs, or by intense lease negotiations with tenants.
Ask for their property selection criteria or investment mandate before investing with them.
9. Fair fee structure
Property investment businesses will typically charge an Establishment Fee, a Management Fee and a fee to sell the property.
Most Management Fees are charged on the asset value. But this doesn’t necessarily mean the best for you. If a tenant vacates and you’re earning zero income, you’re paying a fee on an empty property. Look for investments that offer management fees on the trust’s net income. This means every dollar earned and every dollar saved is passed on to you, the investor.
It also keeps the investment business responsible for every decision to maintain the property value and rental profile.
10. Adequate reserve funds
The best commercial property investors prepare for things to go wrong. A reserve fund should be big enough to cover repairs, maintenance or upgrades needed during your investment’s lifetime.
A reserve fund creates security. And it also allows property managers to react quickly. Tenants go bust and air conditioning units die. The best investors can resolve these problems in a heartbeat, thanks to a robust reserve fund.
A reserve fund also gives peace of mind. Passive investors don’t want to see their cash flow fluctuate over time. A reserve fund removes any surprises come distribution day.
11. Understand you as an investor
The best property investment companies take the time to understand you as an investor. Whether you’re a retiree or a conservative investor, or an investor who can afford greater risks, ensure the business is committed to understanding your investment needs.
For more information on how to invest with an experienced commercial property investment business, get in touch with Properties & Pathways today.
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