How to Investigate Cash Flow in a Commercial Investment Property

When you are considering the purchase of an investment property on the Gold Coast or in Brisbane, it is wise to gather the facts about the cash flow and future opportunity for the property.  You can do a lot of that research yourself before you bring in the ‘experts’ to help you move ahead.

There are things to look at so you can then balance the property opportunity against any risk that you may also identify with the property.  You can even do a SWOT analysis if that suits the diversity of the property and your ‘time-lines’.  Most properties have ‘risk’, but they also have ‘opportunity’ to be taken in balance.

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Review all property facts and details.

How Do You Start?

Where do you start with this?  You may know the type(s) of property that you prefer to invest in, but that is just the beginning of things.  Will the property support your income requirements and investment plans?  Let’s go a bit further on that.

Here is a checklist of some of the more significant issues to look at when you find an attractive property; you can add to this list based on your focus, the property, and the location. 

Splitting Up the Property Information

As a ‘golden rule’, do not move on the property purchase until you are comfortable with all the facts that are provided to you.  Here are some thoughts on that:

  1. Current tenancies – visit the property first to get a ‘visual’ perspective on the tenant mix and the layout of things.  Then you can assess the existing tenancies, the businesses, and the combination of tenants as they support each other.   The tenant mix assessment is a big part of retail property review and planning.  Shopping centres are a case in point.
  2. Vacancies – if the property contains several tenancies, then look at the existing vacancies and determine the chances of leasing the space in the coming six months.  Is space ‘prime’ or ‘secondary’ when it comes to business position, layout, and presentation?  Extended vacancies can strain the investment potential of a property, so it is worth considering in greater detail.
  3. Upcoming vacancies – these will be driven by lease expiry dates in the existing tenant mix.  Review the leases and look at the expiry dates inside the next 18 months.  You can then assess or discuss the leasing of the space with the existing tenants and or external leasing agents.
  4. Lease supported rents – this is the income stream and the ways it can create cash for the property owner over time.  Lease rents can be gross, or net rents and the difference will be the outgoings for the property and how they may be recovered.
  5. Income and expenditure – these numbers will be ‘current’ to a financial year and an existing property budget or business plan, so explore them and identify any strengths and weaknesses in the cash flow.  You can compare the expenditures to similar properties in the location, so you know that the ‘averages’ apply.  You can compare the rents collected to the actual market rents; in doing that, you will know if any tenancies are paying above or below-market rents.  The question is then if the matter will be a ‘pressure point’ at the next rent review with the tenants concerned.
  6. Third income streams – these are extra rents that you can obtain from the property and the other areas such as storage, antenna space, signage, car parking, and licenced outside space.  If you can identify those extra income streams, ensure that there is some format lease or occupancy document that supports the process of occupancy.
  7. Lease documentation – look at the occupancy documents in detail as they are the supporting process for occupancy, risk, investment performance, and tenancy interaction.  Check the leases against the inspection findings that you achieved in looking at the property.  When in any doubt, take photos of what you are seeing or worried about so you can ask more questions.  Always seek the fullest summary and supporting documentation of all leases and tenants.
  8. History of the asset – it is always nice to know the history of the property and just what has happened in the investment over the years.  Get a full set of ‘as-built drawings’ of the property as part of any purchase contract negotiation, as they will come in handy when tenant changes or property upgrades are required.
  9. Capital works programs – these are the more critical items of maintenance that may occur once every few years or more.  They are also and generally reserved for items of essential plant that may need replacement.  In any older buildings, it is wise to get an engineer and a quantity surveyor to give you a full assessment of the spending requirements of a capital nature over the next five years for the property you are interested in.

So all of these issues will help you understand the tenancy variety. They will also help you know the stability of the cash flow for the property.  From all of that, you can take the next step in moving towards the purchase or negotiation decision.  When in any doubt, ask more questions. 

Take plenty of notes in your property selection and investigations.  Check all information and question anything that seems to be missing.  A due diligence process is also helpful when you get to the time of going to contract on a property that you like.

If you would like more help on property purchasing or sale in Queensland or on the Gold Coast, Please call John Highman on 0417221108