All commercial real estate deals have a factor of uniqueness which 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.
Multi-family and hospitality
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 these singular uses. They are constructed in a very purposeful manner which makes those improvements useless to most other businesses.
Zoning will also have an impact on future use for the site.
Multi-family can be situated adjacent single-family homes. The odds of getting that rezoned to anything else are slim to nil.
Hospitality will typically be located in commercially zoned areas, so it would be less affected but might 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 in which to invest.
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 your research. A multi-family property in a gentrifying neighbourhood will have vastly different performance abilities when compared to 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 are just a few:
- Average Daily Rate (ADR) – What is the hotel/motel achieving for an average daily rate?
- Occupancy – What are the historical average monthly occupancy percentages?
- Renovations – What has been renovated, when was the work 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? Some of the highest returns in our industry.