AS A COMMERCIAL property investor, one of the very first thing you need is a clear set of Objectives. And you then need to couple those with a series of Buying Criteria.
Over the years, I found clients have refined those key Investment Objectives to be:
Enduring value, Ongoing cash flow, Steady growth, Super growth, Lending appeal, Future collateral, Cost control, and Depreciation benefits.
And the purpose of having Buying Criteria is to give you a basis of rating each property, as to how well those Objectives are being met.
And so, when it comes to Buying Criteria, they are:
Tenant calibre, Lease term, Recent construction, Flexibility of design, the Lease structure itself and the Absence of competition, Good position, Emerging trends, the Passing yield, the Council zoning, Title options and Vendor motivation.
And the key used to determine how well each property performs against each of these Criteria. Perhaps the easiest way to picture their inter-relationship is to combine them into a simple matrix. Here’s an example …
As you can see, the top of the square covers your 8 Investment Objectives; then down the left-hand side, you have your 12 Buying Criteria.
And you’ll notice that I have ranked these Buying Criteria in the order in which they best meet your Objectives.
As such, the first 5 (being tenant calibre, lease term, recent construction, flexibility of design and lease structure) help meet 7 of your 8 Investment Objectives.
You’ll also notice they don’t meet all of the same Objectives; but they address 7 out of 8. That is why they are listed as the top 5 of the buying criteria.
In other words, tenant calibre meets all of your Investment Objectives except for depreciation benefits. And it’s the same with lease term.
Whereas, recent construction meets all of them including depreciation benefits; but not super growth. And flexible design does not meet is lending appeal.
Anyway, turning to the next 3 buying criteria (absence of competition, good position and emerging trends) you’ll see they meet 6 out of 8 Objectives. They do not meet the last 2 (of cost control and depreciation benefits); but they do meet the other 6.
When you come to passing yield you find that it does not really help meet steady growth, cost control or depreciation benefits. And when you get to council zoning, that meets 4 out of the 8 Objectives.
Title options will only meet 3 of your Objectives; as does the vendor motivation. That is why they’re ranked as low as they are.
To Make Everything Easier …
What I have done for clients is create a FREE App known as the HiReturn Filter. And by using this, you can very quickly rate how will each of your Investment Objectives are being met. (To download your copy, just click on the image to the left.)
As I mentioned, the various Buying Criteria vary in importance; as such, they are given different weightings.
Therefore, even though there are 12 Buying Criteria (and despite you rating each one 10 out of 10) … the overall total will only ever be a score of 100. And that’s because of the different weighting given to their relative importance.
The ones at the top of the list have a higher weighting; and the ones at the bottom have a lower weighting.
You Need to Remove the Emotion
What I teach clients is that this process is rather like when you interview people for a position in your firm. You tend to remember the more attractive applicants; or the details about the last one or two people you interviewed.
And invariably, your ultimate judgement could become more subjective, rather than objective.
By using this matrix approach, you are able dispassionately to rate the Criteria (out of 10) as to how well they have been met. And that means you will always end up with an objective assessment for each property.
My rule of thumb is … unless the property achieves a rating of 70% or better, it doesn’t end up on your shortlist.
In other words, the HiReturn Filter allows you to very quickly assess each property on your iPad – either form your office or sitting outside in your car – to quickly come up with a rating. And in so doing, you have a simple way to decide whether or not the property makes it onto the shortlist – for further assessment.
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