Office Investing Today: Where to Find Opportunities in a Changing World
The current global situation is evolving at a fast pace, with unforeseen circumstances like the Covid-19 pandemic creating unfamiliar and unexplored landscapes. It is crucial for office investors to keep a close eye on the current situation in the United States and make investment decisions accordingly. In light of this, the question arises, where does the opportunity lie for office property investing at present?
Investment-grade locations
The current global situation is evolving at a fast pace, with unforeseen circumstances like the Covid-19 pandemic creating unfamiliar and unexplored landscapes. It is crucial for office investors to keep a close eye on the current situation in the United States and make investment decisions accordingly. In light of this, the question arises, where does the opportunity lie for office property investing at present?
Solid infrastructure
The revenue generated by your office space is subject to deductions for repair, maintenance, and capital expenses. It is advisable to avoid purchasing properties that are in a dilapidated condition as they can significantly reduce your profits and discourage future buyers and lenders. Office buildings, in particular, have significant roofing and structural requirements, and a poorly constructed property can lead to continuous financial burdens. Opt for designs that are more durable and require less maintenance, such as masonry, metal, and glass. Avoid building with excessive use of wood and stucco, as they require constant upkeep and deteriorate quickly.
Credit quality of tenants
It’s not a wise decision to lease your property to tenants with questionable backgrounds for a long period of time. It’s better to prioritize properties with top-notch tenants who have a good payment history, regardless of what their business is. The ongoing pandemic has severely impacted the business industry, so it’s crucial to avoid tenants with uncertain payment abilities to ensure you can pay your mortgage.
Market timing
Timing is crucial in the real estate industry, just like any other sector. The key to success is to always buy at a low price and sell at a high price. It is important to avoid purchasing during a market peak, and instead wait until prices have stabilized. To determine the right time to invest, keep an eye on cap rates. A good cap rate for an office property is typically around 7% in a given market, so avoid buying when it is lower than that. Remember that a market correction of 20% could easily ruin your investment profitability, so it is important to be cautious and wait for the right opportunity to invest.
Safe spreads
When considering cap rates, it’s important to keep the spread in mind for your deal. The spread refers to the difference between the interest rate on your loan and cap rate, assuming an 80% LTV. A spread of 3 points will result in a cash-on-cash return of approximately 20%. Similarly, a 2-point spread will give you around 15% return, while a 1-point spread will yield approximately 10%. It’s generally advisable to aim for a minimum of a 2-point spread to have a safety net in case of any unexpected issues such as vacancy.
