Commercial real estate investment in Jamaica is a step-up from residential real estate investment.
The strategy required to succeed as a commercial real estate investor differs from how you would approach investing in residential real estate.
It’s a strategy that involves:
- Having the financial resources to pay a larger upfront deposit
- Thorough research
- Choosing the right type of commercial property to invest in
- Finding the right team
You’ve probably already whet your real estate investment appetite with a successful residential real estate investment.
But commercial real estate investment in Jamaica is another kettle of fish entirely.
Be prepared to deal with:
- Long periods of vacancy (6 – 12 months) while finding the right tenant.
- Complex lease agreements. You’ll need a trust and experienced lawyer to prepare this document and participate in the negotiations with the prospective tenant
- Spending large sums of money on improvement projects (if required), insurance, and lending fees.
- Managing the property manager to ensure that rents are collected on time, the property is being adequately maintained, and that their charges for repairs and staff are reasonable. You should meet with your property manager periodically and have him or her provide you with status reports.
- Multiple tenants. But a good property manager should be able to handle most of the issues on your behalf.
- Lenders who may also request periodic updates. Maintain a good working relationship with them as they may be your primary source of capital for future real estate investment opportunities.
Here’s what you need to know about investing in commercial real estate in Jamaica.
Prepare to Dish Out Big Cash
The commercial real estate market in Jamaica is highly competitive. You’ll be competing with established companies, pension funds, and high net worth individuals.
These competitors will be able to pay cash and can move quickly to close good deals. You may not be in that position when you’re starting out.
That means you’ll have to make a larger down payment. Financial institutions typically ask for at least 20% of the purchase price for these types of real estate investments.
Also, the mortgage terms for these properties will be different from typical owner-occupier residential mortgages. For example, the repayment period is shorter and can range from 10 to 15 years.
If you’re a reputable investor, you may also be permitted to make interest-only payments for a specified period. This will boost your cash flow, especially when the property isn’t operating at full capacity. Commercial real estate properties tend not to operate at full capacity during the first couple of years when you’re looking for suitable tenants or working on property improvements.
Lenders prepare a term sheet that outlines the conditions of the commercial loan, and are usually willing to negotiate the terms. But, a lot more documents are required than what you would present for a residential mortgage. These documents include the:
- Cash flow projections for the property
- Market research on comparable properties
- Financial status
- Relevant experience in operating commercial properties
- Tenant agreements
- Information about your team (property manager, contractor, etc )
It’s best to get advice from an attorney, insurance broker, and tax or financial planner on the best way to structure and finance your deals, protect your assets from potential lawsuits or loss, and file taxes.
Avoiding advice could lead to you spending more cash than you should. You could even end up with huge losses and a marred reputation! It’s better to invest in expert advice rather than pinch pennies trying to figure things out on your own.
Determine your financial goals and organise your finances so that you’re in a position to take advantage of real estate opportunities.
Do Thorough Research
Spend at least two hours each week learning about the industry and the local market. There are many resources online but they may focus on international markets. So, you should try to get insights from people who work in the industry daily like real estate agents and other real estate investors.
Ask them for tips on:
- Finding good properties
- Screening for suitable tenants
- The best types of lease agreements to use
- Selecting the right property manager and managing him or her
- Maintaining and operating the property to get the best return
Your research should also include the location you’re considering for commercial real estate investment in Jamaica. Pay attention to the neighbourhood and the social amenities in the area. You may also want to consider proximity to high traffic areas if you’re planning to rent out offices or retail spaces.
Have An Exit Plan
You should also always have an exit plan in mind when investing in commercial properties. An exit plan helps you ensure that you secure the right financing. For example, if you planned to sell your commercial real estate property in five years, you may want to pay only the interest for those five years.
But your approach would be different if you were planning to hold the property. Your focus would be on locking in the best interest rate for the longest possible time.
There are three main ways to become involved in commercial real estate investing. You may choose to be a:
- Developer
- Landlord
- Private Lender
Becoming a developer is the most active form of investment because you must continuously look for properties to generate profits. This may not be the best option for you. Active investing requires a lot of involvement. You actually develop the properties and work with your team to either sell the development or rehabilitate houses for sale.
This type of investing will consume a lot of your time. Not only will you need to be involved in the daily operations, but you have to put in the hours to find the right deals and keep repeating the process.
Regardless, you have at least five main commercial real estate options to choose from whether you’re an active or passive investor. These options are:
- Retail spaces
- Warehouses or small storage spaces
- Office buildings
- Shopping plazas
- Farm land or parking lots
Passive investing is a different approach to investing in commercial real estate in Jamaica. You can become a passive investor by:
- Getting recurring revenue from rentals or lease agreements
- Purchasing shares in real estate investment companies
- Becoming a private lender for real estate investors
Recurring Revenue
It’s good to understand which commercial property types are in high demand and the best locations for each type in a small market like Jamaica. That way, you can narrow down your focus based on location, budget, and desired returns.
Also, it’s important to know how much you’ll need to get started. Shopping plazas and office buildings are typically the most expensive as they require large rentable spaces in highly desired areas to attract premium tenants.
The number of parking spaces can also make or break a deal, but the returns can be very attractive. The rents are usually based on the area of the rented space and can range from US$10 per square foot per annum for recently built warehouse spaces across the island to US$25 per square foot per annum for office spaces in highly sought after business districts in St. Andrew.
Farm land and parking lots may require relatively low upfront costs (35% to 50% of the purchase price) because very little construction is required to put them into operation. But, the annual returns will be relatively low.
Purchasing Shares in Real Estate Investment Companies
Some real estate investment companies are listed on the Jamaica Stock Exchange (JSE). They include:
- PROVEN Investments Limited
- Kingston Properties Limited (KPREIT)
- Sagicor Real Estate XFund (XPREIT)
- First Rock Capital Holdings
- PanJam Investment Limited.
Some of these publicly listed real estate investment companies are the closest to Real Estate Investment Trusts (REITs). We don’t have any REITs in Jamaica in the true sense of the word. Kalilah Reynolds described the reason for this discrepancy. She said,
“In the United States (US), for a company to be classified as a REIT, at least 75% of its income must be from real estate, 75% of assets must be invested in real estate, and at least 90% of taxable income must be paid out in dividends.”
REITs in the US also get tax benefits. That isn’t the case in Jamaica. But, the five real estate companies listed on the JSE provide a wide range of commercial real estate activities such as:
- Student rental housing
- Leasing commercial buildings
- Leasing properties in the hospitality, industrial, logistics, and retail sectors
- Developing residential properties for sale
Buying shares in these companies helps minimise your investment risk. You’re creating a diversified investment portfolio and putting your money into companies with proven track records of success with commercial real estate in Jamaica.
A word of caution though. Stock investing provides no guarantee of returns. It’s a volatile and sometimes unpredictable investment strategy. So, it’s always best to speak with a financial advisor to weigh your options.
It’s also a good idea to view each company’s financial statements for the past five years so that you can get a clearer picture of the company’s financial performance. You can view these financial statements in each company’s annual reports which can be accessed on the JSE’s website.
Become a Private Lender for Real Estate Investors
Attend real estate events and network with real estate investors and developers. Let those in your circle know that you’re interested in lending money for real estate investment opportunities.
Have a lawyer on hand who can prepare the related documents and someone who can assess the deals and the investors, if you can’t do it. Know the type of investment property and investor you’re interested in partnering with before looking at the deal.
Ask yourself these questions:
- Does the investor need to be experienced?
- Do you need to know them personally?
- What are the conditions under which you will lend?
- What terms are negotiable and which are not?
- How much are you willing to lend?
Find The Right Team for Investing In Commercial Real Estate In Jamaica
Actively investing in commercial real estate isn’t a one person job. A good team will help you to successfully build your portfolio and avoid costly financial, accounting, and legal mistakes which can permanently damage your reputation. Your team should have skills in these critical areas:
- Finding and analysing deals
- Raising the capital and structuring how to pay for the deals
- Rehabbing or developing the property
- Finding the right tenants or buyers
- Managing or selling the property
You will also need a property manager with experience in maintaining commercial properties, tenant screening, and collections.
Build your support network. They’ll help you find deals and finance them. Work at maintaining these key relationships. The people in your network should include colleagues, potential business partners, mentors, and professionals in the real estate industry.
The Risks Of Investing In Commercial Real Estate in Jamaica
Commercial real estate in Jamaica presents risks. Some of these risks include:
- Not being able to attract suitable tenants who’re willing to pay the desired rents
- Long periods of vacancy
- Default of the tenants
- New and emerging trends that reduce the value of the asset such as increase in online shopping and working remotely which can reduce the demand for office and retail spaces
- Economic downturn that reduces consumer confidence and causes widespread business closure
- Inability to secure long-term financing
- A catastrophe that damages the property making it unrentable.
The process of analysing and financing these deals is complex, but the payoff can be significant. You can double your investment, also referred to as your equity, on rehab-to-sell properties that can be completed and sold in less than one year. You can also get a 6% annual return on the cash invested on a leased commercial property.
A proper asset structure ensures that you maximise the benefits of owning commercial real estate in Jamaica. This means determining whether you own the properties in your name, put the properties in a legal trust, or register them under a company.
These benefits include:
- Use debt or other people’s money to buy an asset (this is often called leveraging debt)
- Potential tax benefits from depreciation
- Appreciation from the increasing value of the asset over time
- Revenue from rental income.
Final Words
Commercial real estate in Jamaica can be a good investment. I suggest whetting your appetite for real estate investment first though by either:
- Starting with residential real estate investment
- Becoming a passive commercial real estate investor
You could also choose both. Your choice depends on your financial constraints, mindset, and risk appetite.
Don’t forget to choose the right team and do thorough research before diving into commercial real estate investment. Neglecting either of these important steps can result in huge losses.
This article is part three of a four-part series.
Read parts one and two of the series by clicking the links below.
Part 1: Mindset Shift And Setting Financial Goals
Part 2: Buying Residential Properties On The Open Market
What concerns do you have about investing in commercial real estate in Jamaica? Let me know in the comments below.