Posted by john on March 13, 2006 at 16:33:40:
Tom,
I’m from Falls Church, VA and I see you might be from Maryland. Do you know of any good commercial brokers in the area I can talk to, and also any good commercial loan officers that you have experience with. Thanks.
How can I get a 15% return? - Posted by Mike
Posted by Mike on March 07, 2006 at 08:09:07:
Hi.
I’m very experienced with SFH. I’ve done rehabs and rentals for the last 6 years. I don’t think I’ll stop looking for bread and butter houses. But, I really want to start creating an income stream. Houses don’t cash flow much. Rehabs are great, but very stressful and the cash is inconsistent. Commericial seems like the best alternative for achieving cash-flow as well as equity buildup and appreciation. I’d like to shoot for around 15% annual ROI, but, in my area, I have the same gripes as many of us here. Prices are somewhat out-of-line to achieve anywhere near 15%. I’m specifically talking multi-units. NNN seem to be even lower returns.
What are many of you doing to boost your returns? What is your investment vehicle of choice? Are you just accepting a lower return and living with it?
thanks.
I have to ask??? - Posted by Todd T
Posted by Todd T on March 09, 2006 at 10:10:50:
Why does everyone on this post think that commercial RE appreciation is over??? I don’t get it. If income goes up…price goes up…therefore appreciation?
Todd
Re: How can I get a 15% return? - Posted by ray@lcorn
Posted by ray@lcorn on March 08, 2006 at 20:44:02:
Mike,
Return is all about deal structure. See this article for insights on how to structure a deal for your miniumum return criteria: http://www.real-estate-online.com/articles/art-216.html
For example, using 15% ROI and a 75% LTV loan with terms of 8%, 20 year amortization, the minimum cap rate you can pay is 11.28%. (Note: when using cap rates for valuation be VERY sure that you have VERIFIED the NOI. That’s a biggie… if the NOI is wrong then so is the value, and the error is magnified by a factor of ten.)
However, if you change the structure to include a 10% seller-held second at 5% interest 30 yr am, with 15% down, the cap drops to 10.45%
Keep tweaking and you’ll see the possibilities are endless… for example, with the same loan terms as above, change the percentages to a first at a 65% LTV, a seller second at 25% LTV, leaving 10% as your cash investment, and the minimum cap is 9.63%. See what I mean?
That’s why there’s an old adage in this business of choosing price or terms… I might be willing to give a seller his price if I can name the terms, or vice versa. It’s all in structuring the deal to give all parties what they need or will accept.
And finally, don’t get so hung up on the going-in return. If you understand the concept of forced appreciation, then your plan for the property will provide 100% or higher returns over a three to five year hold, no kidding. The key is to buy at price and terms that ensures there will be no LOSS while you’re putting your plan into effect. I bought an office building a couple of years ago that had a first year projected return of 12%. ($1.1mm sale price, $75T cash down; $925T bank first; $100T seller-held unsecured note, interest only, fixed at 4%). We filled the vacancies in six months and now have an ongoing positive cash flow of over $30,000 per year.
ray
p.s. I’ll be teaching deal structuring and more at the CRE Online convention. Early bird registration expires 3/15. See http://www.real-estate-online.com/convention/index.html
Re: How can I get a 15% return? - Posted by john
Posted by john on March 08, 2006 at 13:24:08:
I think 15% return is a bit aggressive for commercial. I too want to increase my rental income, because I think the appreciation days are over. I am trying to take my residential properties and put them into a commercial property, but I’m more interested in one tenant that takes care of the triplenet, so my involvment is limited with expenses and managment.
Send me an E-mail if you want to chat.
Re: I have to ask??? - Posted by john
Posted by john on March 10, 2006 at 10:44:00:
Todd,
No one has a crystal ball, it’s just my personal opinion that the good times are over in appreciation. My only theory to back this up is that the rise in interest rates will produce less buyers. Less buyers, means less demand, which means flat or declining values depending on the area you live in. I think we all realize that long term we will most certainly have appreciation, but it is not unrealistic to expect a period of no appreciation. You can’t predict the rate of future appreciation, but you do have control over signing up a longterm tenant that provides a guaranteed net monthly income.
Re: I have to ask??? - Posted by Mike
Posted by Mike on March 09, 2006 at 10:19:29:
Todd,
I never suggested commerical appreciation is over. No doubt value is tied to income. I suppose if we have more supply of renters in the coming years, then rents should rise, thereby increasing value.
I’m just looking for cash flow now and not counting on appreciation.
Re: How can I get a 15% return? - Posted by james
Posted by james on March 15, 2006 at 18:54:26:
Hi Ray,
Based on your number, you put about 7% down. Is it typically required 20% down payment in general? Most of the time on my opinion, a seller or agent will ask to see if you have +/- 20%? How does one answer the question (how much you want to put down) strategically(even though you want to put small or no down payment), without them thinking you don?t have much cash reserve?
Re: How can I get a 15% return? - Posted by Mike
Posted by Mike on March 08, 2006 at 13:36:18:
Thanks for the response John.
Perhaps 15% is a little high. I guess my thinking is with a 20-25% down payment and mortgaging the balance at 8%, it would take a 10cap property to give 14-15% ROI. When searching loopnet, there seem to be plenty of properties at a 10cap or better. Granted, this is with the numbers they are listing. I understand that the listed figures are usually not reality.
I’m not looking for a turnaround project. Just, something already up and running. What’s a reasonable ROI expectation that I should have?
Thanks.
Re: I have to ask??? - Posted by Eli
Posted by Eli on March 21, 2006 at 23:47:02:
I dont know what you are talking about here, in comercail real estate YOU have more control over the apprecaition, you are not at the mercy of the local appreciation. It is true you are at the mercy of other market forces like declining rents, but if you buy right that should not matter.
If you buy a building at a 6 cap and keep it for 3 years you might then be able to sell it at a 6 cap. so you might not get any appreciation. but why would you do something stupid like that (paying market)?
What if you bought at a 10 cap today and hold it for 3 years and add some value by increasing rents and decreasing expenses. Then even if the market rate is 11 cap you will still have apprecaiton because YOU created it. Apprecaition is there for YOU to create not for you to sit back and wait for like it is in SFH’s. If you bought a few houses in Pheonix a couple years ago and you are up $100,000 each good job, but that is not the way it works here per se. Yes we all enjoy the appreciation that comes but the real investors FORCE the appreciation… The “free” appreciation is nice but dont count on it, just enjoy it when it comes.
And by the way YES it is still possible to find 10 plus CAP rates, I found a 19.83 cap TODAY in fact and I passed on it because it was too small for me to bother with) It was only netting like $30,000 a year.
Re: How can I get a 15% return? - Posted by ray@lcorn
Posted by ray@lcorn on March 15, 2006 at 23:08:58:
James,
That was a case of the seller needing to get out of the property, and we assumed the existing note. In fact it was the banker who brought us the deal because the seller was having problems. The banker needed a white knight to save his loan, and agreed to restructure the terms to provide us a worst-case breakeven deal.
In general a lender wants to see the buyer have “skin in the game”, typically defined as at least 10%-15% equity. But that’s subject to the limitation that banks cannot lend over 85% of cost or value, whichever is lower, and minimum debt coverage ratios, usually around 1.25:1 on the NOI after management expense. That’s why seller carrybacks at favorable terms are so prevalent. To answer the strategic question of how much to put down, it’s as little as possible without overleveraging the deal, defined as less than worst-case breakeven. That’s if you’re trying to get the highest possible CoC return… there are cases where that isn’t the goal, but that’s another post.
And as always, finance terms depend heavily on the financial strength and experience of the borrower, and the specific circumstances of the deal. One of our posters here, (CarolFL in the archives), used this same approach last year to buy a $1.1mm apartment complex with about $9,000 out of pocket. She was able to name her terms on the assumed loan and the property had positive cash flow from day one. The deal got done because she had a good track record with single-family rehabs and rentals in the market, sufficient net worth, and a plan to turn the property around.
ray
Re: How can I get a 15% return? - Posted by john
Posted by john on March 08, 2006 at 14:06:45:
What is loopnet? anyway, I think it depends on the area you are willing to invest. In my area I’m looking at 5%-8% (Washington D.C)
Loopnet.com - Posted by brandoncbsre@lycos.com
Posted by brandoncbsre@lycos.com on March 09, 2006 at 16:36:02:
Loopnet.com is a commercial investors candy store. Nationwide MLS for commercial, check it out.
Re: Loopnet.com - Posted by john
Posted by john on March 09, 2006 at 19:36:36:
Is Loopnet the biggest MLS listing for commercial?
Re: Loopnet.com - Posted by Sam
Posted by Sam on March 17, 2006 at 09:52:45:
John,
I’m in Loudoun County, I can put you in touch with some good people, send me your contact info.
Re: Loopnet.com - Posted by TomC (Md)
Posted by TomC (Md) on March 10, 2006 at 15:35:41:
Yup, and they have been so successfull that LoopNet will issue an IPO and go public later this year.
Regards,
TomC
Re: Loopnet.com - Posted by DONDON65US@AOL.COM
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