What RATE OF RETURN for commercial properties? - Posted by tryandtryagain

Real Estate Investing Industrial
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Posted by Terry on April 03, 2008 at 19:20:34:

If you are just going to go out and buy something, then the returns aren’t that great and personally I would rather play the stock market. No one gives away money and like Ray said in his previous response, it depends on the amount of work and risk involved.

I am currently on my third deal that should return 100% of my money invested in approximately a years time. Call me lucky, but the deals were all hard work to wring the value out of them. I am writing about them in my new blog at www.myactualprofits.com/wordpress if you are interested.

Personally, I won’t look at a deal unless I think I can get a 8% cash on cash average and a 20% IRR over the hold. Not worth the effort to me personally.

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What RATE OF RETURN for commercial properties? - Posted by tryandtryagain

Posted by tryandtryagain on March 24, 2008 at 10:07:19:

As a rule, what kind of return do you seek from commercial properties - 15%, 20%, 25%, more? Obviously, if you can find better return you’ll take it, but at what point is your desired return so high that you’d rarely ever find deals?

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My two cents - Posted by ray@lcorn

Posted by ray@lcorn on March 25, 2008 at 12:15:22:

This is a question that comes up quite often, and the range of answers is as broad as the universe of investors.

In my opinion, the ROI is misinterpreted as a measure of deal viability, or at least for the way I size up investments.

In my view, the acquisition cap rate is a starting point. Beside the fact that it is hard to figure out which cap rate is being quoted; i.e. last calendar year, potential vs.actual income, first year operation, etc.; in the best case it is nothing more than an estimate of the first year return.

Since I rarely buy a property with less than a three year hold period, what matters more than the entry cap rate is what I do in the hold period to create and capture upside. As I work the plan, the income and the value increase. So after the first year the operative measure for me is ROE, return on equity.

I’ve done deals with a 0% scheduled first year return, or even a loss. But over a three to five year hold we put our investment plan into action, in which our rule of thumb is to get back 100% of our investment (down payment + CapEx) within the three to five year time frame. So while my first year return may be very low, later years may jump to 20%+. Once the original investment has been recovered through either cash flows or a cash-out refinance the ROI becomes infinite, hardly a measure of performance. At that point the ROE reflects a measurable parameter of performance and forms the basis for deciding when to sell, refi or hold further.

What does influence what is acceptable for the first year return is the amount of risk and effort it takes to achieve the plan. For a property that requires little improvement and is essentially a coupon clipper, the first year return is likely indicative of future years as well. But for properties requiring work, like turnarounds, distressed situations or redevelopment, I structure the deal for the long term gain rather than the first year return.

But that’s just me, and many others use different approaches, all of which can be right for that investor.

ray

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Re: What RATE OF RETURN for commercial properties? - Posted by john

Posted by john on March 24, 2008 at 20:37:30:

Your rate of return depends on risk (just like stocks) If you were to buy a prime piece of property with no landlord responsibility then your rate of return would be low like 5-6% cap. If you bought an apartment complex with lots of landlord responsibility(I.E. fix toilets, management etc.) in the middle of nowhere, then your risk and time is hire so you should look at a rate of 10% or higher.

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Re: What RATE OF RETURN for commercial properties? - Posted by tryandtryagain

Posted by tryandtryagain on March 25, 2008 at 08:29:02:

I guess I’m trying to determine when a good deal is a good deal and how often I can expect to come across one. I know that varies for each investor. I’m a small commercial investor so a 5% cap rate is pointless to me. I need properties closer 9%-12% cap rates to make any money. I don’t want apartment buildings. Just retail, office, and industrial type properties. The MLS is full of 7%-8% cap properties. What kind of returns/cap rates can I expect from “pocket listings” and actual good deals?

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Re: What RATE OF RETURN for commercial properties? - Posted by john

Posted by john on April 04, 2008 at 04:47:09:

The good deals you will have to find on your own or at least negotiate with the 7-8% MLS listings. Nothing is going to be handed to you, you will have to create your own deals. Remember it’s a buyer’s market so you have some room to negotiate.