Any commercial RE players here?

turbo6bar · 01-09-2007, 06:53 PM

I do the single family rentals exclusively, but I'm thinking of moving onward. I've been scouting timberland (not quite commercial), small retail space, office space, and car washes. You can't get a heckuva lot for under a million these days. The CAP rates range from 5 (yeah right, buddy) to a more respectable 10-11.

Despite double digit CAP rates on what appear to be quality properties, I'm still apprehensive. My fear is due to the residential housing bubble. On the other hand, I'm not certain the carnage will spill over into commercial RE fully. After all, declining or flat housing prices won't necessarily mean the dentist or CPA is forced to close shop and leave office space for good. I think worst case scenario is an overbuilt marketplace that will keep rents flat, meaning I won't see any appreciation or income growth.

I'm sitting on a small cartload of cash, so I'm motivated (bad place to be), but at the same time don't necessarily want to piss away some bucks for the thrill.

If you guys know any good web sites, I'm game.
jurgen

1973911s · 01-09-2007, 07:51 PM

What part of the country?

Dantilla · 01-09-2007, 08:33 PM

PM sent.

PeteBrown · 01-10-2007, 04:12 AM

My business is institutional real estate consulting for some of the largest pension funds in the world. Despite all the headlines, there are two distinct markets in real estate. Retail, or single family housing, which is in a slowdown and institutional, which is is experiencing growth in underlying fundamentals and capital flows.

turbo6bar · 01-10-2007, 05:24 AM

I am in the Memphis, TN area.

Wayne, I do believe there is definitely speculative elements in commercial. The cheap money has certainly created some awfully low returns. In my area, there is an abundance of vacant retail space. I'm not so keen on that segment, because it's likely to take a big hit when the housing slowdown reaches full effect. There are a few nice properties anchored by national chain stores (Sherwin-Williams, Walgreens, etc), but I am not prepared to make a move on $3-6 million properties.

I work out that I can earn about 12-15% cash-on-cash return with a CAP rate of 10. The alternative is waiting out the single family housing bust. Assuming housing depreciates by 2-3%/yr (a very realistic bet since I play in foreclosures) and 5% in high-yield savings/treasury bonds, my do nothing return is 7-8%. That isn't a terrible low-risk move.
jurgen

artplumber · 01-10-2007, 06:18 AM

Doesn't Motion play the flip and rental games? (not commercial)

rammstein · 01-10-2007, 08:35 AM

I want to send you some options. PM me your requirements.

Here's what I need to know-

1. Are you looking to stay local? If not, how far will you go?
2. From the way you have described what you see, I would guess you are looking for turnkey properties, in other words properties that are up and running, not value-added type deals that start at a low cap.
3. You mentioned retail and office. Is this where you see yourself going to?
4. How much are you looking to put down, and how much are you wanting to leverage it?

As for the marketplace, commercial is not going to see the same pains that residential has. That being said, the cheap money did lead to some questionable investing and there's always going to be risk. If you are sitting on a cartload of cash, you could always get out now too, and take the gains hit of 15%. Gains tax will probably never be lower than that. You're right for your caution, you aren't in a bad position as it stands. Finally, watch out for the underwriting you see on listings- I've seen some pretty ridiculous claims (8 caps that should be 5s). But it sounds like you have a good handle on things- pm me if I can send you some options.

Dantilla · 01-10-2007, 08:58 AM

Quote:

Originally posted by rammstein
I've seen some pretty ridiculous claims (8 caps that should be 5s).

I'm looking at a few pieces right now as part of a 1031 exchange. While cap rate is important, it is more important to find out if the cap rate is based on actual, or pro-forma numbers. Quite a few brokers are painting pretty pictures with their numbers.

I've been looking at NOI and then figuring out the debt service with a mortgage calculator to see actual cash flow. sometimes my calculated cash flow is quite a bit different from what the cap rate would suggest.

turbo6bar · 01-10-2007, 09:02 AM

I'll drop you a PM.

I will actually be taking a capital gains hit on properties sold. I despise the 45-day ID rule for 1031 exchanges, so I decided to just pay the tax and have more freedom.

Anyone have historical info on cap rates? Are we in a historical trough? Hypothetically, I think there would need to be cap rate expansion IF interest rates rise. After all, I still believe investors will desire a positive cash flow, and rising interest rates will reduce that cash flow. I anticipate the risk of rising rates is stronger than the windfall of falling interest rates, and that is the crux I sit inside at this moment.

Jurgen

Dantilla · 01-10-2007, 09:04 AM

Quote:

Originally posted by turbo6bar
I still believe investors will desire a positive cash flow,

Cash flow is king. That's the entire reason I invest in real estate.

turbo6bar · 01-10-2007, 09:04 AM

Dantilla, what financing structure are you using in your calculations? I am using 20 yr amortization @7.0%. I am assuming minimum 20% down payment.
Jurgen

rammstein · 01-10-2007, 09:05 AM

Quote:

Originally posted by Dantilla
I've been looking at NOI and then figuring out the debt service with a mortgage calculator to see actual cash flow. sometimes my calculated cash flow is quite a bit different from what the cap rate would suggest.

Where things really go wrong with what brokers "paint for you" comes in the expenses. When you buy a property, the taxes you pay will be higher than the current owner. The current owner might be "self-insuring", whereas you plan to pay insurance. Be sure to calculate your own expenses.

turbo6bar · 01-10-2007, 09:06 AM

Exactly. Cash flow is KING, which is why I am shunning residential and looking towards commercial.

rammstein · 01-10-2007, 09:09 AM

Quote:

Originally posted by turbo6bar
Dantilla, what financing structure are you using in your calculations? I am using 20 yr amortization @7.0%. I am assuming minimum 20% down payment.
Jurgen

If you have a price-point and basic property-type in mind, you should be able to get soft-quotes from a lender in the area to give you a rough idea of how to proceed.

turbo6bar · 02-18-2007, 08:22 AM

Anyone know about gas stations or know RE forums where I can get advice?

A local businessman placed 5 of his 6 gas stations up for sale. These were built in the late 70s and are not affiliated with a national chain.

I keyed on one station that is in my immediate area.
Some numbers from loopnet (my numbers in parentheses):

Inside sales $152k/mth (conservative 3% profit margin = $4500/month)
Gasoline sales 80k gallons/mth (4 cents/gallon profit = $3200/month)
Lottery sales $22k/mth (no idea what profit is here)
Check cashing service $434k/mth with 2.5% service fee ($10850/mth)

Owner is offering sale at $839k or NNN lease at $9000/mth

I presume management is already in place, as the owner cannot possibly manage 6 gas stations by himself.

Critical issues:
1) environmental - must get Phase 1 and probably Phase 2 environment assessments
2) labor costs (this will be the biggest expense)

On the flip side, I am pursuing a 2 acre lot in an adjacent town that would be ideal for a mini storage complex. The potential return is much greater, but would burn more up front money.

Anyway, the deals seems to be there, but they certainly aren't falling off trees.
jurgen

Porsche-O-Phile · Porsche-O-Phile's Garage

I agree completely with Wayne and although I deal with this stuff more on the construction side than the RE side, I do deal with it a little.

Gas stations are not a good way to go - especially out here. I could tell you absolute horror stories about UST compliance efforts I had to go through with my former employer. In CA, trying to do fuel storage is a surefire way to spend an absurd amount of money. If you're trying to pull a UST permit in the City of L.A., you better have many tens of thousands of dollars and at least a year (yes, a YEAR - you read that right) in some cases, just to pull a permit.

Good luck.

Dantilla · 02-18-2007, 12:56 PM

Quote:

Originally posted by turbo6bar
1) environmental - must get Phase 1 and probably Phase 2 environment assessments

Even if the lender did not require it, I would as a buyer insist on at least a phase two as part of due dilligence.

berettafan · 02-18-2007, 05:34 PM

Be careful in the commercial market. Lots of 'dumb luck' money getting thrown into commercial properties and the sharks have figured it out.

Trust noone and do your own homework. The commissions involved in commercial real estate are a powerful drug that attract lots of dishonest people.

motion · 02-18-2007, 07:11 PM

Quote:

Originally posted by turbo6bar
I do the single family rentals exclusively, but I'm thinking of moving onward. I've been scouting timberland (not quite commercial), small retail space, office space, and car washes. You can't get a heckuva lot for under a million these days. The CAP rates range from 5 (yeah right, buddy) to a more respectable 10-11.

Despite double digit CAP rates on what appear to be quality properties, I'm still apprehensive. My fear is due to the residential housing bubble. On the other hand, I'm not certain the carnage will spill over into commercial RE fully. After all, declining or flat housing prices won't necessarily mean the dentist or CPA is forced to close shop and leave office space for good. I think worst case scenario is an overbuilt marketplace that will keep rents flat, meaning I won't see any appreciation or income growth.

I'm sitting on a small cartload of cash, so I'm motivated (bad place to be), but at the same time don't necessarily want to piss away some bucks for the thrill.

If you guys know any good web sites, I'm game.
jurgen

REITS - Leave it to the experts.

Jurgen, its too late for commercial/retail. Its the new residential. Check into the REITS. Find a good manager and start feeding him small chunks, say $25K or $50K. Develop trust in him and knowledge for you. When things implode in a year or two, you'll have the knowledge to go out on your own and find some deals. Commercial/Retail are for the big dogs. You had better be prepared to play or else. You're a smart guy. I know you'll catch on soon

turbo6bar · 02-18-2007, 07:25 PM

I am definitely being apprehensive.

My gut tells me the gas station could be a great cash cow with a bit of risk (environmental issues can be disastrous). Building a mini storage on raw land will take more time and be cash flow negative for a while, but then I have total control from day 1.

On the horizon, though, the market is starting to bleed a few single family foreclosures at reasonable price levels (still not good buys, yet). Options are good.