patrick.net

When I bought land I spent a lot of time researching this stuff, eventually spoke with a CRE broker who helped me out. So I'll pass on what I've learned.

Cap Rate is 14% for your building but that's NOT including operating costs... just the price.

You would have to price in vacancy loss, property taxes, debt service, insurance, management costs, repairs... to get the true Cap Rate.

So do your research first. Go to a commercial mls like loopnet.com and look up at cap rates for local CRE of the same type. Don't expect cap rates for a place with 500 units to be same as one with 5.

If your cap rate is way below others, the place is not worth buying. If it's in a ball park... just figure out if it's profitable. CA is usually not profitable, it's all speculation. In other states you can actually buy CRE and make some marginal profit.

Commericial property are always represented as cap rate.

Cap rate is a funton of location and building condition and overall market condition.

An A location, A condition property may realize a 4% cap rate and it may be considered a deal.

An C location, C condition property may have a 14% cap rate and may be a total dud.

So just basing whether a property alone is a deal based on cap rate is totally useless without the underlying reasons. The property with the highest cap rate is the ones you show be worried about. duh. For example, if you owened a house in Palo Alto in 2000, the cap rate may be 3% while a home in Vallejo may be 25%, well you just made a million dollar mistake going with the 25% cap rate.

Fixed cost. In any business, I am interested in projecting the fixed and permananet cost. In Texas, the fixed cost may be astronomincal based Texas size things to maintain and huge unavoidable property tax. Especially if the fixed cost makes up a high % of your revenue. It is the primarly reason why Texas is expensive. You get my drift. Property that has low fixed cost as a percentage of revenue are coveted and command a higher price tag, duh.

Then there is understanding the rent and nuance itself. Is there potential. Are there short term leases. Are there rent shifting. For example, a mall owner offered a tenant 600K in cash to renovate a location and sign a 10 year lease, but you know the tenant allowance is built into lease and inflate the rent and cap rate. These are things you need to understand in order to evaluate whether it is a deal or a dud.

So many more things, but can't cover them all.

Errc,

Real estate is local. You have to look at the selling cap rate for something equivalent to this 5 units in your area to determine its value. What is the vacancy for the building? What is the local vacancy rate? Who's paying for utilities? Are there deferred maintenance? Can you get a copy of the Schedule E from your friend for the last couple of years? That should give you a better picture about the building and its cashflow. If it's a cash cow, why is your friend selling it?

There are a couple of rule of thumbs that are being used for investment properties. It's the 2% rule and 50% rule. Google them. These rules are typically not applicable to properties along the coasts.

I will add my 2 cents...

This is a mixed residential/commercial building -- I don't know how this works for the loan or the value calculations, but from the management side of things it complicates issues. I don't want to overstate it, but the leases and expectations for commercial properties/tenants can be different compared to residential. For office space there is ofeten base rent + maintenance + insurance and taxes (google "triple net lease"), but this can vary. Also a successful commercial tenant will provide a stable income stream with no vacancy for long periods of time, but once vacant a commercial property can become a nightmare. Obviously there are a lot of factors at play here, but consider that it can be hard to find a business that is suited to the space you have, successful enough to be able to pay the rent, but not so successful that they outgrow your space.

The numbers look good to me assuming "reasonable" taxes, vacancies and maintenance costs. Near where I live/work in Denver it would be worth significantly more than $244k. Maybe double.

How does financing work for something like this?

Would I need to have 20% CASH down payment?

It seems like such a no brainer, if I can assume that the PITI works the same as it does with residential RE.

But how is profitablity affected by the bump in taxes id be subject to? I imagine there's plenty of gimmicktry one can utilize as far as taxes go, but that has to be one of the considerations.

Hypothetical:

Can circumvent a realtor, and the subsequent commission. Seeing as how building isn't actually for sale, just throwing around ideas with a friend, to help one another.

The 244k appraisal is a year old, so let's say it appraises for 250k today.

Let's say he would accept an offer for 235k

Every unit being currently leased.

3 - 1br apt @ 450
1 - 2br apt @ 550
1 - retaill shoppe @ 1000 (3 yr lease)

Do I need to plunk at least 35k as a down payment, in order to get to 80\20, or does this work differently being that the units are leased and the building cash flows?