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Emil1753

Inspired Forum Member
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Oct 11, 2009
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Here it is.This is a 45 year old 2 story mixed use building in a "Top 10 Ontario Town". Mainfloor 3000 sq ft commercial is leased to a single occupant (retail clothing store) with lease ending in 2012.On the second floor are 7 small apartments.The building is situated on a corner lot with great visibility in a "B class" neighbourhood. Ample parking is available.Rents are on the low side and may easily be bumped up.VTB is a real possibility.Here are the numbers.Asking price $588,000Purchase price $550,000Downpayment 35% $192,500
Closing costs 2% $11,000
Reno cost 5% $27,500
Vacancy Fund 1% $5,500
Total cash investment $236,500

Mortgage principle $357,500

Gross monthly rent $6,455

Expenses
Taxes $1557
Insurance $212
Maintenance/Advertising/Capital Expense Fund 10% $645.50
Management 6% $387
Vacancy 4% $258
Gas, Water, Hydro for common areas $500
Total expenses $3,060

Net Rent $3394

Mortage payment 6% w/20 year amort. $2,546

Cashflow $849 monthly

True Cap rate 7.41%



What are your thoughts?
Please be honest no matter how brutal.

Thanks guys.

Emil.
 
good analysis. In commercial tenant pays taxes? they are really low which is why it might be a good deal! too bad financing conditions are so bad. still ok cash flow. Good luck!
ps. *how many bachelors? I`ll tell you why later..
** why reno cost 5%? haven`t seen this guesstimate before. isn`t estimate usually more accurate based on actual inspection report? TX.
 
With your cash investment so high and cash flow so low there is a high possibility that expenses will push you into negative cash flow.
What percentage of the income is derived from the commercial lease?
I ask because commercial space can be very slow to lease and with the economy the way it is a lease opening in 2012 could be a deal breaker. Can you afford to go 6 months to a year with that space vacant.

Bottom line in my opinion is you will have far to much cash invested to justify the return.
 
QUOTE (Platinum @ Dec 16 2009, 09:30 PM) ..

True Cap rate 7.41%
check leases of clothing store. HIGH CHANCE OF BANKRUPTCY. Is there a personal guarantee on that lease with some networth behind it ?

Assuming $10/ft in commercial rent I arrive at 30,000 from main floor and $42,000 from 7 apartments (i.e. 6000 per) or $500/month. Is there upside ?

This being Ontario you can`t raise rents quickly, only on turnover.

This is TOO RISKY A DEAL with a single commercial tenant in a weak retail environment in a small town.

Needs to be 10% CAP to 12% for commercial space.

Consider a one year vacancy on main floor .. then what will you do ? How easy to re-rent or rent as another 5-8 units with some add`l improvements? Is this zoned for potential ALL residential ?
 
Here is another way to look at your numbers.

You are investing $236,500 cash which should give you some return simply because if not tied up in this property it would be earning a return elsewhere.
Private loans can, and do, earn 8-10%.
Cash invested in a deal should be designated it`s own income stream. A positive cash flow of $849/month is only 4.3% return on your cash investment, which is low, leaving no positive cash flow at all from the property itself.

Putting aside the high risk of this investment your money would still be far better invested elsewhere.
 
I`d like to add to the posts above. Never mind any other concerns to work through, the return is too low for the small commercial / apartment setup
 
Without going into each line item that exists on the income statement of a real estate investment, the general rule is:

If annual gross rents x 5 >= purchase price then you potentially have a solid rental property and should look further into the deal. If not, move on.
 
QUOTE (Rickson9 @ Dec 19 2009, 12:27 PM) Without going into each line item that exists on the income statement of a real estate investment, the general rule is:
If annual gross rents x 5 <= purchase price then you potentially have a solid rental property and should look further into the deal. If not, move on.

I think you meant gross rents x 5 >= purchase price (not <=).
Even with the corect symbol this means 20% annual rent to price ratio or higher which is rare.
Are you saying then that 18% annual rent to price ratio for example, is not worth further investigation?
I disagree that is just wrong. maybe change it to gross rent x 6 > price (or 16.6% annual rent to price ratio) which ia also great and more feasible. many will agree an even lower ratio is good (i.e. rent x 7)
 
QUOTE (investmart @ Dec 19 2009, 03:38 PM) I think you meant gross rents x 5 >= purchase price (not <=).

My bad. I corrected my post. Thanks.

QUOTE (investmart @ Dec 19 2009, 03:38 PM) Even with the corect symbol this means 20% annual rent to price ratio or higher which is rare.
Are you saying then that 18% annual rent to price ratio for example, is not worth further investigation?
I disagree that is just wrong. maybe change it to gross rent x 6 > price (or 16.6% annual rent to price ratio) which ia also great and more feasible. many will agree an even lower ratio is good (i.e. rent x 7)

Obviously I can only speak for myself. So yes, I am only looking for annual gross rent x 5 >= purchase price or better. I literally closed a deal this morning for annual gross rent x 4 ($36K per door; $750 p mo rent). I don`t particularly care if another investor would do rent x 6 or rent x 7.

All investors should do what works for them.
 
Hi Rickson9

The problem with using that as a formula as it would suggest that between 99%-100% are bad purchasers in nearly all major and even smaller cities over the last 8+ years... that`s unreal...
(and of course is a property with 7grm with tenants paying utilities in good shape not better than something that meets your filter where utilities are inclusive and in poor shape.. etc..)

Your implying that a purchase along the lines of a newly constructed property with minimal deferred maintenance, in a high demand area, in a major city with positive fundamentals, at a 9% cap rate is a bad purchase?
 
QUOTE (housingrental @ Dec 19 2009, 05:23 PM) The problem with using that as a formula as it would suggest that between 99%-100% are bad purchasers in nearly all major and even smaller cities over the last 8+ years... that`s unreal...

I apologize if that was the impression that my post gave. My intent was to communicate my preference of paying no more than annual gross rent x 5. My intention was not to pass judgement on what other people pay. I just don`t care what other investors pay.

QUOTE (housingrental @ Dec 19 2009, 05:23 PM) Your implying that a purchase along the lines of a newly constructed property with minimal deferred maintenance, in a high demand area, in a major city with positive fundamentals, at a 9% cap rate is a bad purchase?

I apologize again if readers feel that that was my intent.

With regards to your example, it would be more accurate to say that "purchase along the lines of a newly constructed property with minimal deferred maintenance, in a high demand area, in a major city with positive fundamentals, at a 9% cap rate" is not for me.

I assumed that my post was my opinion (and nobody else`s). I apologize if that is/was not the case.
 
QUOTE (Rickson9 @ Dec 19 2009, 03:12 PM) I literally closed a deal this morning for annual gross rent x 4 ($36K per door; $750 p mo rent).

Congrats! was it a 4-plex in the states for around 140k? ok thanks
 
QUOTE (investmart @ Dec 19 2009, 06:19 PM) Congrats! was it a 4-plex in the states for around 140k? ok thanks

rent x 5 is currently the new `normal` in hard-hit U.S. states and rent x 3 or 4 is the new `desperate`.

I`m not the most seasoned investor, but I think that it would be safe to say that rent x 4 would be difficult (if not impossible) to find within a 2-3 hour radius of where I live (or the entire province of Ontario).
 
QUOTE (Rickson9 @ Dec 19 2009, 04:00 PM)
.. My intent was to communicate my preference of paying no more than annual gross rent x 5. ..


One of the beauties of real estate investment is that there are many choices in so many property types and areas of the world ..



4-5xrent = price is an excellent metric to start with .. but may mean small town or poor part of a big city or very old property or depressed market (or all 3) .. one great way to make money if you specialize in it .. but not the only way !



I have list here a list of around 26 factors besides ratio of rent to price that should be considered .. http://myreinspace.com/public_forums/Real_Estate_Discussion/62-14548-Buy_vs_Build.html
 
Hi Rickson9
Fair enough...

I`m an awe that a " newly constructed property with minimal deferred maintenance, in a high demand area, in a major city with positive fundamentals, at a 9% cap rate" is not for you.... I`m sure if things work out for you you`ll have down very well for yourself...

QUOTE (Rickson9 @ Dec 19 2009, 06:00 PM) I apologize if that was the impression that my post gave. My intent was to communicate my preference of paying no more than annual gross rent x 5. My intention was not to pass judgement on what other people pay. I just don`t care what other investors pay.



I apologize again if readers feel that that was my intent.

With regards to your example, it would be more accurate to say that "purchase along the lines of a newly constructed property with minimal deferred maintenance, in a high demand area, in a major city with positive fundamentals, at a 9% cap rate" is not for me.

I assumed that my post was my opinion (and nobody else`s). I apologize if that is/was not the case.
 
QUOTE (ThomasBeyer @ Dec 20 2009, 01:11 PM) 4-5xrent = price is an excellent metric to start with .. but may mean small town or poor part of a big city or very old property or depressed market (or all 3)
If it is because of a `depressed market` it is great. What a person can find in the U.S. is quite remarkable.

http://tinyurl.com/ylgd5lfhttp://http://tinyurl.com/ylgd5lf

"Orlando`s distinction for falling condominium prices comes as no surprise to Winter Park condo owner David Burt. He paid $167,000 in 2006 for his two-bedroom unit at the Lancelot complex in the Goldenrod area. Three years later, he`s hoping to sell it for $37,000.

"I thought for sure there would be some kind of bottoming-out point -- you know, the point where mortgage payments would be the same as you`re paying in rent," said Burt, who recently relocated from his condo in the Goldenrod area to San Francisco. "But they haven`t. Rental prices have either stayed the same or they`ve even risen in some places. But the condo prices have just dropped through the floor."

...

"In some newer projects, units are converting back into apartments, as in the case at 55 West in downtown Orlando. And others are selling units in bulk. In November, for instance, Smith Equities Real Estate Investment Advisors of Orlando sold 640 units at Park Central in South Orlando to a Canadian buyer for $58,750 per condo."
 
QUOTE (housingrental @ Dec 20 2009, 02:41 PM) I`m an awe that a " newly constructed property with minimal deferred maintenance, in a high demand area, in a major city with positive fundamentals, at a 9% cap rate" is not for you.... I`m sure if things work out for you you`ll have down very well for yourself...

As much as 4-6% caps are common in Ontario, 10-12% caps are as common in many parts of the U.S. In good areas I might add. You can understand my reluctance to go lower than 10%. It all depends on the market you are `working`.

If the U.S. jacks their fed funds rate and the USD recovers, it would be some nice gravy.
 
I hear you Rickson9.... best of luck.....
And obviously there`s a whole bunch of challenges that go with your strategy... taxation and legal structure... financing... management and rent collection issues... further valuation decreases... (and the job losses, wage decline, population decline, etc.. that do this..)
But you`ll be smiling if the stars align...
 
I actually like and believe in Rickson`s strategy very much. The catch is - doing it right/professionally is actually very hard work!
 
QUOTE (housingrental @ Dec 20 2009, 07:48 PM) I hear you Rickson9.... best of luck.....
And obviously there`s a whole bunch of challenges that go with your strategy... taxation and legal structure... financing... management and rent collection issues... further valuation decreases... (and the job losses, wage decline, population decline, etc.. that do this..)
But you`ll be smiling if the stars align...

I can tell you that (unfortunately) I am far from the only Canuck down here...

No disrespect, but with regards to the challenges, I have heard them before. They come up in every bear market as sure as green grass in the summertime. I haven`t been investing long, but I have been tremendously fortunate in life to have experienced a number of bear markets (RE 90s, tech wreck 2000, stock and RE crisis 2007). If I graduated from University and only knew bull markets, I would be far (far) less successful. Good news has never been good... for me. Bad news is the sound of free money.

No financing. I`m using cash. Negotiating with cash gives me the leverage to negotiate very hard against any Seller. Other Buyers can`t compete if they`re walking in with offers conditional on FHA financing that will close in 3-4 months...
 
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