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?

Not an expert here, but my understanding is that loans for rental investments are harder to get than they used to be. Things may have improved in the past year or so, but a friend told me that he needed 25% down for a loan on a rental property. If you plan to live in one of the units, you may be able to qualify for a more traditional owner occupied loan (lower down payment requirements and better rates, most likely). The commercial unit might prevent that, though.

Also, in terms of qualifying for the loan, you may not be able to count the rental income for purposes of debt to income ratios. I have read/heard that they sometimes want to see some history of being a landlord to consider rental income. Additionally the rental income may be discounted (I think I have read 70% of gross) for the purpose of qualifying (ostensibly to account for vacancies, maintenance, changing market conditions?)

If you have been a diligent retirement saver, consider using a 401K loan to get the down payment. Consider rolling everything over into a self directed IRA and buy the building outright.

Edit: I just realized that it has 5 units total...probably can't qualify as owner occupied even if you did choose to live there.

FortWayne says

CA is usually not profitable, it's all speculation. In other states you can
actually buy CRE and make some marginal profit.

Yeah where I moved, there is hardly any appreciation at all. So one has to look at-for lack of a better word- fundamentals. How much it costs to buy, how much it costs for maintainance, how difficult it is to get tenants, how long it takes to sell when you don't want to do it anymore etc. etc.

It is not like CA, where you buy for 400k and next year it is 500k. But again it doesn't crash as much either.

errc says

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?

This will be a commercial loan. You will likely have to put 25% down and go with a 5/1, 7/1 or 10/1 ARM with 25 years amortization. Given the small loan size, the interest rate will likely be high. In the 6% would be my guess. I don't think the DSCR will be an issue given the above numbers. Lender typically requires a DSCR of 1.15 - 1.25.

Appraisal will be expensive. Inspection will be expensive. Loan fees and origination will be expensive. Talk to a commercial lender or two to get an idea how commercial loan works. It's a totally different animal compared to residential.

https://www.bizjournals.com/sanfrancisco/news/2023/01/19/meta-san-francisco-sublease.html

Meta dumping nearly half a million square feet at San Francisco high-rise
Laura Waxmann Jan 19, 2023

After months of speculation, it's official: Meta Platforms Inc., parent of Facebook and Instagram, is significantly reducing its real estate holdings in San Francisco, listing one of its two offices in the Transbay District on the sublease market.

Meta (NASDAQ: META) confirmed Thursday it is seeking to shed 435,000 square feet at 181 Fremont St., a mixed-use high-rise next to Salesforce Transit Center. Real estate services firm JLL is charged with handling the listing, the largest single available sublease in the city.

The building, which features high-end condominiums on the upper floors, is owned by Jay Paul Co. Its offices are primarily occupied by Instagram employees.

https://financialpost.com/real-estate/property-post/work-from-home-mortgage-securities-default-risk-moodys

Remote-work trend creates mortgage-backed securities default risk, Moody's warns

The popularity of working from home in the U.S. is cutting into office tower revenue to the point that it is putting some commercial mortgage-backed securities at risk of default, according to a new report from the credit rating agency Moody’s.

https://twitter.com/KobeissiLetter/status/1646256473733750788?ref_src=patrick.net

I wonder if Portland will experience also an increase in vacancies as businesses shut down or move out of town.

79% of Portland businesses have been vandalized.

.

https://www.zerohedge.com/markets/dominos-falling-brookfield-defaults-161-debt-dc-office-buildings

see above link ...commercial real estate in washington dc is taking a major beating (just like elsewhere like san fran and silicon valley)...

a friend of mine who works at Coast Guard headquarters as a support contractor said that the biden admin is trying to get the agencies and departments to return workers to the office ...

my friend said that the mayor of washington dc is pushing the biden admin to do this especially since washington dc businesses like restaurants and cafes have lost a lot of business due to work from home ...

ad says

my friend said that the mayor of washington dc is pushing the biden admin to do this especially since washington dc businesses like restaurants and cafes have lost a lot of business due to work from home ...

Once people realize they don't need to go to a city, they know they don't want to go back. Does anyone like average, Applebees type food just at some "fancy" restaurant with a high lease at $18-$20 for an average burger at lunch? A basic entree at dinner that's $50-80. That's what cities are.

Did trivia at the local place last night. I just had some beers. 5. $12.50 total. I drink cheap beer. One of our friends had a prime rib sandwich and 3-4 bourbon drinks. $25. These are the same beers you can get in a city and bourbon. Not house bourbon either. Don't really go out to eat myself anymore as new food messes with my gut at any place. But the place we were at was Applebees type food to slightly better on certain items.

In a city my beer bill would have been double and likely triple. My buddies bill would have been $60-70 because it was "prime" rib and the bourbon. It's one thing to visit a small town, it's another thing to live in one. You start to realize why the fuck was I paying so much for everything AND dodging homeless, shit and needles.

Only caveat is you'll need a nice or at least comfortable car. You'll be in it a lot. But your house/rental will be 50% less and bigger.

Most of my story is 1 get out of cities, but 2nd with regards to commercial real estate, offices specifically, it's toast. Small companies in smaller buildings aren't going to renew their lease. Banks won't keep lending if the landlord/owner doesn't have the incoming income/rent to cover debt. The massive buildings get different terms, but it's usually 5 year commercial paper with annual review. We're entering a phase where a lot of reality in the office space market is going to come out.

Some of this did play out during the housing bust to an extent with offices. But this is a different animal when we told people to stay home for 2 years besides, first responders, medical, infrastructure workers and food workers. Sorry for weird sentences and any typos. Weirdly out of it this morning and just don't care..

https://www.bizjournals.com/sanfrancisco/news/2023/04/18/wework-loan-default-s-f-office-building.html

WeWork venture defaults on loan for San Francisco office tower at 600 California

zzyzzx says

https://www.bizjournals.com/sanfrancisco/news/2023/04/18/wework-loan-default-s-f-office-building.html

WeWork venture defaults on loan for San Francisco office tower at 600 California

Nooooooooo!

https://fortune.com/2023/06/01/commercial-real-estate-office-crash-is-here-says-cre-ceo/amp/

‘What’s happening in the office sector is apocalyptical’: This commercial real estate CEO says the crash has already started

Good video...NYC will likely be a going concern if property taxes decline.

https://www.youtube.com/watch?v=Yafvra3AN4g

https://www.axios.com/2023/06/13/companies-aggressive-return-to-office

Companies get aggressive on return-to-office

My company just added an extra day back in the office per week and I will share their very good reasoning to help you understand. “We are doing this because everyone else is doing it.” -management.

https://finance.yahoo.com/news/blackstone-reit-announces-major-asset-180808646.html

Blackstone REIT Announces Major Asset Liquidations As Redemption Requests Continue

Government's latest plan to help struggling commercial property owners: charge people 20 bucks just to go into the city.
https://www.foxnews.com/us/new-york-city-receives-federal-approval-charge-drivers-attempt-reduce-congestion

https://finance.yahoo.com/news/analysis-commercial-real-estate-investors-230518576.html

Investors in commercial property are used to riding out storms. This time it's different

https://thedailyscroll.substack.com/p/what-happened-today-september-7-2023?r=6gdz

Roughly 20% of the banking sector’s deposits are exposed to troubled commercial real estate assets, amounting to $3.6 trillion worth of risk just as the commercial real estate sector is collapsing—and quickly. That’s according to a new Wall Street Journal analysis that finds commercial real estate could become the next sector to trigger an economic collapse reminiscent of the 2008 housing market crisis. In the period between 2015 and 2022, with interest rates low or non-existent, banks large and small went on a lending spree to landlords, doubling their outstanding loans in just seven years. But the problem is, the commercial real estate sector is in deep trouble. Commercial property prices are down 16% since last February and are expected to fall even more as transactions begin to pick up again in earnest after a pandemic lull.

If real estate investors can’t pay the banks back—partially due to higher interest rates—the banks stop making real estate loans, which drives the price of real estate down, which makes it harder for investors to pay them back. This “doom spiral” will likely be put to the test over the next year, especially as $900 billion in loans will need to be paid off or refinanced by the end of 2024.

Scott Rechler, chief executive of real-estate investor RXR, told the WSJ that the situation is “creat[ing] a backup that will eventually overflow on the commercial real-estate markets and on the banking system.” And Blockworks macro researcher Jack Farley tweeted on Saturday, “I have it on good authority that 84% of office CMBS [commercial mortgage-backed securities] were not paid off in August.”

Worthwhile read...https://seekingalpha.com/article/4632390-blackstone-mortgage-trust-valuation-is-getting-risky

https://finance.yahoo.com/news/kevin-o-leary-says-coming-230043170.html

Kevin O’Leary Says a Coming Real Estate Collapse Will Lead to ‘Chaos’

Which is about commercial real estate, even though title doesn't mention it specifically.

zzyzzx says

https://finance.yahoo.com/news/kevin-o-leary-says-coming-230043170.html

Kevin O’Leary Says a Coming Real Estate Collapse Will Lead to ‘Chaos’

Which is about commercial real estate, even though title doesn't mention it specifically.

cre collapsing doesn’t bother me one bit. but knowing our fucking government of the wealthy assholes, they’ll bail out the wealthy at expense to middle class to rescue outdated business model. that’s what they did every other time.

Signature Bank's Commercial-Property Loan Sale Expected to Draw Bids at 40% Below Face Value, Reflecting Eroding Property Prices

https://wallstreetai.substack.com/p/november-9th-2023-financial-outlook#%C2%A7signature-banks-commercial-property-loan-sale-expected-to-draw-bids-at-below-face-value-reflecting-eroding-property-prices

https://www.cbsnews.com/news/real-estate-owners-saddled-with-half-empty-offices-as-hybrid-work-continues-60-minutes-transcript

The reality is the price of office buildings is tanking, as much as 40% since the pandemic. Uptown at Columbia Business School, Stijn Van Nieuwerburgh, a professor of real estate, has modeled out the impact of hybrid work on pricing…and calls it a train wreck in slow motion.

Prof. Stijn Van Nieuwerburgh: And this is just the beginning. And the reason it's just the beginning is because there's a lot of office tenants that have not had to make an active space decision yet. "Do I want to renew this space? Do I wanna vacate? Maybe I sign a new lease for half as much space." This is what tenants have been doing for the last three years. So when you take all of those current and future declines of cash flows into account, we end up with about a 40% reduction in the value of these offices.

https://www.dailymail.co.uk/news/article-13071753/san-francisco-offices-vacant-ian-jacobs-reichmann-real-estate.html

Real-estate tycoon looks to buy $900MILLION worth of San Francisco office space as companies and residents flee downtown amid homelessness, crime and work-from-home
Ian Jacobs, 47, has decided to purchase an estimated $900million worth of office space in San Francisco
The heir of the Reichmann real-estate dynasty has set up $75million in commitments for the new business venture
The Bay Area has experienced a drastic jump in office vacancy

The start of a new cycle as Ian Jacobs (see above post) and the rest come in and buy at cheap or fire sale prices.

Then the city and state governments clean up the city.

Companies increase presence in the city.

Price value increases for real estate as a result.

https://www.wbur.org/news/2024/02/15/boston-tax-shortfall-empty-offices-space-report

Report: Boston faces more than $1 billion tax shortfall due to empty offices

@Eman any interesting commercial deals coming up in search of investors? i’m interested, serious post. i know you are a smart guy with track record of good decisions.

FortwayeAsFuckJoeBiden says

any interesting commercial deals coming up in search of investors? i’m interested, serious post. i know you are a smart guy with track record of good decisions.

I wouldn't touch commercial office space right now. It's dying. Certain sectors like medical need offices, but most businesses really don't anymore.

You gotta have $$$$$ but warehouses are your best bet if you are going to invest personally and not through a REIT or publicly traded company. Which goes back to remote working. IL is not growing in population. Yet massive warehouses pop up monthly along the major highways here. Storage of inventory is a massive factor now even for the minor players.

I wouldn't touch office space now or for the foreseeable future. My wife grosses $6M/yr in cash sales and hasn't stepped foot in her office in 5 years maybe? 50-60% margins. Offices were a "marketing" expense in a sense, to make you look good when a client visited. It's just not worth it. Only upside is repurposing the space which is risky. Trampoline indoor park for kids and birthdays. But that's a one off thing. Industrial, manufacturing and warehouse is where the money is going. Definitely not office even if there's a price collapse.

Commercial RE needs to market to the government and get some of that sweet sweet illegal invader money. They could house the invaders in those places. Just let them sleep on the floors and they can take hand towel baths in the sinks of the bathrooms. Give each floor a bunch of hot plates and microwaves and some refrigerators. Get sum o dat sweet sweet invader money.

wookiee warehouses out here cost more than I can afford. acre costs about 200k, and construction cost is close to a million. used to be less than half btw. small businesses who had those built while back just saw values double and triple over few years. and weird shit is their rent doesn’t bring enough to cover any loans.

life lesson i learned is when shit collapses you need to have cash ready to pull trigger fast before window closes. i feel that moment is coming and i’m actually prepared.

Following up. Restaurant commercial might have some upside with the work from home deal. It's where my wife does most of her business. Not in an office. I think that ship has sailed at this point. She meets everyone at a restaurant or coffee shop. This is all anecdotal but I generally get it right. I wouldn't touch anything in the office space regardless of hearing the come back to the office news. Employees will push back. And the space after leases are up won't be viable for the business and they'll leave.

FortwayeAsFuckJoeBiden says

Eman any interesting commercial deals coming up in search of investors? i’m interested, serious post. i know you are a smart guy with track record of good decisions.

Hi Fort Wayne,

I’m always looking at deals, but have been doing it half-hearted as the market is in a transition, not sure for the better or worse.

Remember the 40-unit deal by SJSU I mentioned in the other thread? Seller paid $13M basically for the land a couple years ago. Got it entitled to build a 23-story 168-unit high rise condominiums. The market churned; numbers no longer make sense to build; bridge loan is coming due; and seller wants to sell before getting drowned with high rates. Seller initially wanted $12M, and eventually came down to $10M. Now, seller will sell at $9M. Our latest offer was $8M. We can come up a couple hundred thousands, but not much more.

My math suggests we can get all our equity back in 5 years. Then let the building do it things with cash flow and principal pay down. In the next cycle, be it a decade or 15 years, the next developer will pay us handsome money for it. Assume 3% annual growth/appreciation…. on average, 6.6% is the average for Bay Area real estate, we’ll make out like bandits.

We’ll raise money with a very close group of friends and relatives if we get the deal. Not going beyond this sphere. Thanks for your trust and compliment.

Can’t share much other this line from yesterday at the moment.

A Chicom company abandoned these high rises in Los Angeles : https://en.wikipedia.org/wiki/Oceanwide_Plaza

Now they are victim to graffiti vandalism : https://laist.com/news/downtown-los-angeles-graffiti-taggers-high-rise

Wonder if these high rises will get bought out by an American firm or organization and will be finished.

What's your opinion on these abandoned high rises, Eman ?