Question about forced appreciation and commercial property

[Chris Horlacher]

I am a second year law student. I am interested in becoming a real estate attorney and investor. I had a quick question about forced appreciation in commercial properties. I was curious how long a property must be operating at the new NOI before it could legitimately be reflected in the worth of the > property on the market. For example... if I were to increase the rent 1000 per year and decrease expenses 1000 per year... how many months or years would I be required to maintain this before being able to sell a property for an additional 20K in a 10% cap market? Obviously it depends on many things, but I am asking just generally; what would an average buyer look at in terms of length of time?

[Damien Hall]

Dave:

You are right that a cash out refi would decrease cashflow. You would only do it if the income from the building could sustain the increased mortgage payment. Besides, the lender won't do the refi if the new loan drops the debt service ratio (DSCR) below their requirements.

For instance you locate a building and during your due diligence you see the potential to increase rents and decrease expenses by making some repairs. This will increase NOI and increase your DSCR. So if your strategy is to refi, you calculate how much you can take out without a negative effect.

Your strategy will be to build capital either thru rental income which can take years or to get cash from a refi. This is the benefit of doing a refi as soon as you can.