All Forum Posts by: Bill E.

Where do you think the opportunities are?  What asset classes?

This may be a total newb question but - is the 8% hurdle an annual thing? In other words, each year the investors get 8% return on their investment before it goes to 70-30 split? Or is it a one time hurdle such that once the investors hit 8% on their investment the first time the deal is now 70-30 going forward?

E.g. 100,000 investment from investor.

Yr1 NOI of 9,000

Investor gets $8000 + 700 (8% plus 70% of amount over 8%)

Sponsor gets $300 (30% of amount over 8%)

Yr2 NOI of 9,000

Investor now gets $6300 (70%)

Sponsor gets $2700 (30%

Yr3 repeat of Yr2 and so on...

Everyone knows the big hedge funds and institutional players have invaded the large multifamily (100+ units) space and driven CAP rate to all time lows in search of any kind of return. It is not uncommon to hear of these properties trading at 4% CAP rates in high demand areas. To them that sounds like a pretty good return considering the risk free rate of return is currently below 1%. The hedge fund buying appears to have had a "trickle down" effect and bumped prices in smaller properties in secondary markets as well.

To the private investor these numbers just don't pencil.

If more attractive yields become available in different investements in the future will the hedge funds leave? If they all try to sell these properties will there be a crash? Could a great multifamily buying opportunity be on the horizon?

Curious for BP opinions...

I've been thinking the institutional money situation could result in a multifamily bubble bursting in the next 5-10 years creating a huge opportunity to buy large multifamilies as the institutions rush to chase higher returns elsewhere (or even avoid losses since their 4 CAPs will no longer cash flow).

Why do you think it will leave inflated valuations in the wake instead of a crash in value?

Thanks Joel.

Yes the corporate rentals present an interesting issue. True - if you lose them you go back to market rate. But, at the same time the income they produce now is very real and there's nothing buyer will need to do to realize it (unlike paying for "potential" where the buyer will need to incur costs to realize the potential). Chances are also good the corp will renew and possibly even add another unit. It would be hard for seller to sell without some compensation for these units above market rent. Perhaps some kind of discount is appropriate.

That said - what kind of cap rate would you apply to this bldg if you only considered it at market rents (i.e. no corp rentals)? 8%? 10%?

Gross Income: $132,000

12 - two-bedroom, 1 bathroom units

Fully occupied

Interesting quirk - 4 units leased as furnished corporate rentals to large multi-national corporation with plant nearby. These units are on 18 month leases and pay about twice what the market rate units pay. All utilities, kitchenwares, furniture, etc are included in rent.

Located in small western New York town on a lake. Walking distance to shops, restaurants, bars, beach and tennis & basketball courts. Not many rental options in the area and it's the premium neighborhood in the county.

Using the 50% rule NOI = $66,000

At a 10% CAP that = $660,000.00
At a 9% CAP = $733,333.00
At 8 % = $825,000

Decent condition - interior updates could help. Nearby comparable properties rent for up to 25% more.

Thoughts?

Anybody have experience with this? I'm thinking about using it outdoors to spruce up some garden/underground outdoor spaces.

http://airstone.com/

Hint - sometimes, today included, when I view loopnet on my phone vs. on my computer, the locked properties show up unlocked. From time to time it seems to do this.

Ok I've got some more details from the broker-

The mortgage is a CMBS loan and the fees to defease are too big. The only thing that makes sense is for the buyer to assume. Also, the mortgage prohibits secondary financing.

The deal also includes 13 acres of developable land, including some commercial frontage. They have apportioned $200k for the land.

So, say you can get it for 1.5mm (9.6% Cap using 50% rule) which seems possible, or perhaps you could do even better, considering the limited pool of buyers the financing terms create. Then you subtract out the assumed mortgage of $1.07mm and you are left with $425k cash that you need to bring to the table. That comes out to about a 28% down payment. You can also refi the whole thing in 2016.

Thoughts?

Thanks for the replies.

Here's where I'm getting confused. If the Seller is transferring the mortgage to me, then they aren't paying it off and instead are keeping all of the money they receive. So, if I pay the full price of $2.25mm then Seller keeps it all? And, I still owe the balloon payment for the balance of the loan in 2016? Seems like the balance of the loan should be credited back to buyer at closing or something. I'm just getting tripped up on the mechanics of how this works.

Also, I agree this financing makes the deal less attractive which makes me think you could offer much lower than market rate. And then if you could refi somehow this could be a great deal.