All Forum Posts by: Cameron Paterson

 Haha yes.  I'm just curious, not reckless.  :)  I do plan to start quite small but this real life example was shared with me, and numbers are numbers so I figured similar principles would apply to smaller investments.  And with this example, it's very easy to see the huge change in cash flow based on minor changes in estimates/interest rates/desired return....just confirms that you need to get it right.

The owner of this building is also having trouble selling it, and at first glance I didn't understand why, but now I'm starting to see the issue.  He's a bit high on asking I think.

 Excellent!  That will be the next book I tackle.  There are so many books out there...I struggle to find which ones are worth my time.

I truly appreciate your input here!

 That definitely makes sense.  That equity is certainly important and it's definitely providing a return.  Great point and thanks for sharing that with me.  Like I said I'm just learning and sometimes an explanation helps me understand why someone approaches it one way vs another.  Thanks!

 Ah - I will revise that then.  I was looking at the formula here:  https://www.biggerpockets.com/renewsblog/2016/06/1...

I didn't see the principal paydown - I assumed that isn't included since it is not cash, but equity.  Maybe I'm missing that.

 Haha - don't worry.  I'm not planning on purchasing this building.  It is just a real life example I have in front of me, and I'd like to know how someone experienced would tackle it.

And of course, if I did hypothetically purchase this, I would of course do my due diligence, get opinions of maintenance from a contractor/experienced property manager, and be sure to be conservative.  Right now I'm just looking for top level analysis to learn.

I'm new to this, so I apologize in advance if I miss something basic. I'm just trying to understand the best way to value a commercial property. I just read an entire book that talked about CAP rates, and now I'm finding not to use this method....

This is a retail building with 6 or 7 tenants, some who have been there 10+ years.  The building is older, but in good shape, with busy street frontage and a national chain in the main front spot.

Total Income (CAM, Late Fee, & Rental):  $375K  (100% Leased Last Year)

Repairs:  $50K
Utilities (Owner Paid):   $27K
Property Tax (Owner Paid):  $32K
Insurance:  $9K

Net Ordinary Income:  $257K

Est Vacancy:  $43.5K  (13% of Rental Revenue.  The area's average is 20%, but this property's history is very good)

Estimated Yearly Income:  $213.5K.

CAP Rates in the area are 5-8.5%. I'll go with 6.5%. Value = $3.3M.

However, with a standard 25% down loan, loan amount is $2.475M.  At 15 Yr, 5%, yearly P&I is $235K, for a negative cash flow.  Yikes!  I see why this doesn't work.

If I use a CAP rate of 8.5%, value is about $2.5M, and P&I is $178.5K, for $35K cash flow.

In this scenario, down payment is 627K, for a COC of 5.5%. Still not very good...right?

I know a lot goes into this, but how would you value this property and how much would you pay for it?

I get the single point in time point, but if I am thinking about purchasing a commercial property, are you saying I shouldn't use the CAP rate method? If not, what method should I use?

Finding an average agent or wholesaler may be easy due to low barriers, but finding an exceptional one is the key - those people are very skilled, know their stuff, and are an essential part of your team.  They also do very well for themselves.

I'm in the same boat James.  My dad was Mr. Fixit and handyman skills have always been my weak point.  I also feel my strengths and time would earn a better return on something else in the business. However, I'm worried paying a third party may be a cash flow killer and I also am concerned that depending on someone else's judgement or taking them at their word that they are doing something correctly could be a problem long term.

Thank you!