All Forum Posts by: Charles Kennedy

Well just based on your net CF you're only giving yourself just under 7% cap on a single-family rental, which I don't really like

Wow, you are going to be very highly levered, 3.5% down. I'm curious, have you already been quoted for a loan that will be giving you 3.25% FIXED with only 3.5% down? This high leverage is going to give you little wiggle room and you will need to lease up quickly. 

Have you done analysis on properties that are similar to the ones you intend to purchase? How are then renting on a gross rent basis? What about on a per square foot basis? Compare these figures to what your are assuming you will rent out. Are you close to "market"? Are you going to be able to get $4,200 dollars from two different tenants when the place was originally only meant to be a duplex?? I don't know the AK market at all, but that seems high to me. 

Also, cap rates are more easily found for commercial real estate and not as much for duplexes, you can see if you're not paying too much for the property by looking at recent sales in the same area and comparing the $/SF 

Seems like you are doing some decent market research @Henri Meli. One thing I would caution about renting at $14/SF. Sure it is great to have someone in rather than no one at all. When I just looked at EGI, assuming the space was vacant for 1 year, then leased at $16.33 as opposed to immediately renting at $14/SF, there is an $8K positive difference in taking the $14/SF. However, we must also realize this is a 5 year lease and we hope that rents continue to rise in the future, but then have locked themselves in to $14/SF. Perhaps you can negotiate this lease to have $0.50/SF rent escalations yearly. 

Or as I said if you can get someone in at market rent in less than a year @ market rent, it is worth it on a 5 year basis. If the lease were longer, you would be able to wait longer as well.

Rent escalations are typical for leases, but generally those that are a bit longer, so getting one in a 5 year lease may be a little difficult

 This also the standard for commercial loans. I work at one of the large banks are loan terms are generally 3-5 year terms, but amortized or 25-30yrs. We look at "mortgageability" at loan maturity to determine the possibility surplus/deficit they would have by refinancing in the longer term/permanent debt markets. 

 Although already specified that mez=mezzanine debt, I'll elaborate a bit more. Mezzanine, literally means another floor... from google "a low story between two others in a building, typically between the ground and first floors."

Now a typical commercial lender will not exceed 75% Loan-to-cost (LTC), so you are required to post 25% equity with yourself or a JV partner. Many people don't have the equity to do so and will seek "mezzanine financing", to pick up another 15% of the cost (you know only have to put up 10% equity, YAY!). Now this mez financing is further back in the capital stack, but still before equity (meaning if things go bad (project fails), they get paid back AFTER the senior/traditional debt, but still before equity). Like all investments, the mez lender will want to be compensated for this risk and you will have to pay a much higher interest rate on these loans. At large banks you often see senior debt in the mid 3% range for high quality properties with mez debt around 11% for an all-in rate for something like 5%.

I also believe you must let your senior debt lender know if you are going the mez route. 

Finally, let me finally note that I personally wouldn't recommend being so highly levered. There is a reason the banks/lenders don't like when you have a very high LTC/LTV, because it means you have higher debt service payments and if you lose a tenant for a long period or time or the market takes a turn for the worst, you can easily default. However, if you have less leverage (say with only 65% debt), you payments are much lower and you can withstand a downturn.

Good luck,

Would need more guidance if on Square Footage, but I'd guess around 9%? Very dependent on in-place NOI, credit of tenants, etc.

I've can tell you class A multi-family is in the 6-7% cap rate range.

So I threw this into excel to get a little better understanding and here are my thoughts...

It looks like your in-place rents are at a weighted $12.33/SF, but your assuming the vacant space will go at $16.88/SF. Do you have comps that support this? Are you looking at comps that will look how you plan the property to look after you've made improvements (CAPX)? I see no factor of that into your calculation. I took your rents as if they were accurate and applied a 7.5% market vacancy, but have no idea what the market is at for class-B (what is our asset class here?) vacancy/occupancies. I then followed your expenses assuming they were right and applied your 8% cap. This put me at a value of $1.35M. 

But is this the right value? Things we need to look at for accurate valuation... appropriate cap rate for asset class in that specific market and for that class (A, B, C). What about vacancies in market? If we think we are going to put new tenants in at $16.33/SF (this seems really high for a Class-B property), then we can likely assume at tenant rollover, we could do the same. You should do some analysis on when tenants are rolling over, it could be an opportunity to improve cash flows if they are below market (especially if you plan to add CAPX).

At current price... $1.5MM seems too high