All Forum Posts by: Chase McArthur

@Derek Morrison

As everyone has previously stated, buy high, sell low.

In essence the cap rate is rough estimate of the return you would get if you bought the property with 100% equity (cash).

Typically, lower cap rates mean a more deairable, stabilized property which translates into a less riskier asset. I say typically because in today's market demand drastically outweighs supply. It is this demand that is compressing ( lowering) cap rates. Lower cap rates are typically found on Class A and B properties.

Higher cap rates are typically properties that require improvements, usually higher vacancy rates, are in less desirable areas and are usually Class C and below properties. Therefore the higher cap rate can translate into a more riskier investment.

This however doesnt apply to all property types. For example, mobile home parks are typically higher cap rates, which doesn't necessarily mean that the property is in disrepair. In most cases MHCs requires less maintenance and are less management intensive; they are just cash cows with very low turnover. The reason why these investments are usually command higher caps is because they are less desirable due to the fact they are less sexier of an asset to own. This however is rapidly changing in today's market.

@Dan Heimer

Check with the local codes. They typically have regulations about how many persons can occupy a given space.

@Kyle Gilbert

Walking through every unit is up to you. If that would make you more comfortable with the deal. It may burn up time on your DD because you will have to wait for tenants to comply.

As far as financials go, as a buyer you will typically need to submit an LOI and depending on the terms, submit earnest money to show you are serious.

Financials are a highly guarded secret, lol.

@Eric Cady

As I am not an attorney, the following should not be considered legal advice:

So as stated above you are referring to a syndication. With this structure (under rule 506(b) of Regulation D) you are allowed to recieve capital from up to 35 "non-accredited" investors. However, these investors must be "sophisticated" either they themselves or through representation i.e. attorney, financial advisor ect. This simply means that they must possess efficient knowledge of finance or business to understand the risks involved with such a venture.

In order to do this you must simply create an LLC through your state, as well as create an offering memorandum that contains all the pertinent information in an enhanced manner as to adequately explain a full level of proper disclosure. This will require a significant amount of money in order to properly draft the necessary paperwork required to meet regulations.

Also, the amount of funds that can be recieved from non-accredited investors can not exceed $1M. The amount of money that each investor can contribute is also limited on the net worth of the individual.

Bear in mind that this process takes considerable time and money to develop the legally required structure that will allow you to proceed with a syndication.

It is very possible for you to do, but be prepared to take the long road to get there. The deal that you syndicate should be worth all the trouble it will take to successfully transact the deal.

I don't know how knowledgeable you are with CRE investments but you should consider drowning yourself in developing a very detailed understanding of CRE business and finance in order to successfully execute a deal.

Let me know if theres anything I can do to help you.

@Ethan Smith

It all depends on if your numbers will support flood insurance, as lenders may require it. Personally, I wouldn't be opposed to it of its a good deal.

@Aaron Laster

Absolutely, please keep us posted! I'm eager to see how it plans out for you.

@Jonathan Schwartz

It is assumed that the NOI will increase relative to the purchase price of the property, therefore increasing the terminal cap rate.

For example:

100k NOI @10% cap = 1M value

A 3% increase over 10 years =134,392 NOI

134,392 NOI on 1M value = 13.4% Cap

Commercial property doesn't appreciate like residential properties. Valuation fluctuates based off of various macro/micro factors. There are variables that can have terminal rates lower than initial rates, supply and demand as well as interest rates are a few. But obviously we can't predict that a year from now, let alone 10 years.

All we really know is the starting NOI and the level at which we can increase it annually. You can see in the above example how the growth rate correlates with the terminal cap rate. A 3% annual growth equals approx a 300bps increase in the cap rate over the horizon, not a coincidence.

@Charlie Swain

My pleasure!

If you need any help, let me know.

@Charlie Swain

Make an account with TenX. You can get access to every commercial property's financials that they are taking to auction.

@Ryan Dunne Ewing

At this point it would be wise to gear the property and expand your portfolio. You're in positive cash flow territory which buys you some significant advantages.

Although it can potentially be risky, gearing it will give you a tax free realization of your equity while allowing you to keep your property and redistribute your capital into another, potentially larger property.

As it stands you are still in the residential category as you are below 5 units. Because of this you can value your property both with an income approach as well as a comp approach. However, your income approach should not be based off of a cap rate, it should be based off of the areas GRM. Since you do not fall under a commercial property, estimating the value off of cap rate is going to skew your valuation and probably not in your favor.

As was previously stated, you may have over improved the property. If the neighborhood you are in is...less than desirable, than it will be difficult to sell. Not to mention that by doing all the renovation you have done you have essentially taken all of the value add components out of the equation, hence making it less desirable for another investor.

Therefore, it would be in your best interest to avoid the fees, taxes and various other headaches of selling, pull the equity and find another value add play on a larger property.

This is how portfolios grow. Just food for thought.