For years now prices have been rising faster than rents in most places, meaning cap rates have been compressing, which lowers returns. I don’t have a crystal ball and have no idea what real estate will do in the coming months and years. After spending the past months and years stressing out that suitable deals were getting so rare, I can tell you that I am done trying to fight so hard in the fishbowl with much larger fish than myself. I am going to build deals from the ground up, where the competition is vastly lower and returns significantly higher.
The pro’s:
I am getting a brand new building that I am certain of the construction technique/building codes.
Maintenance will be as low as possible, besides in a NNN leased building.
Besides the contracting company (whom I am happy to pay for their knowledge) I am getting the building at cost, instead of using a cap rate valuation. I have come up with in my pro forma about a 10+ cap, which flat out does not exist in today's CRE market.
LTC on construction loans is much more favorable than commercial purchase loans, and usually have the better rates and terms as well…obviously banks prefers new construction.
The con’s:
The speed in which I start to receive a return is slower than if I were to buy a building that was leased already.
The number of steps and base of knowledge needed for a new build is much higher than buying a built and leased property.
Leasing a new build, especially in our new environment, may be a slow process, which could be costly.
All in all, I have decided to take on new construction projects going forward. That is not to say I have stopped looking for good deals on already built properties, but it is no longer my only strategy and is no longer causing me angst!
What are your thoughts? Strategies?
Cheers!
