All Forum Posts by: Account Closed

I'm a commercial real estate investor in California and am interested in hearing about how and if other investors factor earthquakes into their investment decisions. For example, if there's a 50% chance of a magnitude 8 earthquake within the next 30 years, would that factor into your underwriting/valuation at all?  Would you consider it at all when deciding whether to sell vs. refinance-and-hold a property? (Assuming you're experienced enough and comfortable investing outside of California) 

Earthquake insurance is very cost-prohibitive and deductibles are usually 25%, so let's disregard property insurance. It doesn't seem like any brokers or investors in California are considering earthquakes. On one hand, you don't want to let something that may never happen get in the way of your financial growth, but one natural disaster can ruin your portfolio especially if you only own a few properties.  Looking forward to hearing your thoughts.

Thanks Bryan and Aaron, the blog has been posted in the "member blog" section of Bigger Pockets. If you click on my profile, the link to the blog should be showing on the right side.  Enjoy!

Hey Bigger Pockets,
A few days ago, I came up with the idea of writing detailed blog posts which would each explain the background, analysis, and lessons/takeaways from some interesting real estate transactions happening around us. I really enjoyed writing the first blog post about Carl Icahn's purchase of the former Fontainebleau Las Vegas and hope that anyone with an interest in real estate or business will find it entertaining and educational. Any thoughts, suggestions and feedback are highly appreciated.

Moderator note:

(Josh if you want to write blog posts there is a feature to check out on Bigger Pockets. Linking your website in the body of a forum post here to a blog on your website is not allowed per BP rules.) Please fill out your signature line in your profile.

Hey Rob,

This deal doesn't look too exciting.  One of the great things about real estate is the opportunity to acquire a property that is operating below its full potential and to make money by increasing the value of the property.  Adding value to a property can usually most easily be achieved by filling up vacancies or raising rents on existing tenants (If a property is valued based on a cap rate, than higher income leads to higher value.)  On the other hand, one of the unfortunate things about real estate is that there's always potential for the value of a property to decline, which can also happen in several ways (For example, the tenants vacate or market rents decline).

For example, if the property you're describing was vacant and/or was in a difficult ownership situation (bank-owned or owned by an inexperienced investor), there's a good chance you would be able to acquire for a much lower price.  You may need to submit a whole bunch of offers, be patient until a good opportunity comes along, or be creative in searching for deals, but you can probably acquire the exact property (just vacant) for around $1.2 million.  At that price, you would have to spend a few months of time marketing the property for lease, would probably have to spend another $50,000-$100,000 on leasing commissions and tenant improvements, but you would be able to own the same exact property with the exact same income for $1.25-$1.3 million.  By taking on a bit more work on the front end, you can make about $700,000 in profit which will provide you with a cushion in case the market takes a downturn, the tenant vacates, or something else goes wrong. Or you can even, just sell the property for $1,920,000 and move on to the another deal.  Or hold on to the property and earn >10% cap rate rather than a 7.5% cap rate you would be earning on a higher purchase price.

The best advice I can give you is to focus on price above all else.  Would this deal still be attractive at $1,920,000 if the seller wasn't offering attractive financing?  Probably not.  If you only have $200,000 to invest, it might make most sense to acquire an underperforming property at an auction for $200,000 or an underperforming smaller property with much more potential with a 40% down payment for $500,000.  The way people become extremely wealthy in real estate is by taking advantage of the value-add potential when acquiring the deals.  If that value-add potential is taken out of the equation, real estate is much more risky and not very exciting.

Good luck!  Feel free to reach out with any additional questions.

Sounds like a good plan which can potentially be very profitable. One thing to take into account is that most cash investors are looking for very good deals of at least 30% off of market value.  For you to add yourself to the equation, you will need to acquire properties at probably more than 50% less than conservative market value.  Not impossible, but very difficult.  To achieve that type of a discount you'll likely need to be dealing with some extremely motivated owners or you'll need to see some hidden potential that the current owner is completely unaware of.  

Almost seems like it might just be worth it to be a real estate broker and earn 5% commission selling properties at full market value....?

@Matt Roth

There is a lot of uncertainty in retail that it seems you're already well aware of.  Here are a few recommendations:

• As much as possible, if you acquire a retail property make sure that it's located in a great location inside a city.  If retail demand drops 20-30% or more (which is likely), you don't want to be the property owner who owns the oldest, worst-located retail center in town.
• If you have a choice between tenants, choose tenants that are service oriented.  Such tenants include hair salons, nail salons, restaurants, check cashing, etc.  These tenants have the highest likelihood of being viable businesses over the next 10 years and into the long-term and won't have the ability to take their businesses online
• Keep in mind that there is much larger risk for larger retail spaces which are over 10,000 SF because of the difficulty of replacing existing tenants if they vacate.  Spaces that are under 10,000 SF can easily adapt of office space, medical space, and can work for hundreds of types of businesses.  But when spaces are over 10,000 SF, the demand from tenants is extremely limited and there is a big risk of not being able to re tenant vacancies   
• Lastly, it's probably not a good idea to acquire a center that's operating anywhere near it's full potential.  If a center is 100% occupied with tenants paying market rents and it is being sold at a market cap rate, then there is no cushion in case the worst case scenario ends up happening to suburban retail.  If, on the other hand, you acquire a retail center that is 60% occupied, or with rents that have plenty of room to be increased, and the owner is pricing in the property in a way that would allow the investor to make a profit through leasing and raising rents, then you're in a much safer position.  Worst case scenario, if the value of the property drops by 20-30% because of the challenges facing the suburban retail market, at least the profit through your hard work will cover all of the downside

First of all, high leverage isn't a problem on its own.  The problems is that many people buy properties using not only high leverage, but also at the peak of the market, and also when the property isn't such a great deal (a property not being acquired at a significant discount of market value).  

We seem to be at the peak of the market now, so unless the property is a very good deal, it probably wouldn't make sense to borrow 95% of the purchase price, especially if you'll be personally guaranteeing the loan.  

There are tens of millions of commercial properties throughout the country that you shouldn't need to settle for a deal that is anything less than spectacular, especially if its your first deal and you don't have much cash.  Especially since you're writing that you expect to have $100,000 within the next year, I would recommend to be very patient and cautious for the next year or two now that we seem to be at the peak of the market.  If this was 2009/2010 my advice might be different, but most experts agree that we're at or near the peak of the market.

Also, a good question to ask yourself when analyzing a property is "Is there anything I can do to this property immediately to add 20-50% of value to the property over and above what I'm paying for it?" (renting, raising rents, thinking about the property in a different way/use, etc.)  Why rely on market trends or a potential development opportunity, when there are so many properties where you're able to take things into your own hands and add immediate value?

Here are some questions to help you determine if the deal is good enough:

• Are you able to do anything to the property for it to earn a 10+ cap on the property, so that even if the development plan doesn't end up happening, the property will still be a decent cash flow investment? (raising rents, adding a billboard, etc.)
• What type of seller are you acquiring the property from? (experienced investor, someone who inherited the property, a distressed seller)  When did that seller acquire the property? If the seller is an experienced real estate investor or if the seller acquired the property within the past few years and is looking to flip it, it might be a good idea to be extra careful.  
• Are you acquiring the property below land value (or at least not above land value)?  If not, I would probably walk away.  In development, you can't have your cake (existing property) and eat it too.  You either can price the property based on its current use or development potential.
• Is the property being widely marketed on Loopnet?  If so, then it probably isn't such a great deal. If it were a great deal and the seller was offering 95% financing, it would likely sell very quickly.  

Let me know your thoughts and if you have any other questions/thoughts.  Good luck!

-Josh

Hey Everyone,

Just looking to learn about how people are feeling about the real estate market.  More specifically:

• How do people see the commercial real estate market performing in 2016? (In light of the questionable global economy, possible interest rate increases, strong jobs report, election year, etc.)
• What types of properties/areas do people think are the safest and most likely to retain value in the case of a crash or market decline?  
• What factors are playing into your decisions of whether to sell or hold onto properties you currently own?
• Are there any strategies investors are using to protect their capital or to take a more conservative approach?

I wouldn't limit yourself to a cap rate based on the land and construction costs. Many properties with NNN leases sell for significantly higher than the land-inclusive replacement cost. As an investor, you should try to attain the highest possible rents that you can negotiate, with regular increases (preferably yearly increases but at a minimum 10% increases every five years). You took the risk of acquiring/owning the property when it was vacant and you should try to attain the maximum amount the market will pay for the property you can provide. As Bob said, the services of an experienced broker could be well worth it in helping you achieve the most you can get.

I would check on Loopnet for similar properties for lease and check out the asking rents for similar build-to-suit offerings. Or you can search similar properties for sale on Loopnet to determine the amount of rent other tenants are paying for recently signed built-to-suit NNN leases. Don't leave money on the table.

Good luck!

 I haven't used any of these companies but did some research a while back when I was considering a facade renovation.  A few active companies seem to be:

-http://www.davidhidalgoarchitects.com/facaderenova...

-http://www.nsmc.com/  National Signs and Marketing

It also might be worth a try calling the City and checking if them have any programs (incentives/rebates) for facade renovations and new pylon signs.  Most importantly, it's important that the changes you're making will enable you to charge higher rents or to have a greater likelihood of keeping tenants.  Otherwise, it may not be worth the time and money if all the tenants are on long-term leases or will refuse to pay higher rent.

Good luck!