All Forum Posts by: Mark H. Porter

@Patrik Kisucky I’ve taken on those properties in the past but I’ve always considered the added risk in my offer.  I love when sellers try to sell you on the pro forma income when even they can’t get it there.  Because I think this way I’ve always been positive from day one even with some vacancies.  It’s tough to get bank financing with no cash flow, and that will lead you down the path of even higher rates.

Take into consideration that I’m not a major player in this game so I’ve always been risk averse.  All that means is that I spent a lot of time investigating any issues that could surprise me.

@Patrick Basil Sure.  I won’t take a second look at a property that doesn’t cash flow from day one.

Cash flow is Operational Income minus Operational Expenses minus Debt Service minus Capital Expense Reserve.  Put plainly, it’s the money at the end of the month that you have that can be spent on yourself.  The only other expense you would have to cover would be income tax, that’s why this is sometimes called Pre-Tax Cash Flow.

Where I see newer investors fail is not including what the should in Operational Expenses.  It’s tough to summarize what goes in here but when I owned multi-family I included landscaping, cable, management fees, transportation, maintenance and repairs, water, electricity, and pool maintenance.

I’ve done a few 1031’s with @Dave Foster as the QI and couldn't be happier. Investors have different goals, but if you want banks to love loaning to you the only two words matter … CASH FLOW. Cash flow not only pays the Operational Expenses and debt service, but allows you to build a CAPEX kitty that will take care of the emergencies.

Cash Flow needs to be realized at day 1.  if you have to move your investments outside your geographical comfort zone that’s ok, you just need to add the management fees to your Operational Expenses.  There are deals to be had out there -

my two cents …

Don't ever say short-term cash flow doesn't matter - it DOES. You make your money when you buy, not sell! Immediate cash flow pays for the unknowns. Example - I owned a Walgreens that was NNN except for the underground utilities and the retaining pond that had to be cleaned and inspected annually.

Your LTV will change based on the type and class of property. If you're going to buy a Starbucks with a long lease you could buy one worth almost $5MM as it's going to be an 80% LTV but you'll suffer a 4.5% cap rate. Buy a strip mall with a Planet Fitness, Verizon, and Dollar Store and you will have less than $4MM to spend as your LTV will be 75% but your cash flow will be better as you'll be in a 6%+ cap rate. More tenants, though, mean more differences in what CAM is paid.

I’ve done the STNL and I prefer the strip malls.

-and Anna - don’t think of depreciation as a gift.  Someday you will want to sell this property and Uncle Sam will come-a calling asking for the taxes then.  It’s called “depreciation recapture” and you should educate yourself on 1031 exchanges prior to selling.

Anna, don’t think of the income as anything special, it’s just income like any other.

Like any investments, the costs involved in delivering that investment can be deducted from that income. Don't worry about what state or whether it's LTR or STR, you just need to know what business expenses can be deducted from the income to calculate the taxable income (mortgage interest, depreciation, HOA fees, utilities, property taxes, etc..). Unless you do your own taxes your tax person will sort this all out.

Quote from @Ronald Rohde:

Sounds like an OK deal, those office condos are very hard to sell. I see them listed all the time.

I'm leery of 7% gross management fee, market would be closer to 3-6% on a NNN...

Yup, I’m with Ronald on this last part.  I pay 4% on a new purchase because the CAM hasn’t been reconciled in 5 years and needs to be brought in order.  I pay 3% on another strip mall I bought the same day as it was all in order with no options coming due for three years.

I wouldn’t buy an investment property that a) didn’t make positive Pre-Tax Cash Flow (PTCF) from day one, and b) that PTCF wouldn’t cover the loss or rentals for down months.  Let me explain these.

There are some terms to learn - operational expenses, operational income, NOI, PTCF, capex set aside, and debt service. To me, PTCF is most important to a small investor.

Operational income (OI) is all the monies you take in from the normal operation of your business. Operational expenses (OE) are those expenses necessary to earn the operational income. These expenses include all utilities, HOA fees, trash, pool care, management and leasing fees, and maintenance and repair. A little math - OI minus OE equals Net Operating Income (NOI).

Now NOI is what you have leftover to cover mainly two things - your monthly mortgage payment and your % of income that you set aside for big, depreciable expenses. Things like a new roof, new hot water heater, new flooring, new AC units, etc. These are called Capital Expenses or CAPEX for short.

So … NOI minus Mortgage minus CAPEX set aside = PTCF. PTCF is the money left in your pocket at the end of the month after all known obligations have been met.

Where am I going? Most, though not all, STR are seasonal in nature. You will have to cover some expenses during these down seasons. You must make sure that your annual PTCF is enough to cover the entire year plus put money in your pocket

The key in either Crexi or Loopnet is to build your criteria into your saved searches and get the results daily.

I wanted retail strip centers with a CAP of greater than 6% and with at least regional anchors with multiple units. This took out the centers loaded with nail salons, CBD, local eateries and other C/D grade single unit tenants that drove down amortization period and LTV.

It’s not fair to even reflect for long on the last year.  “Joes Garage” selling for a 5 cap made no sense whatsoever so for those that had patience you’ll now start to find the deals that got washed out of 1031 choices coming back on the market at more reasonable CAPs.

So the answer is yes, we ou can buy out of the Loopnet pool but set your standards and stick to them.

Great start!  Anderson is a great area, I’m closing on my first commercial property there tomorrow.