All Forum Posts by: Robert Plumpe

Hey all:

Just wanted to get some ideas feedback on a building I'm looking at...

It is an office building that is single story/brick.  It is solidly built, in pretty good mechanical condition, but it is a bit dated and would greatly benefit from some cosmetic improvements/benefits.  The current owner is a motivated seller.  There are no stairs/ramps/single story so I don't think there are any ADA compliance issues.

It is just over 8k sq. ft.  it is dividend into four distinct offices.  Each of these larger offices is approximately equal in size.  They share a common entrance, but have their own bathrooms, reception areas and are subdivided into 5-6 individual offices per larger unit.   There is adequate parking in private lot(s) for each office.

The building has one tenant currently (1/4 occupancy).  The owner has kind of let it go...he is getting older and wants out, he wants to sell, not be a landlord.  He has not been trying to lease it all in the past year or so.  He has been trying to sell it, not lease it.

The one tenant pays just under $3k a month.  I think this is a little bit high for the market.

The asking price is $300k.

I am very intrigued in it...It is kind of expensive in terms of sq. foot cost...but it is in pretty good condition.  I don't think there would need to be a lot of money spent on it to bring it up to being a pretty spiffy building.  It is also in a slightly better neighborhood than where I have my other buildings...so it might be worth to pay a bit extra to get a better quality location/building.

If other tenants can be brought in, the building would be cash flowing tremendously.  The negatives as I see it are that the property taxes are too high...it is risky with only ONE tenant in it.  If they move, the building goes to zero revenue.  It also is probably going to take some additional capital to really get it going.

 
It is located in Michigan, in a nearby suburb of Detroit.

Any thoughts?

Paul Little:

One thing I've had some success with is going into the government office (city) and filing a freedom of information request to see all the commercial property transactions in the last two years.   That way you can see the price that properties are actually trading for.  You can get a grasp on what prices are high, average, low, etc.  You can see where the trend is going.

I have found this to be very helpful.

This is also a great way to get started on a property tax contestation.

Romar Watson:

Those numbers very well might be correct OR reasonably close to being correct....

The building is apparently occupied 100%, so it could be hitting those numbers.  The numbers would start to unravel if it had any significant vacancies though.

Physically the structure does not look too bad...but my guess is that it would soon need some maintenance/capital expenditures made.  The current owner may very well be aware of this and is deciding to get out 12-24 months before a whole new roof is needed or furnace/ac...or perhaps some other structural repairs/improvements?  Might individual units need major repair/renovation when current tenants depart?  

The current owner is going to have an informational advantage over you most likely.

I am also not at all familiar with the market...but this certainly DOES NOT look like "upscale" housing.  What are the quality of the tenants?  How strong/long are the leases?  If it is "down market" and month to month lease situation, then a 13% cap rate MIGHT be too low and a value trap.

So my advice would be that the deal might make sense, but you've got to dig deeper to make sure there aren't a lot of hidden problems.

Good luck!  Let us know what happens.

Jeff:

My advice to you would to NEVER do deals/business with somebody you don't trust and/or business model that you don't understand/get.  Just don't do it....there are an almost infinite number of deals or possibilities out there.  Just keep watching, analyzing and a deal will come.  

As to that particular email....why would "deal architects" be approaching people for a $5k IOU?  paying 12% interest?  If these guys are so good, why don't they reinvest their profits and reap the rewards?  If these deals are so good, why are they "slumming" trying to get $5k at a time?

Take it another level further...If they are able or willing to pay 12% on their notes, what type of return are they getting on their deals?  15%, 18% or more?  If they are able to generate these numbers consistently, they are going to have massive profits that they can reinvest OR they will be able to get bank/investment company financing.

Most likely it is a newbie that went to a "get rich quick in real estate using leverage" seminar...and is trying to drum up $$$ through anyway possible.

In the alternative, it is a scam, probably a ponzi scheme.

Either way, nothing I would want to be associated with...

Mr. Nguyen:

It sounds like a very nice house, and it also sounds like a good area!  You & your wife appear to be on a solid financial footing.  Congratulations!  

HOWEVER, I am shocked to hear of property with a 4% (or less) cap rate.  I hear that things are expensive in CA, and that their properties are generally nice and in demand.

One risk that nobody has brought up here is that you are going to bear a tremendous amount of "interest rate risk".  Right now, interest rates are at unprecedented lows.  Depending on how you measure it and who you ask, rates might not have EVER been this low...So the question is will they stay this way?  What will happen in the future?

I would be willing to bet that interest rates are almost certainly NOT going to go lower.  I think they will gradually rise.  If that is correct, the value of real estate will go down to some degree.  Think of it this way...If a 30 year government bond yields 3% today...and 5-10 years from now it yields 6%, all other assets will go down in value (to match the risk free interest rate).  So a cap of 4% today might become 8% in the intermediate future.  That will be a HUGE move.  The lower your cap rate is, the greater a risk you take.  If your cap rate is 8% and it goes to 12%, you still take a hit, but no where near as big as if it goes from 4% to 8%.

At 4%, you've got to have a few things go right...property has to get rented, has to get rented to good tenants, no major repairs need to made, and so on & so forth.

If you are almost certain that rents will go up significantly in the intermediate term, that will give you some margin of safety...but just how much higher will rents go?  They would have to go up 50% to go from 4% to 6%!!!

Also, at 4% why not buy into a REIT or BDC? You have no management issues, and your income could certainly be significantly MORE than 4%, heck, you might get 7%, 8% or even more....

Seems like an awful lot of risk & work for 4%, but I never understood the CA & NYC markets....

May you have good fortune whatever path you decide to take!

Hey all:

I've seen "deals" like this from time to time and have even talked to a couple of investors in "deals" like this.

There is a chance that there is some "hidden" factor that might not be readily apparent just be looking at it on the interweb.  There might be additional land that might be used to build garage/pool/something else that might make the rents higher or the property more desirable.  Maybe the building can be expanded/subdivided to further increase it's value?

Maybe there is a good chance that the property lies in an area that is going to be redeveloped or taken by eminent domain?

Could be something else entirely?

OR

It could simply be a bad deal.  I would guess that most investment properties offered up are probably fair to bad deals if you really dig deep.

I once asked an investor that bought a negative cash flow apartment building (he knew it would be cash flow negative before purchase) why he did it and he said that it was a combination of four factors:

A). The area was a nice area that he wished to work in.  He presumed that the "value" of the property & market would go up in the intermediate & long term.

B). The rents were slightly below market and the quality of the tenants was somewhat better than average.  He presumed that he could raise rents somewhat over the short & intermediate term.

C). He had some $$$$ burning a hole in his pocket and in retrospect he admitted that he acted too quickly and paid too much.  He had owned the property for about 2 years.  It was not terribly cash flow negative...and was not a catastrophic bad deal, just not a good deal.  He stated that in hindsight, he probably would not do the deal again.

D). In that area and in that period of time, this was the "least bad" of the deals that he looked at.  At that point the market was definitely a "hot" market and ALL comparable properties like this were cash flow negative.  He had some real estate and wanted more...so he bought the best deal he could at the time.

So perhaps the property you are analyzing is in a "hot" market and everything comparable is cash flow negative?  If that is the case, it could be the "top" of the market?

If the deal doesn't make sense and doesn't clear your required returns, I would probably pass on it.

Chris:

I am going to assume that your student loans are "federal" student loans vs.private student loans...

I would definitely continue to accumulate savings in preparation for investing.  

If you've got a goodly amount of capital, it is easier to build it.  Capital attracts capital.

Further, if you fall into hard times or something goes wrong, you can get all sorts of deferments with student loans that you can't with other forms of debt.

Or, you can take the middle path.  Continue to accumulate savings BUT pay double monthly payments on your student loan debt going forward.

Good luck!