All Forum Posts by: Wells Mangrum

I invest in local NNN real estate. I'm considering investing in out-of-town NNN. Out-of-town NNN would help diversify my portfolio. Also, if I buy the out-of-town NNN at my common vacation spots, then I could deduct travel expenses.

How does one perform due-diligence on non-local NNN real estate?

I am ok with employing a commercial broker who knows the location, but how do I know that I can trust that broker?

Also, if I instead get a strip mall and need a property management team, how can I find a property management team that I can trust?

Thanks in advance!

Where do you think we are in the real estate cycle?  How fast do you think that change will come?  What changes can we prognosticate for the short term future?  These predictions matter because they affect our current financial decisions.  

Here are my thoughts:  

Current capitalization rates tend to be below the historical average.  This I believe to be in large part because interest rates are low.  If the positive correlation between interest rates and capitalization rates is not immediately evident, please see the following article that shows the positive correlation between the 10 year treasury and capitalization rates:
 http://blog.stewart.com/stewart/2016/12/01/commerc....  

The lack of any inflation has allowed the Fed to keep these interest rates low for an extended period of time.  Indeed, fears of deflation and recession have demanded that the Fed keep the interest rates lower than some bankers desired.  However, we are now finally seeing signs of inflation.  Wages are rising and inflation is coming back.  These inflationary pressures will increase due to the tax cut.  As a response, the Fed has already announced that they will be raising interest rates this year.

With the increase in interest rates, it seems to me that there will be a force driving capitalization rates upward.  Since the cap rate is a mathematical derivation of commercial values and net operating income, it seems tautological to claim that rising capitalization rates will either drive down commercial values and/or increase net operating income (by driving up rents).  

Am I the only one convinced of this upcoming event or do others see this change coming?  Does this make you want to sit out of the market for a time and wait for the rising capitalization rates to materialize?

CoStar's dismantling of Loopnet in order to consolidate their position in the Commercial Real Estate market is a disservice to open markets. 

I am an investor.  I review Loopnet about three times a week to get a feel for the market.  I have purchased buildings that I first found on Loopnet.  But usually I "find" deals through Brokers who have non-listed buildings.  Still, Loopnet has been a valuable resource to me.

In my opinion, CoStar is not investor friendly because you have to pay a fee to access the site.  My second-hand understanding is that they charge $200-$500 per month to access their site.  That fee is not justified for someone like myself buying one building a year.  The net effect of the loss of Loopnet is that investors will be less informed about potential real estate offerings and it will be harder to get buyers and sellers to meet. 

I will be looking for the next company to come along and fill the void created by CoStar's short-term attempt to monopolize the market. 

Commercial real estate is often valued by capitalization rate and net operating income (NOI). Building value = NOI / Cap rate NOI = gross income - expenses Where “expenses” does not include financing expenses. Cap rate is determined by market variables including local and global economics, building quality, land value, lease value . . .

Hey Seth,

I too am a physician investing in NNN commercial real estate. I purchased my first property about 7 years ago. I began by reading several real estate books (maybe 25 books). I believe that the best book that I read was by Geltner:
https://www.amazon.com/Commercial-Real-Estate-Anal...
That is a hefty text book.  But I read books like this every month in medical residency.  And I bet that you did too.

Once I felt informed, I sought for mentors . . . and I feel like I am still looking.  I have worked with several commercial brokers.  One I trust, but I still always fully vet his recommendations.  The other brokers have proposed to me several offers that I deem to be bad deals.  Their bad recommendations (at least bad in my opinion) have caused me to lose trust.  Ultimately, I feel like I am still very much on my own.

I constantly am up-to-date with the NNN properties for sale in my area on Loopnet.  Most of these are junk.  The bad brokers (mentioned above) will send me e-mails alerting me to properties that I already know about through loopnet.  My good broker will call me with deals not available on loopnet.  And these are the deals that I usually end up going with.  But these deals are rare and I end up waiting for months and months before my good broker can come up with a new deal.

One current challenge to NNN investing is the elevated prices of NNN properties in the setting of rising interest rates. For example, I see many Burger King NNN properties for sale at 6% cap rates. But current commercial loans from the bank are at 4.5% interest and may be rising to 5%. So I would only receive a 1% to 1.5% margin between the cap rate and the bank loan. This to me is unacceptable compensation for the risk involved. So I won't take the NNN deal at 6% and I keep looking for the evasive 8% cap rate deals with stable tenants and a 20 year lease. If bank loans rise to 6% then I will need to raise my target cap rate to 9% to keep my desired margin.

I'm rambling now so I'll close.  I hope there is something of value in my thoughts above.

Good Luck!

Thanks Joseph.  That was an interesting discussion that you linked.  Much of that discussion centered on whether or not to contribute to a 401k plan if the employer matches your investment.  That factual scenario does not apply here.  But it gives me a good feel of the general opinion of investors.  Thanks!

Hello,

Should real estate investors maximize IRA contributions?

To answer this question I will assume the following conditions regarding the investor:

1)  Aged 40.

2)  High income as a physician: currently in the top tax bracket.

3)  Future non-retirement assets invested in real estate will return 18% post-tax.  This is a leveraged return taking advantage of real estate depreciation tax rules.   

4) IRA assets will be invested in stocks/bonds with an assumed annual return of 8%. (IRA returns will not be magnified by leverage.)

Benefits:

1) The assets in the IRA grow tax free.

2) Diversification. If the investor's non-retirements funds are all in real estate, then IRA investments in stocks/bonds helps diversify.

3) The IRA investment has less risk because it is not leveraged.

Disadvantages:

1) Leveraged real estate return of 18% is greater than the non-leveraged IRA stock/bond return of 8% (see assumptions above).

2)  The marginal tax rate of a real estate investor may not drop during retirement because their real estate income will continue in retirement and because taxes may increase in the future.  

This is a complicated question.  I have my own opinion but it tends to differ from the opinion of financial advisors.  So I wonder what other real estate investors think.

Thanks!

I invest in commercial real estate and want to use Quickbooks to track my income, expenses, assets and liabilities.  I am looking for resources for commercial real estate investors to enhance their use of Quickbooks.  Are there any recommendations?

I already purchased and read Nancy Neville's book at mylandlordsbookkeeper.com  I found it to be useful but geared toward residential real estate investors.  For example, her proffered chart of accounts and items lists are not aligned toward a commercial real estate investor; also her templates do not fit well with a commercial investor.   Still it was a useful resource.  

I am interested in learning more about using Quickbooks for commercial real estate transactions such as how to expense CAM expenses to multiple tenants.  I also am interested in how others track depreciation of properties that have segregated rates of depreciation.  How do you use Quickbooks to create 10 year proformas (the Quickbooks 1 year budget is not my thing)?  Should I set up and use the fixed asset manager and loan manager?  What useful reports do people create and how often?  

I watched the Quickbooks Training on-line seminars available via quickbookstraining.com.  I listened to the Mastering Quickbooks 1 and 2 lecture series and the Accounting lecture series (about six days of lectures).  They were all excellent background material on Quickbooks but obviously not geared toward Commercial real estate.

I have not yet purchased the landlordaccounting.com e-book.  I am considering that as a next step.  I am also considering Faust's book on fasttracconsulting.com but it is out of print and expensive.  

Any advice on what to read next? I want to really master this as I value excellent records to help guide my investing decisions.

Thanks in advance.

I do not claim to know the answers to your underlying question. But here are two factors, among many others, that I consider: 1. Inasmuch as the patients/tenants in the assisted-living center have government sponsored's insurance such as Medicaid, reimbursement to the center will be dependent on the changes in government. If you believe that healthcare reimbursement may change then assisted living care facility reimbursement may also change and thus be vulnerable to some risk. 2. Government sponsored HOA loans are available to some of those running qualified assisted living centers. These loans are non-recourse, fixed rate, and have long terms. From my perspective, all of these loan features are desirable.

thank you!