3 Building packages at 10% CAP

This couple owns half of the town, including industrial stores, multiplexes and land. They are liquidating out of the town, and are selling their assets. These are not listed and are private sales.

The 3 buildings look really really nice and inside are very well taken care of. They are offering building 1+2 for 450k
Or building 1+2+3 for 520k.

building 1: 1 commercial 5 residential 46.7k income 14.8k expense
building 2: 2 commercial 3 residential 43.5k income 20.8k expense
Building 3: 1 commercial 1 residential 20.4k income 12.6k expense

Note: The incomes does not include vacancy factor and management cost. The vacancy is really low for the area, the commercial units were never vacant.

I figured taking the extra cost into consideration, this is a pretty solid 10% CAP building. The buildings in province are priced at 8% or lower CAP rate. Good deal right?


First thing which happens when contemplating a new purchase is analyzing the numbers. First don't count on or believe the numbers supplied to you, they are likely embellished or presented incorrectly and seldom match reality. 

First a vacancy factor always needs to be included first to determine adjusted operating income. Looking at expenses is critical to success and under the 50 / 50 rule half of adjusted operating income should cover all expenses, maintenance and reserves.
Always look at numbers which will adjust because of a sale like property taxes, always look for expenses not listed but required to operate the property successfully.

Sellers will try to show a lean list of expenses as the more net operating income the more valuable the property. According to my calculations the cap rate is actually a 9.5 and at this cap rate should be a class B property Overall! Normally cap rate indicates age and condition. As a class B property this should be a 10 to 20 year old property.

But something tells me their are rent roll issues because although they are giving you income figures, I would very carefully review leases and occupancy terms as something just seems fishy?

Vacancy factor is deducted from gross scheduled revenue while management should be an expense paid by the 50% of expenses. Something tells me this property is over 20 years old and therefore the seller is asking to much for the property as a class C property should be between 20 and 30 years old and a class D property over 30 years old.

Multi-family cap rates in the 4, 5 and 6 for class A, cap rates of 7, 8 and 9 for class B, cap rates of 10, 11 and 12 for class C and cap rates of 13, 14, 15 and 16 for class D. Now a mixed use property such as you describe needs to be examined by looking at both multi-family and commercial standards of class and cap rate together.

Commercial Property class A are generally built after 1980, have over 100,000 sq. ft. and have been renovated to high standards every 10 years to keep quality and design style to most current standards, they are in good to great area’s where commercial properties are in high demand. Landlords want specific types of tenants and have high rental standards.

Class B properties are generally smaller, in good area’s and could be renovated to class A standards but are generally rented / leased for less than class A, have smaller footprints and although in good area’s rent for reasonable rates and terms and are most often bought and sold regularly by investors.

Class C and D properties are older, are mostly in poorer area’s where rents are low, property can be in decline and are normally have deferred maintenance and poorer conditions.

Commercial Property cap rates are class A 4% to 6.5%, class B 7% to 9.5%, class C 10% to 13% and class D 14% to 16%.

Gold River, that’s a great summary of class distinctions…

On the expense run-down, I assume the vacancy/credit loss factor is included in the overall expenses, not on top of them.

Otherwise, the total overhead would consistently run 55 to 60 percent of the GSI, instead of just 50 percent.

It seems to me that adding the vacancy and credit losses to an assumed 50 percent expense factor, would skew the returns and analysis too far underwater.

That said, everything’s relative. If every single property analyzed within a class, had the 55 to 60 percent overhead figure applied, you could still recognize relative deals, inside that class of property.

To keep things “equal” I started applying fixed assumptions to the initial analysis of each property. Then I compared the %'s to the seller’s stated numbers. If ever the seller’s numbers looked worse, I assumed they were more correct …and used them to my advantage.

Meantime, my experience has been, that with competent management applied, in a “flat market,” on “C” properties, the numbers pretty much float in a predictable range.

Good post.