Quick question for the commecial investors…
Nice commerical property for sale. Price: $1.2m
What sort of cash flow would you expect/require for a property with this price. The property is in a very nice location with medical offices as current tenants. It is about 9000 sq ft.
How would you approach a deal like this?
Location: Tulsa, Oklahoma.
Thanks in advance for all responses.
Oldmandate,
Really, you are the only one who can determine what is an acceptable cash flow from the property. Obviously, you want the property to support all associated expenses and debt service with cash left over each month to build your wealth. When I look at properties, I look for a cap rate of 10% or higher and if I like the property's potential, but the asking price doesn't meet my criteria, I make an offer at a price that does meet my criteria. My rule is, the property's CURRENT cash flow has to merit my offer price and any POTENTIAL income increases will be icing on the cake. If the property has a huge upside potential and a seller doesn't like my offer, I may offer them future compensation once certain milestones have been achieved (occupancy rates increase to a certain level, rents are raised to market levels, etc.). Some are interested, some aren't and some probably laugh at me!!! The fact is, there may be other buyers out there willing to take a deal on different terms, but these are MY conditions. You will have to determine what YOUR conditions are. Another key ratio I use is the cash-on-cash return; does it beat my return if I invested my cash in a different investment vehicle? All that said, I would want at least $3k monthly net income for that level of risk. Hope this helps!!!
Mike,
Thank you! Since I’ve never owend any commercial property I don’t know what “the general acceptable returns” are. I was under the impression that commercial returns are generally higher (for a given investment amount) than residential due to their “riskier” leasing scenarios. Off course the 10% return you mentioned is very much a yard stick rule that a lot of people on the residential side adhere to.
No problem!!! Just to clarify, I am not talking a 10% ROI. The cap rate is a property valuation technique, similar to, but less complex than, NPV. Basically, take the net operating income (NOI), which is your gross income minus vacancies, operating expenses, taxes, etc. - basically, every expense except debt service - and multiply your NOI by 10 and you get your price at a ten percent cap rate. If you get a property at this price, your NOI will support 100% financing - which you probably will never get, but it’s nice to know your asset can pay for itself - or at 80% financing, will provide you a nice cash flow and in my experience a 20% or greater cash-on-cash return - your ROI on your total cash invested (down payment, closing costs, etc.). You may have understood exactly what I was saying, but misunderstood advice can really cost you, even though it was free!!! Happy hunting and God bless!!!
Many thanks Mike.