Commercial Real Estate Lapse, Rebound, Relapse Part II: Sunday Morning Thought 09 June 2013

After a lapse, there is almost always a rebound, which is the current state of the commercial real estate market.  The rebound even includes areas of cities which were once abandoned many years ago, and are now going through a city revitalization project.

During the lapse many investors created a buying market for many new investors of commercial real estate.  The lapse being caused by lenders either not refinancing properties, which became deals with lending already in place for an investor who has access to cash to pay off a note which balloon has come due.  Or from an investor who entered the commercial real estate market trying to wear multiple hats, like managing the property, doing the maintenance and up keep for the property, and acting as the handyman as well; the proverbial jack of all trades, but master of none.

A formula for an unsuccessful leap into the commercial real estate market, driving an investor into a frenzy of disappointments, ending in a loss of the investment and resentment of land lording.

Real estate investing is mostly the K-I-S-S method, simplicity in all things.

So with the current rebound, history will repeat itself with the new commercial investors, as the commercial real estate market is now poising itself for another relapse.

The rebound is being driven by higher purchase prices which are substantially impacting the capitalization rate of properties which are the “bread and butter” types of commercial real estate. So what may have been a multifamily property which sold with a cap rate of 8.5%, goes up for sale in this rebound market, and after a bidding war, sells with a current cap rate of 4.5%, a recipe for higher rents to try and bring the cap rate back towards 8.5%.

But, the shadow market of house rentals may prove to cause another relapse in the commercial multifamily sector.  With renters having a choice of either renting a house for the same price as renting an apartment in a 100 plus unit complex, the house with a front yard and backyard may become a better option for many.

Watch the Private Lending 102 Webinar on our FaceBook page.  At the end of the Webinar download the information loaded PDF Private Lending FAQ’s.

 

 

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Commercial Real Estate Lapse, Rebound, Relapse: Sunday Morning Thoughts 02 June 2013

What caused the lapse in the commercial real estate market?   

Many would think sub-prime lending, but that is not the cause.  Commercial lending is based on the income of the property.  The lapse has been caused by easy lending.  Similar to sub-prime lending in that it was easier to get a loan and purchase a commercial property, without regard for knowing how to manage a commercial property.

Many people had never learned about managing commercial real estate but entered into the arena believing they could handle the demands of commercial property.  Many of the properties were multifamily apartments.  Although many of the investors sold off items from the apartments, such as , microwaves, refrigerators, washing machines, dyers, etc. and then skipped out on their loans, and leaving in their wake the rubble of what was once a viable housing community.

Many of these properties were left in a horrible state, but was it really that horrible?

Not necessarily so.

It had been noticed that many once viable properties, in thriving rental areas, had fallen into low occupancy, disrepair, and higher than normal expenses due to mismanagement; with many units in a community becoming uninhabitable from some type of damage such as fire, or property destruction such as knocking holes in the walls.

The lapse was a time of finding a plethora of value-add properties, which are still present at this time and many more like type properties entering the commercial market weekly, if not daily for lucrative rental areas.

Next Sunday’s post the Rebound part II.

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The A, B, C’s of Real Estate Investing: Sunday Morning Thoughts 22July 2012

 

 

now renting? sweet! can I get the one with all the broken windows plz? (Photo credit: tray)

 

With so many great deals out there and on the horizon, how do you pick a winner?

 

 

 

Analyze.

 

 

 

For each type of invest there are hard and fast rules of analysis to apply.

 

 

 

For instance you would not analyze a residential deal the same as you would analyze a multifamily deal.  Even within residential evaluations, a two bedroom one bath is not analyzed the same as a five bedroom 4 bath.

 

 

 

But there are similarities of analysis for all properties. The A, B, C’s of evaluating properties.

 

 

 

“A” classified investments are located in high-end areas.  Generally people with higher incomes and educations reside in “A” type areas.  The area can be all residential or mixed with multifamily units.

 

 

 

Generally, these types of properties are considered prime real estate, have a low cap rate, normally around 2-4%, they also have a higher tenant turnover if it is a rental property.  Most often investors purchase “A” properties for equity and cash flow.

 

 

 

 

 

 

 

“B” and “C” class properties make great rentals and are in middle class type of areas.  Investors tend to refer to these types of properties as ‘bread and butter’ investments.

 

 

 

Rental turnover is normally low to moderate for properties which are well-managed.   These type of properties can have cap rates ranging from 5%-13%, have great cash flow, and moderate equity.  Equity gains can be increased with improvements and minimal to moderate rental increases.

 

 

 

“D” and “F” properties, well just like in school you may want to avoid these types, but why?

 

 

 

“D” and “F” property investments coupled with strategic planning on improving can be a lucrative investment.  Keep in mind people who live in “D” and “F’ areas may not have a checking account and may work lower blue-collar jobs.  They may also receive some form of government assistance.

 

 

 

 

 

 

 

This does not by any means, mean for a person of more wealth to take advantage of someone by becoming a slumlord or slum investor.  Where you are not making improvements, or taking care of maintenance issues.  People of all walks of life deserve to live a happy life regardless of circumstances.

 

 

 

So which type of investment are good, better, and great?

 

 

 

All are profitable with the right types of strategies.  Remember entry strategy, holding strategy, and exit strategy, are all phases of a great investment.

 

 

 

 

 

 

 

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Increase in interest for Commercial Real Estate: Sunday Morning Thoughts 30 January 2011

If you input ‘commercial backed securities’ in a search engine you will see approximately 12.3 million results, give or take a few, and depending on which search engine you prefer to use.  Among the plethora of results- ‘Cantor prepares to debut commercial mortgage backed bonds.’

Many other institutions already have commercial backed bonds.

The commercial real estate market and SFR (single family residence) market are at most times opposing one another.  When the interest for one is up the interest for the other is down.  As everyone is running to the nearest, next and best SFR foreclosure, there also exists over valued over bloated commercial foreclosures in abundance just like houses.

Also like houses, commercial real estate is many and varied- From 5 unit multi-family, mixed use, retail commercial, business commercial, and apartments.  When home foreclosures increase, so does the demand for apartments; displaced home owners need some place to live.  The choice is either family or find a rental.

During the housing boom vacancy rates for rentals increased.  Now that so many people are becoming non homeowners, there is a shift from ownership back to renter.  This shift contributes to an increase in value for apartments.  Increasing the net operating income by $1 increases the value of the property by $100.

At this time with more foreclosures on the horizon apartments and other types of rentals will be in an increasing demand for at least another 8-10 years.  As a private lender having a note on these types of properties which normally have a maturity of 5 years is a low risk investment with a very nice yield.