Private Mortgages

[DesertCat]

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Right, I understand that. However, sometimes the current use of a property isn't its highest and best use. And sometimes the highest and best use of a property can generate profits that are not from rents at all. Maybe it wasn't too clear from my original response, but the point I was trying to get at is that renting properties is only one way to make money in REI. Another way might be to tear down the rental property and build something else.

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I think the best real estate deals are where you can find properties that are underutilized and convert them to their "highest and best use". A friend of mine found a home in the right area that was also zoned commercial, converted it into a commercial storefront, and later a restaurant. It's commercial rent was 3x higher than it would have rented as a home, so he essentially made this property worth 3x more with some smarts and a little elbow grease.

[Phone Booth]

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I guess that the idea that I was responding to was the idea that CURRENT rents are the only way to value a commercial property. Maybe that's not what that poster meant, I'm not sure.

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He said income, not just rent. Also what he said is that if income does not change, property value won't. He's wrong in that the cap rate can change as well, but his main point is right that there's no general mechanism by which properties appreciate in value beyond the increase in value of the future cashflows expected from it.

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I guess that the idea that I was responding to was the idea that CURRENT rents are the only way to value a commercial property. Maybe that's not what that poster meant, I'm not sure.

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He said income, not just rent. Also what he said is that if income does not change, property value won't. He's wrong in that the cap rate can change as well, but his main point is right that there's no general mechanism by which properties appreciate in value beyond the increase in value of the future cashflows expected from it.

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Right, I agree, and the more I've been thinking about this thread, I've realized that the way I interpreted TheShadow's post was incorrect. You guys are right.

The problem with my original analysis of using leverage to get more for your money, though, is still basically correct though. The only problem with it is that, for commercial property, you can't separate appreciation from income as they are not distinct.

However, you CAN factor in expected appreciation when you're dealing with smaller residential properties bought for investment purposes. In smaller properties price and cash flow from rents are often do not fluctuate in concert.

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Right, I understand that. However, sometimes the current use of a property isn't its highest and best use. And sometimes the highest and best use of a property can generate profits that are not from rents at all. Maybe it wasn't too clear from my original response, but the point I was trying to get at is that renting properties is only one way to make money in REI. Another way might be to tear down the rental property and build something else.

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I think the best real estate deals are where you can find properties that are underutilized and convert them to their "highest and best use". A friend of mine found a home in the right area that was also zoned commercial, converted it into a commercial storefront, and later a restaurant. It's commercial rent was 3x higher than it would have rented as a home, so he essentially made this property worth 3x more with some smarts and a little elbow grease.

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Agreed, and thats just the point I was getting at. For a rental property, my min investment criteria is a 10% cap rate. But sometimes I can find properties that only pay a 5% cap rate (or less) but could be converted to other uses. So current income aside I might feel that the deal has something else going for it other than its current income.

[Tien]

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"Now say that you put 200k as a down payment on a $1M apartment complex: 20 units, renting at $600/month. Lets assume that your complex appreciates at a modest 4% over time and the rent never goes up in thirty years. After thirty years, you've made $4,320,000 in rents plus 3,240,000 in appreciation, PLUS you STILL own the property. I'm not too sure how to calculate your yield here, but needless to say that 7.5 million after thirty years is a lot more than the 300k you make selling the home on an installment sale. "

Commercial property does not appreciate. The value of the house is based on the income of the building. So if rents never increase (and no additional income is achieved) and expenses remain the same, price will stay the same.

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This is not really correct because cap rates change from city to city, market to market.

In a really hot market, the cap rate that you can sell your properties for can be really low vs other markets.


In a span of 5 years, from 1990-1995, my parent's 20 plex appreciated by over 300 000$ and the rents sure as hell didn't increase over 5 years to justify such an increase in appreciation.


So yes, commercial properties do in fact "appreciate" but the argument is really for cap rates, and what kind of cap rates people will accept in which markets.

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In a span of 5 years, from 1990-1995, my parent's 20 plex appreciated by over 300 000$ and the rents sure as hell didn't increase over 5 years to justify such an increase in appreciation.


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Thats a great example. About a year ago my brother decided to move to Portland, OR. He and I started looking at some smaller complexes there for him to buy - 10-20 units or so. I found a realtor and got some comps. Properties of this size were selling at a NEGATIVE monthly cash flow. I couldn't beleive it. Rents for a 2br were like $650 per month, and the properties were selling for $120k PER UNIT. The market was so over priced that there was no possible way we could find anywhere near a viable investment even at a modest 6% cap rate. I'm not sure how thats NOT appreciation.

[SossMan]

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"Now say that you put 200k as a down payment on a $1M apartment complex: 20 units, renting at $600/month. Lets assume that your complex appreciates at a modest 4% over time and the rent never goes up in thirty years. After thirty years, you've made $4,320,000 in rents plus 3,240,000 in appreciation, PLUS you STILL own the property. I'm not too sure how to calculate your yield here, but needless to say that 7.5 million after thirty years is a lot more than the 300k you make selling the home on an installment sale. "

Commercial property does not appreciate. The value of the house is based on the income of the building. So if rents never increase (and no additional income is achieved) and expenses remain the same, price will stay the same.

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This is not really correct because cap rates change from city to city, market to market.

In a really hot market, the cap rate that you can sell your properties for can be really low vs other markets.


In a span of 5 years, from 1990-1995, my parent's 20 plex appreciated by over 300 000$ and the rents sure as hell didn't increase over 5 years to justify such an increase in appreciation.


So yes, commercial properties do in fact "appreciate" but the argument is really for cap rates, and what kind of cap rates people will accept in which markets.

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exactly.

for instance...I'm looking at an office building in Rochester, NY for $4m. It has a 15% cap rate.
The best cap rate I can get here in the Bay Area is probably in the 8-9% range.

[DesertCat]

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for instance...I'm looking at an office building in Rochester, NY for $4m. It has a 15% cap rate.
The best cap rate I can get here in the Bay Area is probably in the 8-9% range.

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Cap rate is supposed net rents after deducting all costs (taxes, insurance, maintenance, marketing, management, etc) other than interest/financing costs. Are you sure you are including those? If you are can you explain why the cap rate is so high (i.e. pending building collapse)? If it's legitimate, sink 100% of your net worth and your family's net worth into it and pm me if you need more cash

[Tien]

Well even 15% cap rate is just a number. There's more to it than the percentage.

For example the tenant. If you have a very bad tenant that is often deliquant on their payments, it means you have 1 tenant occupying your entire commercial space and there's a high risk of the buyer buying the property and getting a property with huge costs and no paying tenants.

It is different than residential where your risk is spread over multiple units.


Another factor is the market. If you are thinking about investing in a market where the entire economy is collapsing, 15% cap rate SHOULD be the norm.


Another factor of the market is WHERE your property is located. Even in the same city, if you own commercial property in the slums with poor people, you can expect to sell your property at higher cap rates than a few neighborhoods away.


And I forgot to mention repairs. Repairs on commercial properties run really big numbers.

[Tien]

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Real estate market crashes
Mortgage companies crash

I buy a house for $200,000

I sell it to someone on a 30 year mortgage at a higher interest rate then a bank would charge. If they default on the mortgage, I get the house back.

Current mortgage rates are 6.446%, so I do (??) 7.446%,

"Your estimated monthly payments are $1,391.04 and you will pay $300,775 in interest over the life of the loan."


Problems:

If they don't pay for house insurance, the place is destroyed and they default on the mortgage.

If they turn the house into a meth kitchen and the government seizes it (would I get paid?).

Question: How do I pay taxes on the mortgage payments they make to me?

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I normally hate buying a house for rentals. The margins are so slim.

And the problems associated with the property is just a matter of prescreening your tenants.

People with a history of drugs and violence would be prescreened already if you are a good landlord.