Commercial Short Sales…Is it the next big thing? Learn How!
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Just wanted to drop a little bit of information about commercial real estate since I’m sure your getting plenty of emails about how its the next big thing to learn. In deed, commercial short sales are going to be a tremendous opportunity for those who understand what they are looking at. So, I just wanted give a little bit of free information about commercial real estate. If you are serious about learning commercial then take a look at these free videos
Gross Income – The total amount of money the business generates.
Expenses – The overhead the business has to pay for or the cost to operate the property. (Does not include debt services i.e. mortgages, liens etc.
Net Operating Income (NOI) – The amount of money left over after deducting operating expenses, taxes, and insurance from the properties gross income.
Capitalization Rate (Cap Rate) – NOI divided by Price. this is the baseline or “measuring stick” when analyzing the value or price of property relative to its income. Example: If a property is being sold at 1,000,000 and the NOI is 100,000 the “cap rate” or rate of return is 10%. (Tip: for those looking for passive investors. If you find a deal that is offered at a 12-14 cap and the market is currently at a 10 cap you can offer your investor 10% rate of return and pocket the difference).
Market Cap – This is the rate of return associated with your property type within a specific market. This is very important to understand what the market cap is because if you find a property being offered at a 17 cap and the market cap is 15, your deal may not be worth the risk due to such a high market cap and only a potential 2% discount and return.
Debt Service Coverage Ratio (DSCR) – Calculated by taking the NOI and dividing it by the total debt service. This is the income to debt service ratio. This is also a very key ratio when analyzing a property. A property may of a descent NOI but has a high DSCR ratio. Easy ways to look at this is if a property has a DSCR ratio of 1 it is breaking even. Most lenders require the DSCR ratio to be 1.25-1.5. A great deal is 2.0 and higher.
Occupancy Rate – This is how much of the facility is occupied. Example if your looking at a 100 bed assited living facility and only 70 beds are occupied, you have a 70% occupancy rate.
Lets put all of this together in an example for a 200 unit self storage facilty being sold at $480,000 where the market cap is 9%. Mortgage is 2,600/month. 83% occupied.
Gross income = $180,000 @ 100% occupied.
Less Vacancy 17% = $150,000 (rounded up for the example)
Expenses = 97,500
——————
NOI = 52,500
Cap Rate = 9.14
DSCR = 1.68 (52,500 / 12 = montly NOI divided by 2,600)
With this example you can see the property can stand on its own, however, doesn’t provide a great discount.
When looking at these commercial short sales it’s important to understand that every deal is not a deal. Being able to analyze the current property value and forecast the future value is very critical and will also prevent you from wasting your time. When looking at commercial short sales you need to understand the current market conditions, competition, in addition to how can someone buy this cheap property and make it profitable. Understanding how to perform high level due diligence in a market area will save you time and money.
When evaluating commercial property there are a couple approaches such as the income capitalization approach or comparable sales approach. If dealing with a short sale the bank will order the appraisal when defaulted. If your not dealing with a short sale, find a MAI appraiser and see if they can give you a better idea.
I hope this little bit of information helped.
Take Care
P.S. I forgot to mention what types of properties you should look for. You have probably been email blasted by guru’s who say self storage, senior or independent living, and trailer parks. The reason why these properties are desirable is because they have the least amount of defaults and banks look at these properties as lower risk. However, don’t let that scare you from apartment buildings and complexes. No matter what property type you pursue, make sure you find a professional property manager to assist you. Get property manager referrals by contacting the state the property resides in association specific to the property type, i.e. self storage association of Florida.
Once again take a look at these free videos to learn more!
Are your ready to expand your commercial real estate knowledge? Learn commercial real estate from Jason Gilbert and the Commercial Training Institute, CTI. Click here and increase your paydays!
Just wanted to drop a little bit of information about commercial real estate since I’m sure your getting plenty of emails about how its the next big thing to learn. In deed, commercial short sales are going to be a tremendous opportunity for those who understand what they are looking at. So, I just wanted give a little bit of free information about commercial real estate. If you are serious about learning commercial then take a look at these free videos
Gross Income – The total amount of money the business generates.
Expenses – The overhead the business has to pay for or the cost to operate the property. (Does not include debt services i.e. mortgages, liens etc.
Net Operating Income (NOI) – The amount of money left over after deducting operating expenses, taxes, and insurance from the properties gross income.
Capitalization Rate (Cap Rate) – NOI divided by Price. this is the baseline or “measuring stick” when analyzing the value or price of property relative to its income. Example: If a property is being sold at 1,000,000 and the NOI is 100,000 the “cap rate” or rate of return is 10%. (Tip: for those looking for passive investors. If you find a deal that is offered at a 12-14 cap and the market is currently at a 10 cap you can offer your investor 10% rate of return and pocket the difference).
Market Cap – This is the rate of return associated with your property type within a specific market. This is very important to understand what the market cap is because if you find a property being offered at a 17 cap and the market cap is 15, your deal may not be worth the risk due to such a high market cap and only a potential 2% discount and return.
Debt Service Coverage Ratio (DSCR) – Calculated by taking the NOI and dividing it by the total debt service. This is the income to debt service ratio. This is also a very key ratio when analyzing a property. A property may of a descent NOI but has a high DSCR ratio. Easy ways to look at this is if a property has a DSCR ratio of 1 it is breaking even. Most lenders require the DSCR ratio to be 1.25-1.5. A great deal is 2.0 and higher.
Occupancy Rate – This is how much of the facility is occupied. Example if your looking at a 100 bed assited living facility and only 70 beds are occupied, you have a 70% occupancy rate.
Lets put all of this together in an example for a 200 unit self storage facilty being sold at $480,000 where the market cap is 9%. Mortgage is 2,600/month. 83% occupied.
Gross income = $180,000 @ 100% occupied.
Less Vacancy 17% = $150,000 (rounded up for the example)
Expenses = 97,500
——————
NOI = 52,500
Cap Rate = 9.14
DSCR = 1.68 (52,500 / 12 = montly NOI divided by 2,600)
With this example you can see the property can stand on its own, however, doesn’t provide a great discount.
When looking at these commercial short sales it’s important to understand that every deal is not a deal. Being able to analyze the current property value and forecast the future value is very critical and will also prevent you from wasting your time. When looking at commercial short sales you need to understand the current market conditions, competition, in addition to how can someone buy this cheap property and make it profitable. Understanding how to perform high level due diligence in a market area will save you time and money.
When evaluating commercial property there are a couple approaches such as the income capitalization approach or comparable sales approach. If dealing with a short sale the bank will order the appraisal when defaulted. If your not dealing with a short sale, find a MAI appraiser and see if they can give you a better idea.
I hope this little bit of information helped.
Take Care
P.S. I forgot to mention what types of properties you should look for. You have probably been email blasted by guru’s who say self storage, senior or independent living, and trailer parks. The reason why these properties are desirable is because they have the least amount of defaults and banks look at these properties as lower risk. However, don’t let that scare you from apartment buildings and complexes. No matter what property type you pursue, make sure you find a professional property manager to assist you. Get property manager referrals by contacting the state the property resides in association specific to the property type, i.e. self storage association of Florida.
Once again take a look at these free videos to learn more!
Are your ready to expand your commercial real estate knowledge? Learn commercial real estate from Jason Gilbert and the Commercial Training Institute, CTI. Click here and increase your paydays!
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