IB - no, I’m saying that lenders WILL loan on mixed use, but that several have stopped lending on pure commercial properties (ie, an office building, or a warehouse)…
If you are in a solid market in northern NJ, cap rates are as low as 4-5% for the A markets in Hudson & Bergen counties… A little higher the further you go from NYC metro…
If you can present it at an 8% cap or higher, you should get a lot of interest in the property, since NJ is a very competitive market… Unless you are in a warzone municipality (Newark, Irvington, East Orange, Paterson, etc…), in which case you’d really need to lower your asking price to bring the property into the 12% cap range or better…
Posted by IB (NJ) on February 26, 2008 at 22:37:41:
I’m trying to determine the value of a mixed use property using the income capitalization approach. Does anyone have an idea of what cap rate(s) the banks are using to valuate commercial properties these days?
The banks are less concerned with cap rates and more concerned with the debt service ratio and the strength of the income. Using 1.15-1.25 for your DSCR estimates should give you a reasonable price range. My banks like to see 1.2.
A lower cap rate means any buyer will need to put more down to make it cash flow and meet the DSCR.
If you assume a buyer puts down 20%, pick a few reasonable interest rates and terms that a buyer could obtain. It is less common to find 30 year amorts for commercial, but since this is mixed it never hurts to ask. Since you know the NOI you can back out a price range. Then your aunt can decide if that is in the ballpark of what she’s willing to accept and how long she is willing/able to have it on the market.
Another thing your aunt may want to consider is seller financing. There are advantages and disadvantages there.
If a buyer is trying to get in with less than 20% down, then the total payments between all loans has to meet the DSCR. Banks will typically want to see at least 10% down from the buyer. Some banks don’t allow 2nds on commercials. The smaller ones tend to be more flexible on this.
You can also check out the recent sales on Loopnet.com. I have both the premium subscription and the recent sales subscriptions - it might be worth a month’s subscription to get some data. It can be hit or miss on finding comps. The premium runs $49/month and the recent sales is $27. Recent sales you can also buy per sale for a couple bucks each. I don’t know if you can search/buy just the recent sales.
Posted by IB (NJ) on February 26, 2008 at 22:50:44:
BTW, This property has a commercial store front on the ground floor and 2 apartments on top. Total = 3 units. I’m assuming the income cap. approach can be used to determine value, correct?
Yes, you would want to use a cap rate approach to valuation for this type of property. That said, there is no single cap rate number that’s applicable to properties in various locations; the cap rate in one area will vary widely from cap rates in other areas. Take a look at other similar properties in your area, and see what cap rate they are selling for (not be listed for, but actually selling for).
IB - I’m also in NJ and can provide some advice depending on the area you are looking to invest in…
One thing that helps is that you are buying mixed use, since a lot of the lenders have ceased straight commercial loans in this area…
Best way to present something like that to a regional lender is to provide cashflow information - that should be the single most important piece (aside from your personal credit scores & finances) that anyone will look at…
You’re going to need to come up with a price that leaves you with a DSCR of around 1.15 or higher to satisfy most of the lenders around here without questions…
You should be able to look at all the for sales in the area to determine an average cap rate that similar properties are being listed for - that information can be picked up readily on the internet…
Posted by IB (NJ) on February 27, 2008 at 21:24:53:
Thanks Doug. I’m actually trying to help my Aunt sell her parents’ property. Are you saying that most lenders no longer loan on purchases of mixed use property?
Posted by bamplified on February 27, 2008 at 12:10:39:
Rates from RealtyRates.com for NJ show an overall average rate for Class A & B apartments at 7.6%. Class A & B retail at 10.7%. I would think as a mixed use property, depending on the quality and condition, that MARKET would be from 11% to 12%. Again, that’s market, which might not be high enough for you. You need to focus on what it’s worth to you as an investor.