Why do people invest in this vs. traditional commercial real estate?
Are the loan terms 30 years on these properties?
How are they different from residential
What are average cap rates compared to traditional retail NNN properties.
Give me the skinny!!
Hi,
Here is what I think. I worked for a top commercial real estate firm who specialized in apartments. I think people invest in multifamily because most people know a thing or two about living in an apartment and it seems to be safe as long as having a roof over your head stays in style. Most everyone has rented an apartment, so they understand the lease, maintenance involved, etc.
Retail and Office properties are intimidating for people because the leases in itself are hard to understand. “CAM charges, NNN, modified gross vs gross”- Not in the average persons vocabulary and take a bit of understanding to grasp. The property management requirements in commercial property is different but the good thing is typical commercial leases are 5 years long vs apartments are usually 1.
If you want to look up cap rates for commercial property, look on Loopnet.com. You can search for the area you live in for free.
The reason I like residential is vacancy and non-payment problems are usually minor in relation to the investment. But my commercial cases show even a great tenant can get in trouble and I have a 100% problem. Of course they are the smoother most of the time.
MidLifeMan,
I think the answers will vary based on who you ask.
MFR is a commercial real estate and the performance is different from other types of commercial RE. You will find commercial investors tend to have a niche or a few niches where they like to operate. Some go for offices but not strip malls. Some like hotels while others focus on MFR. Some focus on NNN lease to the US Government while others want industrial property.
What I think is universally true is the expertise for one type of commercial is not the same for another type so people develop an expertise and somewhat stick to what works for them.
BTW - MFR is traditional commercial RE. It is just not what you think is traditional commercial. In other words, why someone invests in something has a lot to do with the stuff in their head independent of the market reality. We are creatures of habit and we have our comfort zones.
NNN VS. Multifamily
Seems like if I were to enter the the multifamily arena, I would be seeking higher returns than a traditional NNN property.
example: owning a wall greens NNN is about a 6% cap, but absolutely no work.
Owning a duplex is like residential. Leaky pipes, roof, etc. Stuff that I will have to take care of, thus these additional expenses and time are not covered by the tenant. So I would think investors would want a 12% + cap, because after expenses their true net cap might be around 8% or so.
You make it sound as though there are multiple ways to figure your CAP rate…there is not.
NOI divided by Acquisition Cost is the only way.
MidLifeMan,
So we are clear on terms, MFR means 5 or more units, 1 title. In other words, a duplex, tri-plex or 4-plex is not included in the property type. They are all property that can be purchased using a loan for an owner occupant. Hence they are not commercial and are not generally financed using commercial facilities.
As a generic statement, if an investor has higher expenses from an investment, earning higher gross income would make sense. Maybe the yield would be higher or maybe it would not be. If the property is a very choice property or had lots of upside independent of the NOI or net yield, an investor might trade off income for capital growth.
As I said, the above is a generic statement. What any one investor chooses to do is up to them. Some investors have very rigid criteria, some have very vague criteria and some evaluate each deal on a case by case basis. If the deal stacks up they go for it even if it does not fit a specific model. The hold period and the possible financing can have a big impact as to how an investor treats a deal.
Noi
I guess my point with multifamily when calculating the cap rate, is that you never know what the true net cap rate is. If i buy an apartment building at a 12% cap, chances are the day i buy it the roof leaks or something else goes wrong down the road, thus these expenses will reduce my return on investment…and that’s why I am saying that the initial cap rate should be higher to compensate for these additional expenses.
[QUOTE=midlifeman;885914]I guess my point with multifamily when calculating the cap rate, is that you never know what the true net cap rate is. If i buy an apartment building at a 12% cap, chances are the day i buy it the roof leaks or something else goes wrong down the road, thus these expenses will reduce my return on investment…and that’s why I am saying that the initial cap rate should be higher to compensate for these additional expenses.[/QUOTE]
Ray Alcorn has posted in the commercial forum that there is no one NOI of cap rate. What the buyer thinks is right and what the seller things is right can easily differ.
The example cited is a bit off. A roof would not be an expense, it would be a capital item. There should be an allowance or sinking fund for capital items so the NOI impact is already factored in. Even if there was no such allowance, it would be wrong to put the roof into the cap rate calculation the way you are suggesting.
If an investor wants to make a more conservative offer to allow for unexpected items, that is fine. That will not really change how others calculate the cap rate and it could result in the buyer being outbid more often. It is still valid as each buyer has the price they are willing to pay.
[QUOTE=John_Corey;885917]
The example cited is a bit off. A roof would not be an expense, it would be a capital item. There should be an allowance or sinking fund for capital items so the NOI impact is already factored in. Even if there was no such allowance, it would be wrong to put the roof into the cap rate calculation the way you are suggesting.
[/QUOTE]
Roof repairs are an expense - not cap ex, and expenses effect NOI.
Roof replacement is cap ex, not an expense, and therefore will not change cap rates or profit & loss (beyond depreciation) only cash flow.
Heres some more unsolicited advice from the real world, if your making purchase decisions based on cap rate then your paying too much.
Roi
AmotoXracer,
Can you give me an example of how you evaluated one of your deals. I’d like to learn how you determined what is an acceptable ROI vs. what the advertised cap rate was.
[QUOTE=AmotoXracer;885921]Roof repairs are an expense - not cap ex, and expenses effect NOI.
Roof replacement is cap ex, not an expense, and therefore will not change cap rates or profit & loss (beyond depreciation) only cash flow.
[/QUOTE]
Nicely clarified. All the readers of the thread will benefit.
[QUOTE=midlifeman;885927]AmotoXracer,
Can you give me an example of how you evaluated one of your deals. I’d like to learn how you determined what is an acceptable ROI vs. what the advertised cap rate was.[/QUOTE]
I was avoiding your original post because, first, I am a speculator.
That means i wont buy anything today that cannot be sold tomorrow for a significantly higher price. I don’t care about the asset types. Stocks, bonds, real estate, a z06 corvette or a sack of gold coins, I am only interested in things that are worth more than what I am paying. In the event I have a deal that meets that criteria first, only then will I consider operations for the income stream. This approach renders any sort of cap rate/NOI evaluation completely useless, unless a man appreciates the humor involved in operating, say apartments at an 80% cap.
I read all the replies, and i learned a lot of things from it… thanks for helping AmotoXracer, it helps me also to understand the situation…