Income producing properties. - Posted by john

Posted by Terry H on March 19, 2006 at 13:44:11:

Sam, correct most lenders are looking for 1.2 - 1.25 (from what we have experienced). Our lender was a local bank in this case. The bank kind of owed us a favor, but in any case yeah we were able to show them a signed lease from the potential tenant, which the appraiser also took into consideration. Once we closed the deal, completed the build-out the final numbers (sq ft and so on…) were modified from the original lease with an amended lease.

Income producing properties. - Posted by john

Posted by john on March 08, 2006 at 13:34:23:

Greetings All,

I’m focusing on monthly income from commercial real estate. Is there any RECENT success stories you can share about how you are generating a decent monthly net income on commercial properties. I believe that the appreciation days are over, so income is on my mind. Please let me know your stories. Thanks.

Re: Income producing properties. - Posted by George

Posted by George on March 13, 2006 at 12:44:33:

I don’t have the experience that most of the folks on this board do, but I agree with you that real estate prices have probably topped out to a large extent for several years going forward. It is also self evident that interest rates are on the rise, with who knows what outlook years out. I did things very unconventionally compared to most folks here. I purchased a property of a high credit tenant, with a longterm NNN lease, with a longterm self amortizing loan, with a very low LTV of around 50 percent. I acknowledge that I probably won’t make a lot of capital appreciation on this property, and my income is relatively low with caps being so low on high credit properties these days. But…I sleep well at night knowing that I have a solid investment for many years to come. In 10 years I’m not going to be facing a huge balloon payment with potentially much higher interest rates to have to refinance at. I won’t be forced to sell at who knows what price at refinance time. In short, I played it very safe, and with everything happening in economics and the world these days, I’d rather sleep well at night than worry if debt is going to do me in.

Re: Income producing properties. - Posted by Walt

Posted by Walt on March 08, 2006 at 23:33:28:

A little Pessimistic. If appreciation is dead, so is income. It is tied to the property value. What market are you in? Let us help you by sharing more details than you have.

Re: Income producing properties. - Posted by john

Posted by john on March 09, 2006 at 16:05:31:

Walt,

I’m in the Washington D.C. area, so prices are very high. However, I’m trying to find properties about an 1 hour outside the city, that can produce a nice annual return excluding appreciation. I would be happy with 6-8% annual net. If I get appreciation, that’s great and I probably will long term, but income is my focus. I’m looking to buy office or retail space in the 2000-3000 range with 20% down. The problem is that rents aren’t rising in conjunction with the appreciation. It will take some time to catch up. So my strategy is to get in now before rental rates rise.

Re: Income producing properties. - Posted by Terry

Posted by Terry on March 09, 2006 at 03:42:10:

I somewhat agree. I haven’t been in this business too long, but I quickly realized having a good long term tenant in your back pocket is the key. Meaning, find the tenant first (find out what kind of space they are looking for, how much space, so forth…) then go out and find a building for sale that meets their criteria and buy it with contingentcies. Therefore you just created your own appreciation. We bought a building Aug 31, 2004 (20,000 sq ft, 1 tenant with 12,500 sq ft which covered debt service) for $3.2M. We knew we had a tenant for the remaining space, completed the build out (which the tenant paid for completely (rare)), and will close on the sale next week where we will net $4.25M. We are in the midwest so we don’t focus on appreciation. I’ve always thought that is something you can hope for and is just an extra bone if you get it. But the tenant and their rent roll is what makes the value of your building.
So find a building that is coving debt service with some vacant space (upside), get your tenant to agree to a long term lease and create your own appreciation.
Ray - great website and forum, appreciate it.

Re: Income producing properties. - Posted by chris

Posted by chris on March 19, 2006 at 09:58:55:

Terry,

Sounds like you have the right idea in creating some upside for your deals. I have 2 questions.

  1. How and where did you go about finding a tenant?
  2. How did you keep the deal together for yourself (the building owner and the tenant could probably see the value together (without you!) ?
    Thanks in advance…Chris

Re: Income producing properties. - Posted by Sam

Posted by Sam on March 17, 2006 at 09:43:51:

Terry, I’m in the process of purchasing my first building - currently 100% leased, but thought for the next one some vacant space might not be a bad thing—most of the lenders I talk with want 1.25 to 1.3 DCR --how were you able to get funding with 1.0, was it the upside in the vacancy, or did you have to show the lender a lease for your new tenant?

Re: Income producing properties. - Posted by CHRIS IN FL

Posted by CHRIS IN FL on March 10, 2006 at 09:58:42:

WALT, YOUR THOUGHTS AS TO WHAT YOU WANT TO DO AND WHY SOUND PRETTY GOOD. TERRY - GREAT FOLLOW-UP. I AM IN FLORIDA, WHERE MARKET HAS SHOT UP AS WELL, AND BARGAINS IN CASH FLOW PROPERTY ARE TOUGH TO COME BY. I HAVE INQUIRED AROUND SOME, AS I MAY LOOK TO MAKE A MOVE SIMILAR TO YOU, WALT, IN THE NEAR FUTURE. YOU HAVE TO FIND AN ANGLE (JUST LIKE TERRY’S EXAMPLE). FIND DEALS WITH UPSIDE THAT IS NOT PRICED INTO THE SALE, TAKE A CHANCE ON VACANT PROPERTY THAT MIGHT BE PRICED LOW BECAUSE OF NO CASHFLOW (OF COURSE, IF YOU HAVE TENANT LINED UP THE RISK IS A LOT MORE MANAGEABLE), BUY PROPERTY WHERE YOU KNOW OF HIGHER AND BETTER USE THAN WHAT IT IS CURRENTLY BEING USED FOR, ETC. WITH INCOME PROPERTY, CASHFLOW AND PRICE MOVE TOGETHER, SO TO WIN BIG YOU HAVE TO DO WHAT INVESTORS ARE SUPPOSED TO DO - FIND OR CREATE BARGAINS. I KNOW I WILL BE LOOKING SOON TO DO JUST THAT - GOOD LUCK IN YOUR HUNT!

Re: Income producing properties. - Posted by Terry H

Posted by Terry H on March 19, 2006 at 14:03:25:

Chris, we own some vacant ground as well in the area with plans to develop at some point. However, right now there is a sign out there (Pre-lease space so on). We get calls from small business owners, brokers and we simply tell them we are still in the entitlement stage of the development but “what are you looking for, we may have something else that would work for you?”. This gives us a contact, phone so forth and if we don’t have something we start calling brokers to find a building for sale with vacant space. Contracts are written with contingentcies and then you show the building.

Answer to number two is; once the building owner is under contract it’s hard for him to kill the deal (plus he probably wants to sell anyway and move on. Tenants can pull out at the last minute as well and you have some risk. Tenant doesn’t care who he’s working with (us or the current owner) as long as he is getting the lease rate that he is happy with. There’s always risk, but in this case I personally knew the tenant and it was a lock for us.

Totally different deal: I had this 8,000 sq ft building under contract with extensions out to Feb 15, 2006. One tenant already in the building had a master lease (so they should have been paying rent all all 8,000 sq ft). In doing my due diligence I come to find out the tenant is not only NOT paying rent on all 8,000 but he was only paying what he could afford to pay monthly. I could ahve killed it right there, the owner misrepresented the building and the lease, but a broker found out I had it under contract and had a user for the entire building. A few weeks later the tenant that was in the building files Chapter 11 and is kicked out. So now I’m working with an empty building and a possible tenant. The owner found out about the tenant and wanted to kill the deal, keep it for himself, but because I had the right to extend he couldn’t do anything about it. So now it’s a race against time, get the tenant comfortable with the building, get the city comfortable with the tenant and get myself comfortable with the financials of the new tenant… Long story short, I couldn’t get comfortable with the tenant (didn’t like the business plan that much), so I killed the deal. I think they may have worked something out with the current owner, but it’s been a month and half and I still don’t see work on the building (had large requirements for changing the build-out) and I didn’t want to carry it very long with a already shaky potential tenant. It’s a crazy business and my partner always tells me, “there is no loyality out there”…