Posted by Peter on August 08, 2007 at 11:21:41:
Thanks Doug. I fully agree on all fronts
Multi Family vs Strip Centers - Posted by Pete
Posted by Pete on August 03, 2007 at 11:25:05:
Hi, I’ve been reviewing the posts on this great site and finally decided to post my own message/question. I’m from the NY/NJ metro area and I really want to invest in strip centers in my area (NJ mostly) but it seems that with the average cap rates of between 5-7%, there is no value. I mean it doesn’t make any sense to break even or for that matter end up with a negative cash flow every month. That said, I’ve been thinking of investing in multi-family properties but not sure if they are any better. Plus, I would much rather deal with retail tenants than residential tenants. So at this point I’m not sure if I should just wait until the market turns around for stips, buy multi families, or even look for strips outside my comfort level (mid-west) where maybe the caps are better. Any advice would be greatly appreciated.
Peter
Re: Multi Family vs Strip Centers - Posted by Frank Chin
Posted by Frank Chin on August 08, 2007 at 15:03:25:
Pete:
Unfortuately, many investors in NYC are not cash flow investors.
Give you an example. Some Chinese guy bought two attached, but old, 3 family houses on one lot for $1.1MM, right down the street, and loves to come by to chat, in Chinese. Is he investing at 10% down?? 20%, 30%. Well, he put over 600K down, on $1.1 million. I was told that he told the bank if 600K down is not enough, he’ll do $800K.
Is he collecting enough rent to cover 500K in mortgages. Hard to say becuse he’s a contractor, who’s been fixing the place for the last several months, and so far I see only one tenant coming in and out, and is probably watching the place.
Does he know if he’s collecting enough rent to cover this mortgage, or any other?? Hard to say. In talking to him, I don’t think he does, or cares. According to him, he owns over 30 houses right now, and many of them free and clear, and what he does is he takes most of the cash flow to quickly pay off the next batch of mortgages. He tells me this 500K mortgage would be paid of in five years, or less, and it’ll be another free and clear house to pay off mortgages of other houses that he’ll be overpaying on later on, and so forth.
Also, as Doug mentioned, many homes, and older strips sit on land worth more than the strip as a cash flow investment. SFH homes worth 450K, worth 70% of that or less for cash flow investors are snapped up for 550K by buillders to put in 3 2-family homes. SO ZONING, and land use is another big factor.
I also looked into older strips in Long Island with 10% or better cap rates - based on the setup. But when I go to visit, I would find stores that is supposedly rented out, vacant, with many vacancies nearby. In one case, I visited the town planning department, and found out the restaurant, the anchor tenant, is lacking some permits, but things are so bad that they let them slide since they don’t need another business closing up, and more unemployment.
One of the problems is these older strips, usually six to eight stores, little parking except for a few spaces out front, are made obsolete by strips with 15 to 20 stores, a big lot out front, brightly lit, in other words, feels cheery and safe.
In checking out some of these older strips, especially ones where a restaurant is a major tenant, I go by during dinner hours, Friday night, Saturday night and find it dead. How some of them really pay the rent, if in fact they do, is questionable.
Of course, the old adage, location, location, location holds true.
In many older residential areas of NYC, there are commercial properties grandfathered. My dad owns one of these, and the establishments are never lacking in customers as people don’t want travel far for hair salons, medicince, and food. And as rents retail strips escalates, renters come calling as rents for these are still very reasonable by comparison.
I was kicking myself for not acting on a sick looking frame building that housed a closed up old fashion Irish bar, just down the street from my mother in law. I was wondering what to make of it.
Some guy bought it, fixed it up, put a laundromat where the bar was, and fixed up the adjoining garages into more stores, and rented them up to a nail salon among others.
I’m a little tee’d as I used to park down there, and now the corner is hopping, my usual parking space gone, and also for looking at sick strips where I was parking right in front of an opportunity.
So, I think investing in NYC involves spotting opportunties like these, know that it is, and acting on it.
Frank Chin
Re: Multi Family vs Strip Centers - Posted by Doug O
Posted by Doug O on August 07, 2007 at 07:21:36:
Peter, welcome to the NYC metro area… You’re unlikely to find cap rates above those you mentioned, unless you’re willing to invest in areas like a Newark, Irvington, East Orange, etc… If you keep poking your head around, you can find some decent mixed use properties, which can yield around 9-10% … But the housing market is tough in northern NJ (around NYC)…
And many of the strip centers you’ll find will be priced for the land they sit on as well as the income they generate… Since the good ones can be redeveloped by investors with deep pockets, it’s tough to find a deal…
If you’re looking for a large supply of higher cap rates, it’s definitely easier to look out of state…