Archives June 2017

How Do You Measure Up?

Every investor has that certain item they look for in order to identify a good investment property; some use Gross Rent Multiplier (GRM), others use Price per Square Foot, others use Price per Door, while still others use Capitalization Rate (CAP). This certainly begs the question, who is right? Even more profoundly, is there a right or wrong when measuring the value of an investment? Let’s compare these different ways
of comparing.

The Gross Rent Multiplier (GRM) of a property is simple math; it is the number of times the value of a property can be divided by the gross potential rental income. For an example, if a property is listed for sale at $2.5 million and it brings in $250,000 in gross rental income, than the property has a GRM of 10. Okay, but what does that mean, is 10 a good number?

I use GRM as a filter when looking through investment property options. It would be rather cumbersome to extensively analyze every property that is listed for sale. Therefore you can use GRM to weed out the properties that do not generate enough cash to meet your objectives and it is an easy way to decide if the property is extremely overpriced. GRM however has one major shortcoming; it does not take any operating expenses into consideration. Let’s use another example but this time we have two buildings for sale and both have a GRM of 10. In this example both properties are expected to generate $250,000 of income. However property number one has 35% expenses which is $87,500 and property number two has 47% expenses which is $117,500. Since they both have a GRM of 10, are they still worth the same amount? If both properties are located in a 5.5% CAP rate area then property number one is worth $2,954,545 and property number two is worth $2,409,091. That is over a $500,000 difference in building value with only $30,000 variation in expenses. GRM can be a handy quick look tool but I wouldn’t put my money on it.

Price per square foot (PPSqFt) is another easy math problem; it is the building price divided by the total square footage of improvements. An example is a 12,000 square foot building listed for sale at $1.9 million. The price per square foot on this property is $158.33. This can tell you, when compared to other market data, if $158.33 is priced higher or lower than other buildings for sale. Price per square foot contains the same limitation as GRM in that it does not factor in expenses. Additionally, price per square foot doesn’t look at income either. In this case you could end up with a 12 unit property, renting out apartments at $25 per month and 500% expenses… Oh My!

Price per door is yet another way to evaluate the worthiness of an investment property. Everyone loves a low cost per door, more doors for less money. I too look for a low cost per door, but again it does not consider income or expenses. As an example, let’s take two properties that are currently on the market. (Please note this is a dramatization. Some names and locations have been changed to protect the innocent listing agents.) We will call property number one Peach Street and property number two will be Apple Avenue.

Peach Tree

16 units total, all studio apartments
Total square footage is 4,080 and the price per square foot is $365
Total gross potential annual income is $111,600
Price per door is $93,125

Apple Avenue

16 units total, all 3 bedroom 2 bath apartments
Total square footage is 15,600 and the price per square foot is $143
Total gross potential annual income is $211,200
Price per door is $140,000

Which property is a better value? I suppose it depends what you are shopping for. Are you in the market for “potential” income? Do you want to buy square feet? If you really need to purchase a whole bunch of doors, I highly recommend Home Depot…they have much better pricing!

As investors we need to look at the bottom line, at the Net Operating Income (NOI) of the property. In order to make sure that the property can qualify for a loan or that we receive the ever so powerful positive cash flow, we need to take everything into account. We must look to the property’s Capitalization Rate (CAP rate).

The CAP rate of a property is the NOI divided by the purchase price. Because this calculation is based on NOI, it takes in account potential rent, minus vacancy and credit loss minus operating expenses.

The CAP rate method of evaluating investment properties is the most comprehensive of all the above mentioned techniques. Using GRM, price per square foot and per door can useful tools, but please use them with caution.

If you need any assistance determining the value of a commercial property, please give me a call today.


“Earning You Many Fond Returns…”

TIC Talk

I often speak with investors who have questions about syndications, how they are structured and how it all works. I’d like to take this opportunity to explain our process and how syndications can be beneficial to both new and experienced investors.

What is a syndication? The purpose of a syndication is to pool together capital from several investors and use it to leverage them into larger properties than they would be able to purchase alone. We can put together syndications on small multi-family properties and large commercial properties. Our intent is to place investors that have similar investment goals, risk levels and capital and with other like-minded investors. Since we do syndications on several types and sizes of buildings, you can always take a step up from your average investment property to expand your portfolio.

What is a TIC? We structure our syndications on a Tenants In Common (TIC) agreement; tenants in common is a method of holding title to a property. The owners on a TIC agreement have an undivided fractional ownership interest in the property and ownership shares do not have to be equal. The TIC agreement covers the entire life span of the investment and outlines how the relationship is created and will function. The TIC agreement also allows an investor the option to complete a 1031 exchange if
desired. The IRS recognizes a TIC as a group of individuals versus a business and therefore allows TIC investors the option of completing or not completing a 1031 exchange.

Do I get cash flow? Absolutely! The amount of your cash flow depends on your percentage of ownership. Cash flow is delivered to our owners on a monthly basis. We can structure properties to produce an approximate 10% to 15% cash on cash return. Yes these are properties located in southern California that have very positive cash flow.

How does the property operate? We will conduct all aspects of property management to ensure your property achieves its maximum potential. Our detailed analysis will spell out the management plan and you will receive monthly progress reports. All accounting, leasing, maintenance and management issues are taken care of. You will never need to hear a resident complain or worry about a leaky pipe or paying a bill. The property itself will generate enough money to pay for all of its operating expenses, the mortgage and the remaining cash flow goes to the owner.

What Internal Rate of Return can I expect? In addition to the cash flow, our investment properties will produce an estimated 25% plus internal rate of return. Because we are able to secure excellent financing products we are able to increase the leverage. In some cases we have used 80% or more loan to value which creates high returns for our investors.

What is the minimum investment? We do not have an established minimum or maximum investment amount. The minimum investment amount will be different for each syndicated property. Again, we align “like” investors and create small, medium and large investment opportunities to meet a wide range of investment goals.

Can I sell my ownership? Yes. We generally hold syndicated properties for a two year period and this is agreed to by all owners before closing. The TIC agreement allows you to sell your ownership shares in the property if the need ever comes about.

Can I have an example? For the example, we will use a real property that we are currently syndicating. It has a 14.99% cash on cash return and a 29.17% internal rate of return (there is still some room if you want to get in on this one!). We plan to hold the property for two years. It will have an increase in income by the 6 month mark and another increase by the 18 month mark.

The total initial investment is $749,616. This amount includes the down payment, closing costs, loan fees, due diligence inspections etc.

Our example investor is Hank. Hank is a smart guy and likes the idea of getting into a high return, hassle free investment and decides to invest $150K into our property. $150K of $749,616 makes Hank a 20% owner.

For the first six months, we expect the total cash flow to be $56,202. Hank is a 20% owner so he will receive $11,240 over the first six months or $1,873 monthly. By the 6 month mark, we will have increased the rents and over the next 12 months we expect $127,560 in cash flow. That is another $25,512 to Hank or $2,126 monthly for 12 months. At the 18 month mark, there will again be room to increase the rents. For the last 6 months of the investment period, the property will generate $70,696 in cash flow.
And to Hank, who has long forgotten where this property even is, will receive another $14,139 or $2,356 for 6 more months.

Now we place the property for sale and sell it at the average market CAP rate for that area which happens to be 5.53%. Our sales proceed (including all costs of sale) is $1,286,397. I call Hank to tell him that he just turned his $150K into $257,279.

Total Cash Flow over two years = $50,891
Total Sales proceeds to owner = $257,270

Total in = $150,000
Total out = $308,161

Happy Client = Priceless.

Feel free to contact me if you have any questions about our syndications.

If you have any questions about our syndications, please give me a call today.