Many investors don’t understand the power of commercial real estate. I too had reservations until I understood the power and safety commercial real estate can provide. Commercial real estate is similar to trucks. Trucks come in all sizes and all shapes – a Ford Ranger to an 18 wheeler. Commercial properties come in all sizes and shapes – a standalone building that houses a small restaurant to the Empire State Building. People read in the newspapers that commercial property prices are crashing. People notice the strip malls have a lot of vacancies and it scares them away. Let’s take a look at the power of commercial real estate and a quick note about market cycles. Commercial real estate is a business and is priced based on current cash flows. For simplicity sake, commercial property pricing is based on 10 x annual cash flow, not including debt service (loan). So a property that yields $10,000 in cash flow is worth $100,000. Regardless of the type of property, if you increase rents by 1% ($100) the value goes up a $1000. Decrease expenses by $100 and the value goes up $1000. So what? Let’s look at a simple apartment example.A small apartment complex (10 units) has an annual cash flow of $50,000 and is for sale for $500,000. It has a lot of long-term tenants paying below market rents. You put down 20% or $100,000 (there are ways to make it someone else’s money). We’ll assume it is a positive cash flow property even with the debt service (loan payments). First a storage area is made into a laundry facility that provides $5000 on annual basis. You just increased the value $50,000. Next rents are raised the first year to market rents. Raising rents $50 per unit increases cash flow $6000. You just increased the value $60,000. That means you have doubled your original $100,000 in the first year and you get to keep the $11,000 cash flow. There are many more ways to increase the cash flow including: separate utilities and have tenants pay utilities, decrease vacancy, work out a deal with dish network and get paid, reduce maintenance costs, and more. Just by raising the rent $10 a year increases cash flow $1200 a year and increases the value $12,000. In three to five years you’ll have cash flows of $70,000 to $100,000 (less debt service which remains constant) and you can sell the property for $700,000 to $1,000,000. Now you see the power of commercial real estate.Just like single family homes, not every property is a good deal. First you look for commercial properties in areas that have improving rents, increasing employment, and areas where the entire area is going through gentrification. Next you look for properties that have a value proposition – rents too low, poor management, ability to install laundry or some other measure to increase cash flow. You would be surprised how many buildings are poorly managed or have below market rents.I’ve used an apartment as the example; however this same model works for office buildings, mobile home parks, strip malls and more. All types of real estate (all types of investment) go through cycles. When the economy is booming for example, the vacancy in office buildings goes down significantly (prices go up). Of course the opposite is true during an economic downturn. During economic downturns more people move to apartments, mobile homes and need storage facilities. By observing these cycles one can move in and out of various positions to minimize risk and increase portfolio value.
Commercial Real Estate – Valuing The Cash Flow
Tactical Asset Allocation
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Intown Atlanta – Buyer’s Market
As real estate markets fluctuate around the country home buyers are seeking areas where the market is stable and favors the buying of homes. Occasionally they find an area that is hot for a few weeks but these spurts generally do not last very long. Sellers are likewise wondering if their area is going to pick up and see a shorter average listing time from open until sale. Intown Atlanta is a market to watch currently as there is quite a bit of action happening in this area. In fact Atlanta is showing definite signs of developing into a buyer’s market and there are some great deals to be had on beautiful homes.
Buyer’s markets are simply the best time possible to purchase a home. Atlanta’s current market is running somewhere around 5 available houses for each buyer that is out there so as you can well imagine there is some really attractive pricing happening here in order to garner the attention of buyers. So what can you do to get yourself ready for buying in a buyer’s market? The best thing to do is to be ready to react quickly. Homes can move pretty fast in a buyer’s market so you need to be ready to move at short notice. This will of course mean that your finances should be pre-arranged and pre-approved so that when the home you love comes available you can make a move on it.
The home buying climate is not the only attractive thing about Intown Atlanta, For years Atlanta has been one of the most lively southern cities and along with Miami, Dallas and Houston is a driving force in the “New South.” Atlanta is a growing city that is constantly adding new amenities and recreation facilities for the new residents that have flocked to this area over the past decade. Atlanta has dealt well with this influx in stride, providing excellent public services and employment opportunities with such notable companies as Coca-Cola, Home Depot, UPS and Cingular Wireless calling Atlanta home for their headquarters. Atlanta is a growing city with a lot to offer. With the current state of the real estate market it makes sense to check Atlanta out if you are seeking an area for a new home.