Why you don't invest in commercial real estate "All Cash"
[{"id": "dpj47vf", "text": "This article reads like it was written by somebody who hasn't actually invested; their first point is literally \"buying one outright without using a loan is not easy to accomplish\". Leveraging is great, but let that next recession sweep you away. \n\nA better title for this article is: \"If you don't have money, borrow money, it's great.\"", "replies": [], "depth": 1}, {"id": "dpj7azk", "text": "It wasn't horrible, but it seems to me their target market wouldn't get anything out of an article like this. I find it unlikely there is a large group of people who are ready, willing, and able to purchase a commercial asset but also need to be taught that leverage will likely boost IRR and cash on cash return. One thing I noticed: cap rate is most valuable as a tool to quickly CO. Pare the price between two otherwise different priced assets. A $1,500,000 asset at a 5% cap is more 'expensive' than a $2,000,000 property at a 7% cap. ", "replies": [{"id": "dpjyq5k", "text": "You over estimate people.... Today I had lunch with a client that owns 30 units in 4 properties and had to break down levered returns and why his 80% equity should be used to exchange in to larger properties. Not exactly a big fish but he should understand these concepts by now", "replies": [{"id": "dpk83r2", "text": "I do have that conversation from time to time I guess now that I think about it. ", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "dpkj0jy", "text": "A review of my 3 commercial deals, and how leverage was used:\n1. Bought for 50% cash 50% leverage at 5% APR. 50% occupied, for $1.3m. Now its appraised at $2.3m, and we took a cash-out refi for $1.5m, took about 2.5 years. This was an excellent use of cash. The property was on the open market (for a day), and so we had time to get funding, and being 50% occupied, we found a traditional lender at traditional rates. \n2. Bought a NNN occupied building with 4.5 years left on lease for $613,000 at a 10.8 CAP. But, because of the low purchase price, we couldnt find a traditional lender to lend on it, so we had to buy it cash. We sold the property for $860,000 (net of closing costs). We did a 43% return, but that would have been much more, even if we used a hard money loan. Regretfully it was all cash and we benefited from the project's IRR&gt;\n3. Now closing on a big warehouse, 25% occupied on annual lease, has NOI of about $50,000 with $1.5m purchase price. We couldnt get traditional funding because of low occupancy and short term lease. We don't want hard money because that would throw us into losses for the next year or two until it is stabilized. It would probably be the \"right\" decision to use hard money anyways just considering my track record and expected IRR. Ultimately, we'll refinance or sell; refinance once we increase occupancy slightly, and sell when we get the property fully occupied.\n\nAt the end of the day, if you are buying properties at value prices, it is not a big deal to use leverage. If you know you can flip the asset for a profit right now, then go ahead and use leverage because your risk of capital loss is none existent; if you are buying a property and hope it will appreciate based on speculation, then you might have a hard time if the market future doesn't pan out.\n\nHope the anecdotes helped.", "replies": [{"id": "dps8np0", "text": "On your example no. 2, what did you do to generate the increase in value? Over what timeline was this? Just curious. ", "replies": [{"id": "dpsmf84", "text": "2 months between closings. I marketed the property to other buyers using a broker from a different market. Nothing material was done to add value. ", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "dpleh43", "text": "We're currently covering this in a finance class and I'm having a hard time wrapping my head around how IRR is higher if the amount of debt used is higher. I've googled around and found some reasons, but still don't understand. \n\nDoesn't the interest from a loan make the cashflow of a property less than all cash? \n\nIt seems like a levered IRR is kind of useless? ", "replies": [{"id": "dpv8mn2", "text": "Hi Kappa,\n\n It's not useless, because even if your total levered cash flow is lower, you're using less of your own cash to achieve it.\n\n Let's say you have 10 dollars to invest.\nOption 1: I tell you that you can give me $10, and I'll give you back $12 tomorrow. That would be a return of 20%. You can do this for as many multiples of $10 that you want, but you only can do it once today based on your budget.\nOption 2: Same deal with me, but now a friend of yours (your lender) tells you they'll lend you an additional $10 so you can take the deal twice, making $4. For their troubles, they take $1.\n\nDo you take option #1, and happily receive your $2 (20%) return? Or do you take the same $10, leverage it, and make $3 on your same initial 10?\n\nLevered IRR measures how much money you're making on your own investment, taking into account the time value of money as well.", "replies": [], "depth": 2}], "depth": 1}]