New to CRE, Is this a good investment?
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[{"id": "f6qnngm", "text": "Value = NOI/Cap rate\n\nNOI = Gross rents \\* 50% (50% is commonly used)\n\nCap rate = 6% \\*[https://apartmentloanstore.com/fresno/california/cap-rate](https://apartmentloanstore.com/fresno/california/cap-rate)\\*\n\nThis is a quick estimate, but according to the formula it's worth around $915,000.  But you would know more about the cap rates in Fresno, is 6% fair?", "replies": [], "depth": 1}, {"id": "f6qo33x", "text": "Very hard to know without any specifics. \n\nWhats the area like? What are some similar comps priced at? What about similar lease rates in the area? Does the city or community have a master plan? Any inclination of jobs leaving or entering the area? Typical market research stuff.\n\nWill you be financing, and if so how much? What will the rate be on the debt?  Whats the term of the note? Whats an acceptable return? What about cash on cash or levered returns if financed? \n\nThese are just a few questions I can come up with off the top of my head. \n\nWith the data we do have - if you have zero operating expenses, your annual return will be 8.45%. This isn't very good unless you are looking to make improvements and or do a cash out refinance. If this was land that was leased to the government forever and had no overhead, I would say dive in. I think without a significant value add play, this would not be something to take on. If you are familiar with cap rates, the building is selling for a 3.5 Cap which is incredibly low. Should be north of 7 cap.  Maybe this is not a cap rate asset though. \n\nI hope this helps as a good starting block!", "replies": [{"id": "f6rdala", "text": "How do you get to 3.5% Cap rate?", "replies": [{"id": "f6rvr6k", "text": "&gt; Sorry I made a mistake on cap rate. I had $3.1 million instead of $1.3mm.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "f6qz8cv", "text": "Did you hire an inspector and find any deferred maintenance issues for the building and site? That would also impact your purchase price. What are the comps looking like for other properties in the area?", "replies": [], "depth": 1}, {"id": "f6r94kw", "text": "Get a property condition report for the building, who knows if the roof has a leak that needs to be repaired or some other issue that is not evident to the naked eye (?)", "replies": [], "depth": 1}, {"id": "f6re747", "text": "you dont even know how to value a property and you're willing to spend 1.3 million dollars on it? why dont you do yourself a favor and read a few books before you do anything\n\nYoure talking about a damn strip mall, in a non core market, with shit low credit quality tenants, thathave half of the leases rolling within 4 months of each other in 2023\n\nRISK\n\nRISK\n\nRISK", "replies": [], "depth": 1}, {"id": "f6upn25", "text": "The maximum loan amount I would be comfortable issuing a soft quote would be $620,000 based on a 1.40x minimum DSCR threshold, 4.75% UW rate, 30 year amortization. Depending on TI/LC for Fresno, I\u2019d hold back a portion of the loan amount until the property is stabilized. \n\nRent less expiring leases, vacant, and mtm units=\n6700 per month\n80400 per year gross \n\nLess 26k expenses =\n54,400 NOI \n4.18% cap rate based on a 1.3MM sales price", "replies": [{"id": "f6v6fwg", "text": "Soft quote checks out. Cap rate seems really compressed at 4.18% though. Maybe 5-6% on a good day.", "replies": [], "depth": 2}], "depth": 1}, {"id": "f6v63xu", "text": "Dude, proceed with caution. \n\nPrivate Equity guy here. History with Credit Analysis, and CMBS Lending. I know how the big boys go about CRE investing. \n\nMany on this sub are smaller time local guys or work in brokerages or some sort of 3rd party CRE service sect. = Take their advice with grain of salt. \n\nRisks (Credit and Equity related):\n\n1) There\u2019s multiple tenants rolling in 2023. Any semi-legitimate investor or lender would see that as a massive red flag. \n\n2) Retail for asset type. Don\u2019t even try and argue. This isn\u2019t a Class A, historically well performing, premiere mall or something with very strong national tenants (I.e Nike, Addidas, Ruth Chris, Great Clips, etc). \n\n3) No mention of PCR. Get one and see what it says. I\u2019m skeptical. \n\n4) TI/LC + Replacement Reserves. See what your loan docs would require for that, also see what is currently in place in those accounts. Speak with local broker and get his/her take on how expensive it is to replace those rolling tenants (see point #1) with marketing time estimates and factor those into your models. \n\n5) Leases. Are they all in-line? Do they have a designated \u201canchor tenant\u201d in lease language that could pose further risk if your anchor tenant vacated? Sometimes if an anchor tenant leaves the other in-line tenants will have provisions that will allow for early lease termination or reverting to a % of Sales for Rent. Beware and read each and every page of every single fucking amendment and exhibit, perhaps with a CRE lawyer, before jumping into something. \n\n6) Taxes. You\u2019re in California. I\u2019m so so sorry for you in that regard. Fully understand what kind of tax situation you would be in with this property. Are they currently in an abatement period? Are they thinking of raising taxes? Are their liens already in place? \n\n7) Competition / New Supply. Run comps or get some from a broker. What other (presumably) Class C retail plazas are within 5 miles of the subject? How do the rent rolls compare? Personally inspect both at various times of the day and evaluate the type of clientele. The number of cars in the parking lot. How busy all the tenants appear. Etc. This rather simple reconnaissance can give major clues as to the likelihood of longevity of performance and to get a feel how the tenants are performing. Also, are there new retail plazas coming online during your anticipated position? \n\n8) Rent delinquencies. Find out via broker to get the scoop on this current rent roll. Bad debt expense and litigation for back rent is pricy for the bottom line. Run credit checks on the tenants and see if they have ever been delinquent on payments. Call S&amp;P and Moody\u2019s for credit ratings if the tenants are national public chains. \n\n9) Insurance. You\u2019re in California. Your environmental report will probably indicate you\u2019re in a high risk earthquake zone. This may cost you a lot more for insurance than you anticipate. Word of caution. \n\n10) That current Vacant unit. How long has this been marketing for? Asking rent? How does it compare to comps? These are major questions you should be asking and skeptical of. \n\nAll these points can be successfully negotiated into the asking price. Fuck the asking price actually. Create a nice model and utilize outside parties to help. Come in with a firm offer showcasing how this is a huge value-add play and it\u2019s not really a turn key property like how all these shmucks try and present it as. Best of luck!", "replies": [], "depth": 1}, {"id": "f6va954", "text": "This looks like a tough deal and would be very difficult to finance. If you are coming from houses  why not check out multi family? Too over heated in CA? You could finance that at 75% - 80% likely depending on your financial position. WAy easier to manage.", "replies": [], "depth": 1}]