New Investor looking to make first purchase
Hey Everyone - I am VERY new to investing in commercial real estate and am somewhat new to real estate.  I pay attention to it but never looked at it as an investment until now. I was presented with an opportunity that I know is far too good to turn down as a long-term investment and am going to go after it. Long, long story short this is a parking lot owned by a group that needs money and the best way to get that is to sell some of their parking. The dirt is 1.6 acres, there are 250 parking spots. The purchase price would be $3.2MM for property in an incredible location. 2017 taxes were $84,029.01 and they will go up. I am waiting on a quote to res-tripe the lots but lets say that is $10,000 and then another $12,000 to install parking arms and key card access. What is the best way to go about determining my rent? I am confident I can get $100 per spot from this group but I want to make sure my costs are covered and this is a 100% covered land play paying for itself. Any help is much appreciated as I want to be sure I am coming to my numbers the correct way. Also, I put a quick offer in at $3.2MM but I think I may need to go up to $4.3MM to get competitive as I know my competition and what they are willing to pay. So I am building my assumptions and rent rate off of $4.3MM, not $3.2MM.
[{"id": "e3smbck", "text": "Back of the envelope calc using these assumptions:  7 cap, 10% vacancy, 20% operating costs, and your rent assumptions = $3.1mm valuation\n\nNot a lot of room. \n\nI would suggest modeling it out with financing terms and more detail in general to understand the deal, but it's not a slam dunk steal.", "replies": [{"id": "e3spm8a", "text": "Yeah, unless it\u2019s zoned well in a high growth area so it can be developed in the future, if you\u2019re going by those numbers there\u2019s better deals to be had. ", "replies": [{"id": "e3ss1n4", "text": "I hear you for sure. This is a piece of property in an area of drastically appreciating land value and considered to be the single most sought after neighborhood to own property. It is a redevelopment play 100%. Part of me truly looks at it as a bond to park some money for a while.", "replies": [{"id": "e3ss9fl", "text": "Have you looked into what it\u2019s current zoning is? If it\u2019s such a hot area it would be strange for developers to not already have reached out to the owner several times and that the owner would be willing to take such a low price. ", "replies": [{"id": "e3ssgj2", "text": "Yes. Zoning is all good. ", "replies": [{"id": "e3t157k", "text": "No, what is it zoned for? Residential, commercial, industrial, etc. That\u2019s a HUGE part in a redevelopment plan, because knowing what you can do now is a much safer bet than having it rezoned in the hopes it happens.", "replies": [], "depth": 6}, {"id": "e3t5x8c", "text": "Once it\u2019s under contract, go speak with a planner at the city and make sure you can do what you want. ", "replies": [], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "e3w9cvb", "text": "&gt;7 cap\n\nWhere did this come from?  At a 5 cap it's worth $4.34mm.   OP watch your taxes.  If this was free parking and you turn it into a paid parking lot be aware that some municipalities tax parking at a much higher rate.", "replies": [{"id": "e40cmoh", "text": "Just a placeholder, not knowing the msa, and other info to underwrite.\n\nWould use 5 if it was new multifamily. \n\nInvestor should get it under contract with due diligence period and maybe a few extensions. And do due diligence!", "replies": [{"id": "e40h86u", "text": "Why 5% if multifamily?  Where are you getting these numbers?", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "e3t2kvp", "text": "Is this downtown detroit?\ud83e\udd28 ", "replies": [{"id": "e3uljsz", "text": "....it could be one of 100+ areas in the US...", "replies": [{"id": "e3v5axe", "text": "It could be!", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "e3th2y1", "text": "I suggest you have at least a Phase I Environmental Site Assessment done to minimize the chance that you may be buying a contaminated site. Penalties for liabilities attached to commercial real estate can be more severe than for residential.", "replies": [], "depth": 1}, {"id": "e3vcqcw", "text": "Just make sure you get a good operator or don\u2019t use humans.  Slippage in parking can easily fall north of 30%.  Parking operators are notorious for stealing boat loads of cash.", "replies": [], "depth": 1}, {"id": "e40n1kx", "text": "Other than price (obviously), parking deals are all about the parking lease you can obtain from an operator and knowing the downside of your taxes.  Negotiating your parking lease will make or break your deal.  Parking leases can be very beneficial to the owner if you know what to ask for from the operator (parking leases have gems I have never seen in any other commercial leases). \n\nNEVER let a operator know this is your first parking deal.  They will eat you alive. Once you have a lease offer in writing, you can come up with your cap rate.  If you know the cap rates for the area you are purchasing (parking cap rates specifically), then you will be able to evaluate this deal.\n\nI have purchased &lt;3 cap dogs based on the current parking operation and lot layouts, negotiated a new lease with national parking operator (while in the DD period) and by closing have a &gt;10 cap deal.  \n\nSpecific to your deal information: if your location is truly this good and the demand is there, I would have operators fighting over operating this lot.  I would request multiple lease offers and pick the best to include the operator paying to pave and stripe the lot and installing the PARC equipment at their cost. They also know best how to do the layout and the right system to use - pay on foot - pay and display - gated or non gated - pay on entry - pay on exit - License plate camera system - are just a few ways to set up the same lot.\n\nLastly, if you do not get parking operators that are interested in operating, take this as a red flag. They run on thin margins and need all the locations they can get.  \n\nBest of luck and keep us posted on this deal.  I'll be curious to see how it turns out.", "replies": [{"id": "e40r7b4", "text": "&gt; have a &gt;10 cap deal.\n\n Why would you want to increase YOUR cap rate?  The cap rate is set by the market.", "replies": [{"id": "e40vdc7", "text": "The BUYER side cap rate not sell side. Buyers want high cap rate deals.  Sellers want to sell at low cap rate.\n\nCap rate is NOT set by the market - they are average measures. I have never bought a parking lot where I can't increase the cap. Anything you do to add revenue, increases (therefore not set) your cap rate. Especially in parking.\n\nEx1: I have changed parking lots to diagonal stripe layouts to gain a mere 5 more spaces in a parking lot.  Doesn't sound like much, but over a year it makes a rev difference. \n\nEx2: CBD city lot never permitted for parking and sold as X cap rate.  Put under contract, had permitting completed in DD period, now Y cap after purchase. ", "replies": [{"id": "e40xgjt", "text": "The ONLY cap rate there is on a sold property is the one that was agreed to by the buyer and the seller.  They have a meeting of the minds and decide on an agreeable sale price that creates a cap rate comp.  That proves that cap rates are set by the market.\nEverytime you increase your \"cap rate\" you are decreasing its VALUE.  Lets say you bought a $50,000 NOI for $1,000,000 at a 5% cap rate.  Now you spend $10,000 to restripe and lets say it increases your NOI to $55,000. Now you think your cap rate is 6%.   $55,000/6%= $917,000.  You lost $83,000 in value PLUS out $10,000 in expenses.  Bad move.", "replies": [], "depth": 4}, {"id": "e41fwbx", "text": "To be fair you did increase your NOI by $5,000.  But it will take you almost 20 years to make that money back under your investing mindset!", "replies": [{"id": "e4jhw44", "text": "Not sure you understand.  When I increase my NOI from a better lease I get a from an operator, I just decreased my value?  Can you hear yourself and that reasoning? \n\nI have never paid to restripe or improve a lot, the operator pays it. ", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "e4jj3mv", "text": "&gt;I have purchased &lt;3 cap dogs based on the current parking operation and lot layouts, negotiated a new lease with national parking operator (while in the DD period) and by closing have a &gt;10 cap deal.\n\nThis is your statement.  If you bought $100,000 NOI at a 3 cap you paid $3,333,333.  If you've increased the NOI by DOUBLE to $200,000 but can only sell at a 10 cap then that is $200,000/10%= $2,000,000!   YOU LOST $1,333,333 in value.  Not quite the wheeler dealer you thought you were.", "replies": [], "depth": 2}], "depth": 1}]