Where does one find commercial property with a 20 percent return?
The scenario: A small group of partners has been assembled to buy and operate a retail strip mall. The lead investor is looking for a property that will generate 20% cash-on-cash earnings and does not want to go below 18%, but sellers’ prices seem unrealistic compared to the real NOI.
The reality: The two main characteristics for buying income property at an attractive price are (1) negotiating skill and (2) the seller’s motivation. To get a 20% cash-on-cash return you would need one more characteristic: A mentally unhinged seller.
An income property that is generating a 20% cash-on-cash return is a very successful investment. No one in their right mind is going to sell an income property for a price that generates a 20% cash-on-cash return. This would be analogous to buying triple A bonds at a 22% return in today’s climate.
Income property is priced like any other investment. It is based on the current yield, the quality of the current yield, and the future prospects for the yield. Any income property priced to sell at a 20% cash-on-cash return would be highly questionable as to the quality of its yield as well as the future prospects for its yield.
Yes, I’d agree that to find an in-place 20% cash on cash return is going to be a challenge. The buyer will need to “create value” by bringing a tenant in tow, increasing rents that may be below market, or otherwise leasing up vacant space. A 20%+ internal rate of return (return over time) is certainly a realistic and attainable goal for a savvy investor.
September 27th, 2008 at 5:03 pmGenerating a 20% cash-on-cash return
October 23rd, 2008 at 10:55 pm1416 E. 9th St.Reno, NV 89512
A 3 Bedrooms 2.5 Full Bathrooms 1472 Square Feet Year Built: 1985 MLS# 80006468
my cost 70,000 vs the 125000 home cost this is a short sale if I rent the home for 2 - 5 years can i make a good resale gain
The two-to-five year holding period is optimistic. A four-to-seven year holding period is more realistic. Given the limited information, assessing your 20% cash-on-cash return is impossible. However, the answers to the following questions would provide a qualified response.
- Have you allowed for any vacancy during the holding period?
- Have you considered the cost of lessee marketing?
- Does the immediate and future employment base support your rental projections?
- Have you factored in increased operating expenses?
- What about maintenance and repairs?
- Have you considered management costs (including your own time)?
- Have you assessed capital improvement costs (not an expense, but still money) during the holding period?
- Will your mortgage have any uneconomical costs, triggers or restraints?
October 24th, 2008 at 4:38 pm