The Commercial Real Estate Alpha Site

You can find whatever statistics or articles you are searching for to support or negate a perspective.

Whether it is something along the lines of the month of April 2021 was the highest rent increase percentage in years supporting the potential increased growth of rents.

It could also be the news of capital gains taxes increasing substantially or the use of a 1031 exchange up for debate. Minimum wage increases, gas prices spiking, etc, etc…

Another perspective investors are seeing these days is prices skyrocketing. Whether that equates to lumber costs, labor costs, costs of rent and utilities or the pricing of investment real estate and the proforma returns offered.

I have recently seen properties sell for $1.7 million (which was a top of the market price) come back on the market within 12 months for $4 million ++. The story will be told about how this makes money for an investor, but I am unable to comprehend this perspective. Maybe my view is too conservative or I am too risk averse, but pitching a property like this ( I know it very well) at a proforma 5% cap rate or anything above that is hard to do.

Just as an exercise for our sanity…

Let’s perform a hypothetical back of the napkin analysis

12-unit apartment complex (7 Studios & 5 One Bedrooms)

Say the average rent in our highly desired rental market for these units is $1,100/mo for the studio and $1,400 for the One Bedroom. This is likely higher than what is being charged, but let’s play along.

The total monthly gross income is $14,700 or $176,400 annually

Assuming 97% occupancy and 3% vacancy which is a bit more aggressive than normal.

Adjusted gross income totals $171,000

My knowledge of the property has had ownership paying Water, Sewer and Trash, but let’s say those costs are now being passed through to the tenants in addition to their top of the market rents. This highly desired area has some of the highest real estate taxes and utility costs in the surrounding counties.

The expense percentage we will use for this hypothetical will be 40% which is less than a usual figure but will include, Management, reassessed Real Estate Taxes, Insurance, Repairs, Pest, Turnover, etc, etc.

At 40% expenses we have a total expense number of $68,000

This leaves us with $103,000 Net Operating Income

Let’s look at a range of Cap Rates for value

5% = $2,060,000

6% = $1,716,000

You can see that getting anywhere near $4 million is a big ask, but that’s just in my perspective.

If a new owner manages the property in-house, reduces the expense output through some additional improvements, (Solar, efficient appliances, Hvac’s, Low Flow Plumbing, etc) and of course possibly increasing the rents even higher, then the possibility of going above $2,060,000 exists in a particular perspective.

• On a side note which also weakens the foundation of the above analysis, the true subject property I am referencing in my mind only has 11-units and the actual rents are lower then the presentation above.
• Other properties I have in mind range from acquisition price around $3 million and now on the market for $6 million.
• Another property was on the market previously for $1.6 million and has been reintroduced around $2.3 million.
• And yet another property was on the market for $800k and did not sell and now has been painted and put back on the market around $1.5 million

As an investor in todays market, its important to know the property, know the market, know the actual numbers and make as educated a decision as possible with the understanding that you might overpay a bit for some properties but make sure you have a realistic opportunity to make money and enjoy a strong investment moving forward. A local, knowledgeable commercial real estate agent who specializes in the asset you are looking at is worth its weight in gold or bitcoin.

The market may be sustainable in some aspects that Class B & C investment Real Estate isn’t being created and there is a finite supply which can create the sustained demand. The pricing of such assets and the subsequent rents achieved may be up for discussion as to the short term and long term outlook. Each investor has their own perspectives as do we. We are always open to discuss and learn.

If you would like to discuss further or have any questions, don’t hesitate to reach out.

Sean Dreznin

Dreznin Pappas Commercial Real Estate LLC

tritoncre@gmail.com