Strip Mall Deal, What Do You Think Of This?
This is my first commercial deal (that I am thinking of). The numbers seems kind of low, I want to get some opinions.
Purchase Price: 5mm
NOI: 350K
assuming 6.75% loan, debt service: 283K
Cashflow: $69K
cap rate: 7.05%
cash on cash: 4.6%
There are 5 units, the developer have some national brands lined but. Seems pretty solid. What do you think of those numbers? Thanks!
I think these numbers blow chunks, but that's just me. Lots of deals seem to be getting made for this kind of return, but they're deals I want no part of. I am looking for minimum 9 cap, and pushing as close to 10 as humanly possible.
At a 7 cap the deal should be bulletproof IMO.
I could see pursuing this at the very limited profit margin based on proven success at the location, and only for a long term buy and hold.
However you mention the "developer having national brands lined" - I gather this means this is a built-up which means that the developer is making ALL of his profit up front and you get to let your wallet figure out if this is a good investment in 10 years.
Your CAP rate is really too low to justify the risk. You have many coices of proven successes at 7%; take a look around and I think you will be able to decide for yourself about this one.
steve
I concur with the chunky opinion. I would not touch anything with a cap rate of less than 10%.
[addsig]
I know this sounds dumb, but how did you figure out the cap rate? What does the cap rate tell the investor?
Thanks!!
Chris G
Cap Rate = NOI/Purchase Price...
a 7% cap is pretty darn low, Although a high 8% or 9% wouldn't be far off from market (in my area). There are Net lease deals that go for 7% caps.
It seems that there aren't even tenants in it yet? If the tenants were in it, and they all signed longer-term leases (10 years or more), and its a new building, I could justify that low of a cap rate. I'd check the market for comps, and come back with a lower offer.
Regarding the cap, I would said it is depending on the location of the property. Like bay area, it would be very difficult to find a strip mall with credited tenants with about 7% cap. The average is about 6.5% now. Therefore, you better find out what is the average cap rate in that area.
However, my way is always have several commercial loan officers evaluate the case for me because they might see the property from different angles and might be cautious in taking too much risk. Then calculate the discount yeild rate (which would consider your future income, your terminal cap rate, etc.) rather than just cap, and compare that with your goal. The next thing is to calculate your risk and cash flow for higher future interest rate.
To me, as long as your property's cap rate is higher than the local average cap rate, you can have positive cash-flow, and you can take the risk for higher future interest rate, that means it might not be a bad deal. Be cautious but with positive mind-set. Good lock!