Nov 20th: A Day of Mind Blown Cap Rates!

Nov 19th TO-DO:

  • Email TAI from the Meeting last Tuesday

Somehow, I didn’t get her business card!  So disappointing, I’ll have to look her up on Meetup.com and see if I can contact her there.

  • Email Soquel from the Meeting last Tuesday

Accomplished.  He wrote back and offered to help me however he could.  I almost jumped all over that offer, but I restrained myself.

  • Email Mr. Henderson the Property Manager in Las Vegas who was looking for apartment deals for his clients.

Accomplished.  He wrote back letting me know that most of his investors had fled to higher cap-rate cities, but he might be able to find someone interested.

  • Continue reading “Business Plans for Dummies”

Yup.  Laying out in my mind how the business plan should look and all the elements that go into it.

I did not get into this yesterday.  There was a Dr. Who marathon on.  And I was working on the other parts of the TO-DO list today while watching that.

I shot of a bunch of other emails yesterday, to various other people, one of them was to a gentleman who had some properties in Cleveland that we were looking at, with the move I got behind and wasn’t chasing the leads fast enough, and it appears that most of the properties are under contract now.  So it’s time to keep looking for more deals.

Got an email from Tacoma, a CCIM in, well, Tacoma, Wa.  He keeps sending me pulls and I wrote back to him that the cap rates are crazy!  6% Caps on 45-year-old buildings in Tacoma!  No!  Ick!  I mean those sound as bad as LA, San Francisco, and other major metropolitan area’s and definitely not like the arm-pit of Seattle type prices.  Here’s what he sent me back:

HDR Tacoma Dome

Sold Comps

  • Year Built — 1980, Cap Rate — 5.53 Price – $899,000
  • Year Built — 1978, Cap Rate — 6.71 Price – $1,385,000
  • Year Built — 1974, Cap Rate — 6.81 Price – $1,900,000

My mind is blown.  The only thing I can think of is the fact that people are paying all cash for cash-flow. If those things are financed on a 7 or 10 year balloon at a 6-7 cap rate, you are probably going to be upside down on it when your loan is due.  I have no doubt Interest Rates will rise 2pts over the next 7 to 10 years.

Last night I attended the re-start of the Santa Cruz Real Estate Investment Association.  Boy did I feel like a baby.  The crowd was definitely older and had a bigger buy and hold philosophy and are not in acquisition phases.  They are the tortoise slow and steady.  What I found interesting was that there were two people who are involved in Syndication Deals! We spent a lot of time talking about what we wanted to get out of the meetings and it blew my mind that the people did not know the vernacular and key-phrases for expressing their ideas.

It constantly amazes me that people with money don’t understand the power of that money.  In fact I had a conversation with a Personal Finance/Wealth Management guy at the BiggerPockets meet-up on Monday.  This high income individuals just think they can throw money at problems to make them go away or return more money to them.  These are the people buying 50-year-old 6% Cap’s in Tacoma Washington!  They value their money at a much lower percentage than they should.

Rant Mode:

6.8% Cap rate means that if you bought the property at $1,900,000 your NOI is: $129,200.  When you buy cash your ROI equals your Cap rate.  $1,900,000 / $129,200 = 14.7.  That means you are finally making a profit on the property in year 15 of that purchase.  The building is going to be 65 years old when it finally starts making you cash flow!  Let me repeat that you make no money off the cash flow for almost 15 years, and the building will then be 65 years old!  I can’t conceive of that at all.

Now, let’s take that same $1,900,000 and finance a property as that being a 30% down on a 6.8% Cap property.  That gives us a property(ies) that are worth $6,333,000 (give or take a couple hundred bucks!)  at the 6.8 our NOI is:  $430,644  But since we are financed our NOI is not our cash flow, now we need to take out our mortgage payment (We are going to assume a 10 year Balloon Amortized over 30) your mortgage payment will be:  $302,000.  That means your free cash flow is $128,644, that’s $60 less a month.  So your cash flow is the same roughly 15 years… but in the first 10 years you’ve recaptured $774,000 in equity.

Total Return Scenario 1 in 10 years: (129,200 x 10) / $1,900,000 = 68%

Total Return Scenario 2 in 10 years: (128,644 x 10 +774,000) / $1,900,000 = 108.44%

Financed at a 6.8 you’ve made your money back in just under 10 years.  Unfinanced you are still waiting another 4.7 years to make that money back.  Yucky.  Those are numbers that don’t excite me, and actually confuses me.  Why would you want to wait 10 years let alone 15 years to get your money back?!?  TO GET YOUR MONEY BACK!  Give me a 20-24% ROI with a 10% Cap any day of the week.

 

Nov 20th TO-DO:

  • Investigate Merced, Ca
  • Investigate Sacramento, Ca
  • Investigate Santa Cruz, Ca
  • Investigate Capitola, Ca
  • Define Number Spread a little more appropriately.
  • Set up Appt with Realtor for the 21st, and see if Soquel might be interested in walking it with me
  • Re-Schedule the Zavala Appraisal
  • Toastmasters Meeting
  • Read another 30-40 pages of the Business Plan Book
  • Get Back to the Wholesaler about the Apartments in Las Vegas

 

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