Attorney · Lakewood Ranch, FL · Member since 2008 · 38 posts · 13 votes
I am a second year law student. I am interested in becoming a real estate attorney and investor. I had a quick question about forced appreciation in commercial properties. I was curious how long a property must be operating at the new NOI before it could legitimately be reflected in the worth of the > property on the market. For example... if I were to increase the rent 1000 per year and decrease expenses 1000 per year... how many months or years would I be required to maintain this before being able to sell a property for an additional 20K in a 10% cap market? Obviously it depends on many things, but I am asking just generally; what would an average buyer look at in terms of length of time?
Investor · Washington, DC · Member since 2008 · 90 posts · 16 votes
18y
Dave:
You are right that a cash out refi would decrease cashflow. You would only do it if the income from the building could sustain the increased mortgage payment. Besides, the lender won't do the refi if the new loan drops the debt service ratio (DSCR) below their requirements.
For instance you locate a building and during your due diligence you see the potential to increase rents and decrease expenses by making some repairs. This will increase NOI and increase your DSCR. So if your strategy is to refi, you calculate how much you can take out without a negative effect.
Your strategy will be to build capital either thru rental income which can take years or to get cash from a refi. This is the benefit of doing a refi as soon as you can.
Real Estate Investor · San Francisco, CA · Member since 2008 · 51 posts · 0 votes
18y
In commercial RE, you typically use annual figures when running the numbers. Plus most of the time commercial props have multi-year leases anyway. So you can use the previous year's figures to determine actual value based on income/cap rates.
As for apartment complexes, since you mostly see 1 year leases then you can either value the property based on actual figures or pro forma figures.
You also have to remember if you invest in an area where there is growth/demand, then the cap rates tend to go down hence raising the value of your property.
Commercial Real Estate Broker · Member since 2008 · 5 posts · 0 votes
18y
It is custom to have 3 years income/expense reports and or 3 years tax returns on the property. This is the beauty part about commercial real estate. Also however, in that 3 year period you will reduce morg. balance and receive depreciation to increase your return rate. You can also accelerate your depreciation schedule for further returns.
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Thanks.
If you are talking about increased value when selling you will need at least 12 months with 36 being preferred. For a refinance, I'm told as little as six months is acceptable if you have documentation of the changes leading to the increased NOI.
Investor · Bellefonte, PA · Member since 2008 · 1k+ posts · 88 votes
18y
My bank was ok with 6 months for me to refi a commercial property. They did as Glenn said want to see documentation and lease agreements to setup the new numbers.
I know a local investor that builds apartment complexes and he builds the complex and runs it for 1 year then sells it. The 1 year APOD is enough to prove the expenses and create a solid NOI for him to base the asking price on.
Investor · Washington, DC · Member since 2008 · 90 posts · 16 votes
18y
If the property appraises high enough, you can pull cash out through the refi. This will give you tax free funding without having to sell your property. You can put those funds into the next project.
Real Estate Investor · Georgetown, MA · Member since 2008 · 250 posts · 6 votes
18y
Thanks Damien,
Couldn't a refi hurt your cash flow though?
You'd end up taking out a higher loan if it appraised higher no? Just to pull the equity out?
THen potentially the higher monthly payments would sink you in cash flow.
Lets say you are making $500/mnth. A a duo. Then you refi at a substaintially higher value to pull equity out. Now your Mortgage payments go up $500 a mnth.
Investor · Washington, DC · Member since 2008 · 90 posts · 16 votes
18y
Dave:
You are right that a cash out refi would decrease cashflow. You would only do it if the income from the building could sustain the increased mortgage payment. Besides, the lender won't do the refi if the new loan drops the debt service ratio (DSCR) below their requirements.
For instance you locate a building and during your due diligence you see the potential to increase rents and decrease expenses by making some repairs. This will increase NOI and increase your DSCR. So if your strategy is to refi, you calculate how much you can take out without a negative effect.
Your strategy will be to build capital either thru rental income which can take years or to get cash from a refi. This is the benefit of doing a refi as soon as you can.