I usually look at residential properties but a few weeks ago a single tenant triple net leased property became available.
Going cap rates in the area are 6% and this property is at 10%. The current lease has 15 years remaining with 3% annual increases; if the tenant leaves then I know I can rent this place for a lot higher rent.
Is there a resource to learn about additional risks to consider and financing options available.
What is purchase price and how much are you putting down?
Price would be around 600k and I plan to put 20% to 25% down.
Do you know why the seller is willing to give such a discount (sell so that there is a 10 cap rather than a 6)?
Owner is an investment company that is selling it’s smaller holdings to focus on larger deals. Also there was a botched sale in which the tenant wanted piece of the profits. I am not as concerned about tenant as most other investors might be. If he keeps paying then great if not then we will evict him and put our own storefront.
It's a tiny deal. You need to go to a local bank or credit union. Regular retail lenders will not look at it. To them a loan of 1 million to 2 million is small.
Thank you, just submitted my LOI lets see what happens
A few factors that may help to understand the risks
Property type - retail office or warehouse and vacancy rates for the category
Prop Taxes - how much are they per square foot and how does that compare with area?
Rent - how does that compare with area rent? above or below market?
There may be no discount. It sounds like it is leased at rent significantly below market. If the contract rent is significantly below market rent, then the cap rate should be significantly higher than the cap rate for a similar property at market rent. Cap rate could be correct for the property based on the terms of the lease. Tenants usually stick around with below market rents so that can be a positive, depending on purchase price.
Thank you guys for all the input. My offer was at 12 cap and then at 11 but seller wants 10 cap. While I think it is worth it at 10 but afraid to pull the trigger on my first commercial property.
Hi shak can you send me the listing to review You can message it to me.
looks like i can't send a message to you until you are colleague, accept my colleague request and i'll send you some information
@John Franklin I think you have this reversed. Rent bellow market rent would produce a lower NOI resulting in a lower cap rate. Given the lower NOI you would have to purchase at lower price to meet the market cap rate
Hi Aaron; I don't want to confuse anyone regarding cap rates, since they are already too widely misapplied in RE.
From his post it appeared Shak was comparing stabilized cap rates to implied cap rates (his property NOI/Asking price) and I sensed he thought the asking price was favorably discounted compared to stabilized properties. Maybe I read too much into the post, but my point was the value would certainly be discounted since the below market rent and NOI is locked in for a 15 year term.
Here is the only point I should have made; you can not accurately value a property with below/above market rent based solely on cap rates. Unfortunately, it happens all the time.
To accurately value a property with rents below/above market, you must value the property at the market cap rate and the market rent, then deduct the present value of the rent loss over the term of the lease, from the stabilized value. The resulting value may imply a cap rate, but that is specific to the terms of the lease on this one property. Any comparison of cap rates should always be based on sales of stabilized properties (Market terms, rent and occupancy).
In Shak's case, with a smaller property, I'd look to the local market's price PSF for sales of similar, empty/owner occupied buildings and try to buy below that range, knowing I'm locked into a below market rent on a property with a leasehold premium. I do appreciate you pointing out the apparently conflicting logic of my comment and I hope I've clarified it well enough here.