Deploying $2M into commercial investment(s)

15 Replies

I'm working with a small team to invest approximately $2M cash into commercial property before this year's end. Here are a few highlights in terms of what we're looking for:

  • Location: The northeast (NY, CT, NJ) and South Florida (Miami - Port St. Lucie)
  • Goal: An “easy” acquisition (or a few) with the priority being stable long-term cash flow
  • Target Cap Rate: 7% or higher
  • Loans: Target LTV of ~65% (this is flexible)

This team is looking for stable, reliable investments where they can park their cash for 10+ years without worrying too much about managing or developing the property. The first thoughts that jumped into my head were STNL (or any long-term NNN leases, even if multi-tenant) and self-storage facilities. We are open (and planning) to get loans of up to 65% LTV on these investments to stretch the cash further.

I'm posting this for two (2) reasons:

  1. Advice: I'm looking for advice from any experts out there. What types of assets would you recommend I look into based on our goals?
  2. Networking: Are there any investors selling properties that might be a good fit or brokers interested in helping us find properties to invest in? Please feel free to reach out!

Thanks!

Why are you targeting a cap rate and not, say, Cash on Cash Return, IRR, or some other return-related metric that includes the cost of capital?

When looking in Florida in particular be sure to talk with an Insurance provider and plan for continued future premium increases. Insurance companies are starting to figure out climate risks and incorporate those costs into their models.

The big question - why not invest across a portfolio of syndications?

@Ryan S.

Why does it have to be by the end of of the year? Will the money turn into a pumpkin at 12:01 New years Day? 

You have between $4-5.75M of buying power depending on the leverage you want to take on. 

Is this some sort of friends and family deal or is this a syndication where you have raised funds? 

What are the return criteria you are looking for over 10 years? Cap Rate isn't a return metric btw, but a measure of risk so we can't go off that. It sounds like you want stable cashflows with not a lot of work so that rules out value add, at least to me, and limits the pool to NNN. Does your risk tolerance allow for non credit tenants?

@Taylor L. - Good point about targeting cap rate vs cash on cash vs IRR. In truth, cash on cash return is our priority (dividend yield > appreciation for us). We just typically speak about prospective deals in terms of cap rate since it can be calculated quicker and cash on cash return can usually be inferred from it. Really we'd like to see a cash on cash of at least 8.5%+.

Re: insurance in Florida- this is a great tip! I appreciate the advice.

A portfolio of syndications isn't necessarily off the table but we wanted to explore direct investments first.

@Bill F. - The timeline isn't terribly strict, it's just a goal we've set for ourselves in an attempt to move quickly. If we're only able to deploy a portion of the funds by New Years then we'll be ok. Either way, no pumpkins will be harmed in the process.

We don't have specific IRR targets outlined at this time but it's safe to say 10%+ would be sufficient. Our priority is cash flow. Target cash on cash return would be 8.5%+.

Re: risk tolerance- we are open to non credit tenants. Typically we request to review their financials and make a decision regarding their creditworthiness ourselves.

Hi Ryan,

May I ask why you are limiting yourself to those specific areas if say you could acquire a property that fit's within that budget in an A-class area somewhere else that could give double the returns you are looking at under the same parameters? In my experience, I have just found that your ROR is usually much more important than the geography of where it's coming from. Why limit your gains due to location if you don't have to?

@Frank Rodrigues - The geographic limitations are solely based on proximity to where our team members live. We like having someone local just in case but perhaps in the case of a more hands off deal (NNN) we don't need to be located within driving range of the site.

Are there certain locations or MSAs you have in mind that would be a better fit for our goals?

I don't think 7% cap and "stable tenants" belong in the same sentence. I would say 5-6 is "stable"

Self storage is a business. Who is going to run it? You're not just going to find a manager on the side of the road. I'd stick to a single area, leverage 2 properties and get STNL or NNN buildings. Thats an easy cash flow and minimal work.

@Ryan S.

Sounds good. Last question for you I swear. What's your risk tolerance? 

There is a bit of incongruence between your time line and return goals. If you want an asset with a high likelihood of getting rent checks from for 10 years, you want to by a 10+ year lease. Issue is that long leases trade a lower caps. Now if you want to take on the risks of lease renewal you can get in to the higher cap rates with higher yields, but increased risks. 

I made a toy model for NNN assets that lays out some super basic parameters in order to get a feeling for what assumptions you'd need to make to get you your 8.5%+ returns.

With standard assumptions you get around a 6% CoC. The graph on the right shows on the top what the CoC would go to if you made the different variable listed on the far right.

Main take away: your return goes up the higher the cap rate of your property [duh] and the longer amortization of a long you take [again duh] the corollary to all of these facts is that higher cap rate and longer Ams means more risk. 

Now all this holds true for NNN, but those are basically bonds and leave you at the whims of the market. If you want to move into NN you can add value, but is that something you and your team want to do?

I laughed when I read 7 cap and STNL tenants in the areas you mentioned. I review about 1,000 a week nationally and we are lucky to get 5 plus cap rates with investment grade tenants and debt in the 3's fixed for 10 years with 30 year amortization putting 30 to 35% down.

Developers build STNL break even for about 9 cap and have about 100 basis points resale cost down to 8 cap and sell in 5's for about 200 plus profit spread.

NOW multi-tenant retail centers that are not brand new with a mix of tenants you might find some luck in the 6's to 7's for cap rate. Getting that loan closed before years end is extremely challenging. Lenders often take off Thanksgiving for 1 week and Christmas for 2 weeks. With 3 weeks gone you now have about 7 weeks left in play for a lender to work on a file. You have 1 week to negotiate LOI and 2 weeks typically for PSA agreement to be reached. So now literally talking about 1 month to close it and lenders many not accepting closing by years end as pushing newer applications and loans early in process to close next year.

Maybe you could try short term owner finance to close the sale out this year if it is for tax purposes and then simultaneously run the loan process and take out the seller finance note once the lender loan comes into place.

No legal or tax advice given.  

@Bill F.

Thanks for putting this together!

I’m not afraid of assuming some risk. A 10+ year lease is not a requirement for us, nor is a credit rated tenant. These are the terms that we are most likely going to have to make a sacrifice on in order to achieve our cash return goals.


Also, regarding NN versus NNN- were open to it. The only reason I brought up NNN was because it's the lowest management direct commercial investment Im aware of but it's not a requirement for us. Low management is preferred but I imagine a NN would do just fine.

@Joel Owens - Thanks for your feedback!

I would like to clarify a few items that you mentioned:

1) We’re not expecting public credit rated tenants of a Starbucks or Bank of America caliber. We’re open to smaller tenants as long as their financials are solid.

2) We're not exclusively looking at STNL. This was just an example of the lowest management direct commercial investment I could think of. We are open to multi-tenant and alternative investment opportunities. I believe in my original post I actually asked for recommendations on alternatives to NNN.

3) As @Bill F. mentioned in his response, I now realize my original post may have been misleading regarding timeline (sorry about that!). The timeline I set forth (“by the end of the year”) is an internal goal that we are using to motivate our team to go out and source deals, as opposed to getting stuck in analysis paralysis. If we can’t close until 2022, we’ll be ok.

Thank you again for your feedback! Happy to connect offline if you’d like!



Hi @Ryan S. . Great question, and you got some great feedback here. I would ask about your team and their desire and experience to manage these types of assets. If you don't have an experienced self storage team, or access to a great property management firm, I would avoid that. NNN may be a bit easier but I'm not certain since I've never done that.

Feel free to PM me and we can discuss this a little bit. My company reviews commercial real estate deals and portfolios quite often.  I know of an operator in Nevada who does deals in the geographic region you like and I think it may be a good fit for you.