How to invest $500k-$1M in CRE?

Question

Hello,

I am closing some business deals and will end up receiving between $500k-$1M in the next few months.

I've been thinking about investing it in CRE, like using it as a downpayment and borrowing more money and buying a small medical office building. I have a bunch of questions so I'm just gonna list them all, thanks for any answers you can provide.

1. Is medical a good idea? Any other ideas I should consider?

2. My understanding is that I will end up receiving some kind of rent, but what makes this really attractive is that, barring some kind of recession, rents go up every year and the building will appreciate over time. Am I mistaken?

My goal is to generate some kind of monthly revenue that keeps up with inflation while the initial investment appreciates as well, so in 20 years for example, the value of the building will be greater.

3. What kind of monthly income should I expect to reasonably generate? I know this varies etc, but generally speaking.

Thanks!

Mary B. · Answer

Congrats on your soon-to-be ROI and I'm a tad bit curious why you went John Doe on us...

Kudos,

Mary

Giovanni Isaksen · Answer

@John D.

How familiar are you with negotiating commercial leases? Medical building leases? And as @Nicolas  Gonzalez  points out the TI (tenant improvements) or uplift costs for medical offices can be pretty high. Based on those, working with a commercial broker who is experienced with this type of property would help avoid a lot of first-timer mistakes. I'm not a broker but in a specialty niche like medical it helps to have an expert on your team.

Nicolas Gonzalez · Answer

@John D.

I've seen very few medical foreclosures. That is one reason to invest in them vs. multi-tenant office buildings with class B or C tenants. You will likely get a 5 or 10 year lease, at a cap rate of 7-11% depending on creditworthiness of tenant. So, at $500,000 run your own scenarios assuming your NOI will be somewhere between $37,500 and $55,000 a year.

Then, run those same numbers, but assume you have the credit to use that $500,000 as multiple 25% down payment to acquire 3-4 properties with varying, albeit small, degrees of risk. You've leveraged the other 75% on a 20 year loan at 4.5% interest with a 5 year fixed rate ARM. Now, I'd suspect, your actual return will be closer to 15-20% cash on cash, which has you doubling your cash every 3.5 years and paying your principal down aggressivelyf.

John D. · Answer

Robert thank you, very insightful. It looks like the best thing for me to do would be to talk to a financial advisor who can point me in the right direction as far as these things, maybe someone who charges on an hourly basis. No?

Robert Roe · Answer

Hello John,

All people are the same you would be surprised to find out who is really professional in any type of real-estate or any other business for that matter! I am not in real-estate at all I am a hedge fund manager but I used to work with an owner of about 5 malls in Michigan. Man I could tell you stories. Each city has a 5 year development plan I am sure many people on here do not know about this plan. You need to look at that and see where they are planning to have something like that go to the board and they may even help fund it. Also you would be leasing not renting those places out. You also mentioned something about rent going up every year well in Commercial real-estate you don't want to do a lease for a year they do them for at least 3 to 5 years  on something like this

Robert Roe

rj2763@yahoo.com

John D. · Answer

I perceive them to be more stable long-term and I'd rather deal with medical professionals. Am I mistaken?

Amit M. · Answer

just curious, why the specific interest in medical bldgs?  Did you work in that field?

John D. · Answer

Thanks guys. Can anyone provide specific example? For example Nicolas you mention your medical submarket is strong. Let's say you had $500k to invest.

1. What would you invest it in?

2. If you invested it in medical, what would be some rough estimates of the revenue, appreciation, etc? I love to see an example with all the relevant figures.

Joel any actual examples?

Thanks!

Joel Owens · Answer

Risk, growth, cash flow today versus appreciation on the back end.

How hard do you need that money to work for you??

Many investors do not know what they want in the beginning. It takes a process of working through this will be anticipated  return with this asset class etc. versus others before a path is figured out.

Nicolas Gonzalez · Answer

John- just like anything else, there are pros and cons to becoming a medical condo or standalone building owner and landlord. I live in an exceptionally strong medical submarket and have experience in these deals.

Once such example includes upfit cost in event of tenant turnover- an example would be having to bear the weight of a $25-$35 psft upfit allowance to a new tenant. On a 5,000 sq ft space this can be a big hit if you lack adequate reserves.

What is the trend for medical in your area? These become income deals a lot of the time but have shorter leases than NNN retail-  typically 10-15 years in my area. Obviously everything is deal specific but big strengths are the annual increases, the creditworthiness of the tenants, and typically low/no turnover with higher cap rates than retail lease deals.

How to invest $500k-$1M in CRE?

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