I'm considering purchasing a commercial property as my first rental. I am debating whether to pay cash for it or to get a loan as most things I have read here encourage getting a mortgage to maximize returns. So here are the details:
Asking price: $115,000
Renter is responsible for all other fees including repairs, insurance, etc...
Cash Flow (if no mortgage): $709/mo
This seems low as with most posts I read about on BP, the ROI is anywhere between 18-30%. The property is not located in the US reason why renter is responsible for all fees by law. It is located in an established neighborhood in a big city. The property has been rented to the same company for two years (ever since it was built) and the renter has invested a lot of money into it and doesn't plan on leaving anytime soon. The rent will increase by 10% every three years to account for inflation. I still need to find out if the rent terms are subject to change with a new property owner but this is the current contract. The price of the property will probably continue to appreciate as real estate has been in very high demand in the city regardless of how the economy is doing. Is it a good idea to invest in this property? If so, then should I pay all cash or pay 30% and get a loan for the rest?
1. Who said that getting a mortgage will maximize profits.
2. Buy close to home. Something you can go look at.
3. This deal looks like a scam.
I'm all for remote investing, as my business model centers around that. I have not invested out of the country myself but know a few investors doing extremely well in Purto Rico.
It all comes down to your own comfort level and availability of opportunity in your own back yard. Does it have to be something you can go look at and touch yourself. Absolutely not.
Most investors who purchase our turn key rentals pay cash and do not use financing. Albeit our average price is closer to $60k... but again, it comes down to your own business model and whether or not you want to leverage other money. The Cap Rate does seem a bit on the low side but who knows if it would be much better leveraging financing. You'd have to run those numbers and interest rate you qualify for, etc.
The important thing here is working with a team or teams that you feel good about. If it's out of the country, I certainly would do some thorough investigating into the market and the people selling the deal. Find other people who have invested with them before and get their experiences.
Another big concern for me would be what type of insurance is available in whatever country you are considering. And by the way, what you are talking about as far as the tenant being responsible for the expenses, taxes, insurance, maintenance, etc... that is what is called a Triple Net Lease here in the US and it is not uncommon for some commercial applications.
Hope that helps.
Scam radar on high alert.
Why does this deal raise scam flags?
Originally posted by @Nal Bel :
The property is not located in the US reason why renter is responsible for all fees by law.
The property has been rented to the same company for two years (ever since it was built) and the renter has invested a lot of money into it and doesn't plan on leaving anytime soon.
The rent will increase by 10% every three years to account for inflation.
The price of the property will probably continue to appreciate as real estate has been in very high demand in the city regardless of how the economy is doing.
These statements just sound like what a scammer would say about an investment. Too good to be true. But I really don't know. But I am a strictly a local investor, I want to be able to see what i own.
I don't know if it is a scam or not. If I were scamming you I would present better numbers. I want a cap rate of 8% if I am buying with cash. If I am financing I want 3 percentage points above my cost of money.
One can earn 8%+ easily in other assets that don't involve tenants and toilets, not to mention out of country problems. Please pass!
I would not even consider anything below 10% for a remote investment. But this is my personal view.
Being able to allocate funds far from you, then choose the best return (possibly in a jurisdiction you know and you trust).
And this comes from an Italian investing in USA.
Honestly, it's generally a terrible idea to begin your real estate investing career in an unfamiliar country. Given the risk of the investment, even if the return truly was 7%, which I am sure it is not, the return would be nowhere near what it would need to be to make it worthwhile. If you're shooting for a 7.4% ROI, just put your funds in an ETF.
If you're interested in commercial investing, you'd probably be able to find a property in your area with a Cap rate of 7%+.
Also, the idea of using a mortgage to "increase returns" is that leveraging increases your ROE (i.e. cash-on-cash in this case). It also frees up cash to purchase other cash-flowing properties, allowing for diversification, higher returns from debt-paydown (higher total debt = increased accruement of equity from the tenant essentially paying your mortgages), etc. You can use a mortgage for this property or any other to increase cash-on-cash returns, but it isn't going to change the intrinsic value of the particular investment relative to other potential investments.
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