Deal analysis for Industrial Condo, advice appreciated.

Real Estate Deal Analysis & Advice
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Deal analysis for Industrial Condo, advice appreciated.

Larry Bly
San Francisco, CA · Member since 2017 · 3 posts · 0 votes

Hello,

I have the possibility of investing in an industrial condo located in Florida.  Running the numbers it seems OK but not great, I would like some input and opinions from more experienced investors.  

First of all I have been looking at Cap Rate and CCR as basic indicators while doing my research, I have found some sources that say I should include Debt Service in my CCR calculations and some that have not. If I leave out Debt Service the CCR looks pretty good at 12.42% (based on my findings that 8-12% is decent). However if you include Debt Service, it's suddenly more like 4.8%, not as exciting.

The Association maintains the building, takes care of all the common area maintenance, flood/fire/liability insurance and maintains accounts for all the large capex (new roof etc).

Right now it is one large unit made up of 4 smaller units which is occupied by a tenant who would stay in place. We are currently working on the financing but it seems we will have a 20 year 4.5% loan with a fixed rate for 5 years. We are putting down a rather large down payment being conservative with leverage so I realize this does not help our CCR especially if pre debt service.

The vacancy in there comes from a CBRE report and is what the agent told us also.  We are pretty happy with the area and there would be no repairs or TI as the tenant is staying (as of right now).

Any pointers or advice would be greatly appreciated, thank you!

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  • Kevin Siedlecki
    Investor · Madison, CT · Member since 2014 · 710 posts · 458 votes
    9y

    @Larry Bly - The bottom line is that I agree this is just an ok deal- maybe not even that. 

    I am a little confused by your statement about debt service and COC. You have to include your debt service in your COC calculation, otherwise you are adding non-existent cash to the calculation, making the deal look a lot better than it is. My guess is that you are just confusing Cap Rate with COC. You do not include debt service in Cap Rate, because it used as a way to compare commercial properties, just so everyone is speaking the same language when listing them. The 12% number you're getting for COC before the debt service is meaningless - what you are actually calculating there is the Cap Rate if the price were only $200,000, and you paid cash. That doesn't make any sense, and doesn't give you any information about whether it's a good investment, because that's not the price, and you're not paying cash. COC means annual profit as a percentage of the cash put in. Your COC ROI, as you point out, is really only 4%. As you also point out, that's not very good. So you have a few options:

    1) Use more leverage. A risk threshold of 50% LTV is not going to get you far in real estate.

    2) Negotiate a better price. Again, though, if you insist on 50% LTV, you'll have to bring that price way down to bring your ROI up to a reasonable level.

    3) Find something better. The great thing about investing is that you never have to buy anything. Move on to the next deal.

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  • Larry Bly
    OP
    San Francisco, CA · Member since 2017 · 3 posts · 0 votes
    9y

    Ok thanks @Kevin Siedlecki, this is good information.

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