Is the commercial market up too?

Question

I just got an email from a commercial realty group providing me with an NOI very close to what I am currently operating at and their suggested valuation of my property. I was surprised when I saw their valuation at almost double what I paid for it 3 years ago, they are pitching this at a 5.5% cap rate when we bought it at like 9-10%. While its a great sales technique on the agents side, If it does command that value, then why wouldn't I just do a cash out refinance and keep this one in the portfolio vs a full on sale? Any noticeable pros/cons?

Dave Foster · Answer

@Chris Branca, No need to 1031 if you refi.  Just take the cash and buy something else.  But if you're a cash flow investor look out for how that reduces net cash after amortization.  And in a cash out you don't get access to 100% of the equity.  Not necessarily a problem.  But something to remember.

If your a value/growth investor your goal (everything else being equal) is to buy the highest cap you can and sell it at the lowest cap (NOI/asset value) and then 1031 into the highest cap possible and let inflation/appreciation erode the cap while hopefully rent increases or lease quality adds to your cap.

If you're a cash flow investor then your goals are how much cash do I have at the end of the day.  In a purchase that's loosely equated to cap rate.  But in a hold analysis it's not about the asset value.  It's NOI/cash invested (cash on cash return).

There's some additional matrices to consider in a hold/refi v sell/1031 scenario.  But don't forget that company came to you.  So that NOI is their first offer and I guarantee you not their best offer. Have fun!

Caleb Brown · Answer

The only pro would be to 1031 into something else but if it was me I'd cash out refi and pull the equity out. Market is crazy currently

Chris Branca · Answer

Ah, I see. so I can't 1031 with a cash-out refinance, that only works on a sale?

Chris Branca · Answer

So our plan was always to just throw the money right back in at something bigger & better or just add additional property.

I would love to do a 1031 exchange, but my thoughts was underwriting would be a little bit tougher on a new buy as we are back to square one with a pile of cash and no NOI (since sale of property), vs doing a cash-out refinance on existing and then going thru underwriting with 1 cash-flowing property already under my belt.

Caleb Brown · Answer

Right. But you could use the equity as a DP

Is the commercial market up too?

Most Popular Reply