All Forum Posts by: Nick L.

@Michaela G. Sure I would - if I could reposition it to hit $1,000 next year with a growing land value. In fact I would take that over a 2% rule property if I could conservatively estimate a higher return over 5 years.

@Kevin Harrison Are there dropboxes that offer automated stamping and receipts? Otherwise I could see this leading to a lot of disputes over whether and when the money was deposited.

@AJ Hernandez The expense figures are just a guesstimate. Standard operating expenses are usually around 50% of gross revenues, give or take. Yours might be a bit lower because you will have just rehabbed, but a bit higher because it's Class D. I played it on the safe side with a 60% guess.

@Matt Dorsten OK I like this version of the plan more. For me, the only missing piece is validation of your numbers. If you can pre-lease the building, or at a minimum get several good comps showing that leasing will be easy, financing will be easy too.

I like that this version has three separate plausible income streams:

- Billboard

- Building

- Land play (I assume, since Denver is hot)

Maybe a fourth from upping the zoning too, as @Douglas Dowell said earlier.

You might consider running a Phase 1 environmental as part of your due diligence. Even though the current uses are above ground and non-residential, you never know what the future will bring.

@Giovanni Isaksen

That is very insightful, thank you. I agree with your analysis of digerati haves and have nots. Interesting perspective to think of Google like Starbucks too. I will give this serious thought. 

Since you mention Asian investment, what do you think about markets that have heavy Asian student populations but not much else? For example areas around Urbana-Champaign, Purdue U, Northeastern U, etc.

As to how to fund the improvements, work with the commercial loan officers at a couple of local lenders. As long as your math is good and you can put in maybe 25% of the cost of improvements, they should be able to fund the rest.

If you don't have the downpayment and can't persuade the banks to accept the land and existing building as collateral, you might want to flip the property for a quick $50k or whatever to an investor who will do the work.

Just thought of a possible red flag... what is the state of title? Do you have a clean warranty deed from the bank or could there be liens on the title?

OK. So here's some back of the envelope math for post-rehab valuation.

Annual gross income: $192,000 (@ $500 per unit)

Annual operating expenses: $115,200 (60%... higher than standard 50% as Class D)

Annual NOI: $76,800

Stabilized valuation @ 10 cap: $768,000

Stabilized valuation @ 12 cap: $640,000

Total cost including purchase, rehab, lease up costs and negative cash flow until stabilization: $400,000

This gives you an unlevered 50%-100% return, or higher if you can get a bank to fund the improvements.

What do you think the apartments would rent for after rehab? Based on similar buildings nearby.

I'm with @Shane H. on this one. It's just not realistic to expect an old industrial building to get to 100% occupancy. If you can't at least get by on 75% (maybe lower) you could end up with a big loss. There's always going to be someone with a similar building and lower cost basis who can offer cheaper rents than you can.

To add to @Jimmy Klein's good point about reno costs, one of the big problems with this type of contruction work is messing with grandfathered in systems. For example I looked at buying a very old warehouse type building for partial redevelopment. The contractor commented that while the elevators and sprinklers are grandfathered in, if I had to extend them in any way the grandfathering would be lost and I would have to replace them all with new code-compliant systems.

If you got a new tenant that was perfect but required additional fire suppression, would you want to replace the whole system for them or would you let the space go vacant?

@Giovanni Isaksen Great catch on the year... can't believe I missed that. Of course I should have referenced the Q1 2015 PDF that you linked to.

Thanks for the deeper analysis, that's super interesting. You are right that we shouldn't accept Dr Mueller's charts without deeper digging. I do think the economics of Seattle and a couple of other cities are sufficiently different from the rest of the country right now as to help them break free of the cycle temporarily.

Since you have clearly put a lot of thought into this subject, do you have any predictions for where different sectors of commercial RE are headed - either in Seattle or nationally?