All Forum Posts by: Paul Winka

Finally, I got my a-ha moment: This one sentence you said summed it up quite nicely for me. Investors should be deriving offer price from the cap rate, not calculating the cap rate after the fact. 

Now I am wondering how to get a better-than-average deal when buying commercial property. Upon analysis of NOI and knowing the local cap rate, how does one beat the market cap rate, that is buy NOI at 12% cap rate instead of 10%? I would expect this to be an entirely different game than buying a duplex from a tired, out-of-state landlord. Maybe I am wrong, but any seller that is savvy enough to own commercial property will know what his building is worth. So is it true that there really isn't that much room to budge when buying commercial? How does one looking to buy commercial rise to the top of other buyers? Maybe offer all cash or seek out incompetent sellers out of touch with the local cap rate?

For those that are full-time RE investors that don’t have a regular job, what are you doing for healthcare insurance with regard to the Affordable Care Act or Obamacare? Are you satisfied?

Bob, I replied to you today on another thread too. What will cap rate do for me? I hope I can use it as a tool to negotiate buying commercial properties.

In due diligence of buying a commercial property, I could look at the tax returns and verify NOI, then use cap rate, and "reverse engineer" a fair offer price.

Hypothetical: If the asking price of a building is $300K and the NOI is $15K, that's 5% cap rate I would achieve, not too good. The seller may have bought the property for $150K 10 years ago and boast in the listing of achieving a 10% cap rate. He's not lying about the cap rate, but that is his cap rate not mine. But if I buy for his price, I would get only 5%. For it to be worthwhile, I would need to negotiate it down. Maybe the seller is looking for a gullible newbie to buy his place, but I would at least know better, and make a fair offer. I hope my example makes sense!

What would you do in this situation? 

Probably not that different, Kyle. The waiver may not hold up in court, but having workers sign a waiver is probably not illegal. I will be meeting with a few RE attorneys in St Louis later this month, so I'll be sure to ask about this during my consultation. Bottom line seems to be that if you need to hired unlicensed workers each time to make sure the property is cash flowing, it's a good indicator the purchase price of the property was too high. 

I hope someone can provide an explanation or analogy to demonstrate how cap rate is meaningful. I know how to calculate it; the problem is that it seems like there is always a fly in the ointment that makes one property's cap rate an anomaly from the rest of the neighborhood that takes away from comparing apples to apples.

For example, whether or not the landlord pays utilities can offset the cap rate. So could the age of the building, because it would mean more maintenance an repairs. 

So in this example by the OP, pretending this duplex is a 5-unit or larger, we have $11K NOI / $348K purchase price = 3.2% cap rate. That's clearly an unacceptable return. I don't know the going cap rate for East Bay area, but let's say it is 8%. Would a seasoned investor then use this knowledge to negotiate the price downward to $137,500? ($11,000 / $137,500 = 8%)

Bob, can you list some of the companies that do this cap rate analysis for a fee?

The question in the subject line was prompted by a posting on a wholesaler's website that touts that the fourplex home is "ready to be converted to a SFR" for a big profit. For the record, the house is 3533 Iowa, Ave, 63118, a slightly blighted area of St Louis.

For investors, I was under the impression that converting a big SFR to multiple units, if feasible, was what was ideal.

Making a RE transaction involves relatively BIG DOLLAR AMOUNTS and that was very intimidating for me. I thought of the first deal like going to the casino and bypassing the $5 blackjack table and taking a seat the $200,000 blackjack table. That was the cause of my paralysis analysis. I got over it when I realized that it wasn't a win/lose situation like a hand of blackjack, but that it would be a learning experience and I would pick up skill as I went along. 

For those that are full-time RE investors that don’t have a regular job, what are you doing for healthcare insurance with regard to the Affordable Care Act or Obamacare? Are you satisfied?

I've always been covered by my employers in the past and living outside the USA but now that I am moving back to the USA I have to get smart on this! 

@Kathy Henley Wise idea to find an attorney that also is an investor. If you can share, what's the typical, fair arrangement for working with a real estate attorney for billing? Does one pay a retainer and then get billed in tenths of an hour each time the client would call or email for advice?