Rental House Cap Rates

What is the cap rate on your rental house? Annual income less expenses over current market value, right? The "less expenses" part is the nebulous part of the analysis. Needed items to include are major capital improvements that don't happen yearly. Roof replacements, new kitchens, bathroom remodels, landscaping, painting - all of these should be prorated every year to give a more fair cap rate. Don't be surprised if you get a 2.3% cap rate as I just did on my rental house. So, does that 4% cap rate apartment building look better? Maybe... That's another discussion.

Monthly Santa Clara County Stats

More active listings coming on the market and less deals going in to escrow. Divergent paths between the two stats. This is true in both the single family market and the condo/townhouse market in Santa Clara County. Yet, this is opposite of what is happening in Cupertino, Saratoga, Los Gatos, Palo Alto and Los Altos. We have micro-markets and it is very evident.

Cap Rate Compression

The general feeling is that cap rates are too low. Compared to what? If you compare it to rates 5 years ago, yes. That is a poor comparison though. Cap rates need to be compared to the cost of money and what interest rates will do in the near future. Also, new and significant pressure is coming from the baby boomers moving equity into stable commercial investments. Down payments are higher and not just because lenders are requiring it. More so due to the fact that very conservative buyers are buying into commercial property and being very risk adverse. All cash purchases abound. Leverage at a later stage in life is not so important. Cash flow, security, stability, asset protection rule the deals. Cap rates will continue to compress in the near term - think 10 to 20 years - just in time for the Gen Xers to step in.

Intero @ Santana Row?

Functionality at the workplace. Something to think about when considering investing in an office building or perhaps a retail center. Intero's new office at Santana Row - I wasn't sure what to make of it. Office space in a very high rent retail location - does that make sense? I had my ahah moment while in the yoga class today at Club One in Santana Row. The cost of this operation is actually low. Yes the rent is high, though staffing is minimal. It is a high profile space and very, very functional to the whole company, especially to gym rats like me who will end up working more effectively and longer because of this unique satellite office. Price per square foot is not the only factor of space. My bet is I will be more profitable, as will the company due to this added tool and asset that now exists. The world is a-changin'. Grab your laptop and be ready to move.

Land - what's it worth?

Two land propossals in one day - that's a record. The first 40+ acres in Colorado - about an hour from Denver - $375,000. The second 1/2 acre on a major thouroughfare in the San Jose metro - $1,500,000 approx. Do I hear the 3 "L's" of real estate -location, location, location? Actually, the CO deal is less complicated and easier to evaluate. What is a huge question is what can be done with an in-fill property. Nothing is for sure until drawings are proposed to City planning. Market value from the inverted, reverse, upside down way. Many kudos to all the successful developers out there. Blessed be the cookie cutter ranch house in west San Jose.

Fourplex & 5+ unit apartment lending

There has forever been a financial divide between 4plex pricing and apartment buildings that are 5 units and more. This is true even if the buildings are side by side on the same street. A fourplex will sell for $250,000 per unit and the 5 unit building will sell for significantly less - maybe $200,000 or lower. Why? Because the financing on 1-4 units is besed on what the buyer can afford and financing on 5+ units is based on what the building can support. Because of the less stringent financing, fourplexes trade at above market values. Now enter the new hybrid loans from lenders who lend on buildings up to 12 units based on the 1-4 unit criteria. This new financing underwriting will dramatically shift values in the 5-12 unit range over a relative short period. So, what should you do? Perhaps, buy a 5 unit building in a great area and watch it appreciate.

Borders Books & Waldenbooks restructuring

Technology keeps shaping the retail world. Borders announced plans to close approximately 300 Waldenbooks stores which are mostly located in regional malls. This is about half of their total locations. Borders will concentrate on their flagship model of large mega-stores under the Borders name. These stores have a lot more stand alone concepts. Interesting also is this trend to boutique shopping and away from the department stores and some would say the old interior mall. Keep in mind when you consider a retail investment what changes may be around the corner. Do you remember travel agencies...?

Ground Lease, Absolute NNN, Leasehold

Let's talk depreciation - the IRS allows a deduction on your taxes based on the assumption that the physical structure of the property deteriorates over time. That's great if you actually own the structure. In a ground lease investment, all you buy is the dirt. The tenant owns the building and benefits from the depreciation. In a leasehold purchase, you the investor buy the structure and NOT the ground. You then benefit from the depreciation of the structure. And in between, is the standard ownership structure where the investor buys the land and structure and lease the same to the tenant. In this case, the investor depreciates the structure only and not the value attributed to the land. The moral of the story is: know your tax situation and choose the investment best suited for it.

Conduit Lending Arizona & the World

From the lips of Leif Walker - Walker Mortgage in Phoenix - this is the timeline to acheive the lowest rate financing available for commercial properties ie: the conduit loan. From a completed application package (property leases, description, i&e statement, borrower financials, etc) to letter of commitment - 30 days if you are lucky. At that point various reports are ordered - typically by the lender so this cannot be done prior - which take approximately 45 days. Therefore if you are making an offer on a commercial property and you want 120 basis points over the 10 year, give yourself at least 75 days to get financing - more is better - less grey hair that way. BTW, if you need a great referral, let me know, I know the guy for you.

Phoenix Real Estate Blog - No Baseball

On a serious note - Phoenix's real estate inventory - as was told to me by an industry insider today - has ballooned due to huge numbers of spec homes for sale by builders. Over 50% of the market. Woe is the home owner who needs to sell his 2 year old home. I know population is increasing - though not that fast. Time to get a deal and wait for inventories to dry up over the next few years. People make money doing what the crowd doesn't do. Beware the REO market too - that is the second shoe to drop in that market and a few others too.

Phoenix - Baseball, Retail and Returns

Spring training in the "Zone". Great weather, intimate games, families on grassy knolls, and the oh-so-tempting hot dog. Now to focus on real estate - this community is like every other growing metropolis with land - every national retailer is clamoring to be here. What drives this growth? Ans: growth. Population, jobs, housing, transit routes. Retail is the lurking secret boyfriend of all these debutants. Stronger in safety than housing, far more secure than office buildings, able to withstand a recession in a pinch. Just don't buy the dogs! Eh - too many to list - just think what happens when fads end, technology transforms industries and Sam Waltons are born.

How much space for your new start up?

Planning on leasing space or buying a building to suit your company's needs. Take a look at these space use averages per employee in different sectors of your business.
Call center employees require 126sf per - squeeze those guys in.
Software design 141sf - A laptop and space for doritos bags and cases of Coke.
Sales and Marketing 154sf - Mostly empty space as these guys should be at the clients location.
Engineering design 175sf - ok - fair - they work with big interesting tools and have robots to care for.
Legal 235sf!!! - no comment - I take the 5th.

Which High School in Cupertino?

And what can you afford? Monta Vista High school area tends to be the most expensive. It also is the highest API score of the 5 high schools in the district at 916 (out of 1,000). Lynbrook is 2nd with 912, Homestead with 842, Cupertino High at 812 and Fremont High at 708. My suggestion would depend on your budget of course and also when your child will enter high school. If you have a 5 year old, I think the best value would be Cupertino High which has been making tremendous gains in the last decade and will compete very well with the top three very soon. If your kid is a transfering sophomore then buck up and pay for the current API score of your choice. PS - I think API scores hold very little water - tis the parents that make the kid!

Cost Segregation

39 years life for straight line depreciation on commercial property. That's a long stretch. Now please consider the use of itemized cost segregation. Where a specialized accounting firm allocates separate costs to each part of a building. Examples are roof, HVAC, asphalt, walls, electrical, tenant improvements, etc. The roof if it is a flat tar & gravel or similar will have approximately a 10 year depreciable life. Not much, if any of the building will last 39 years according to the specialists. Therefore, the investor gets much more tax sheltering sooner. There is a somewhat significant cost to set this up, figure $10,000 or more. Though, that's a write off and your benefits will offset the cost of the setup quickly.

The economy by Larry Souza - genius economist

Larry Souza is amazing. He presented his annual economic update to the Bay Area Apartment Brokers Forum today. As far as my interpretation of the data is concerned, this is a good time in the cycle to buy and then hold. Eventually, as all cycles go, we will be on the decline. Though this should be at the beginning of the next decade. Good timing to buy, adjust, remodel, re-tenant, etc. Then weather the storm. Great interest rates help too, so lock in for 10 years.

Dollar General - Single Tenant NNN Investment

Dollar General stores just announced a buyout by Kohlberg Kravis Roberts. 8,260 stores across the country going in to the hands of turn-around/restructuring artists. Current plans are to close 400 stores and open 300 in different locations. Then, I'm sure will come the real changes. Possibly selling off stores, closing hundreds of stores, renotiating leases, etc. A corporate signature is wonderful until you end up with KKR slashing and burning. Difficulty is also that most of these stores are in secondary and tertiary locations. Not easy to re-tenant in those areas...

SBA financing

The small business administration has loan products that assist business owners who are looking to grow. The most known loan is the real estate loan available to a business that will occupy more than 50% of a building. This loan requires only 10% down payment - of course the business must be able to support the financing. Aside from that, other loan products are for the purchase of businesses, tenant improvements, equipment and pleasure craft - oops, no not for that. If you have a viable business plan or have been profitable for the last couple years, this is a good option for expansion.

After tax investment yields

When considering an investment property, please consider the after-tax view. Cap rates are hardly useful in analysing a true investment over time. With cost recovery (depreciation) making such a huge impact on the IRR (internal rate of return), this makes the investment far more attractive. What is also very important is the cost of your money. Waiting 60 or 90 days to do a conduit loan to acheive excellent rates is worth all the effort. The stock markets are faltering, time to get into 10 year loan money before cap rates adjust.

4.95% of all mortgages late last Quarter

Wow, that's a huge number. And this is in 4th quarter 2006. I'm sure it is worse this quarter. Those are not numbers that the banking industry can support easily. Unless we get a real fast rebound in home values - which won't happen across the country anytime soon - there will be a lot of blood on the books of banks. The banks will slow the foreclosure process down to a trickle if they can. Work out deals will be easily had. So that the banks can not take the actual losses, while waiting for an economic miracle. What happens when bankers fail to get their bonuses...?

A Building for Your Business

When considering to purchase a building for your business think business first. Which building will give your business the best combination of location, size, dimentions, zoning, functionality, less maintenance, visibility - the list goes on and on. My point is - price is secondary to the goal which should be will this building allow me to make more money (and how much more) in my core business. Real estate as an investment takes a back seat. If your desire is to invest in real estate, don't tie your hands by coupling your business needs and your investment ones. We can also talk about a lease vs. buy analysis - very lopsided in a low lease rate environment.