I have been involved in the United States property market since November 2005 when I flew to Texas to buy an apartment building on behalf of a group that I was involved in. That led to a consulting role providing marketing and training in a real estate firm in San Antonio for most of 2006.
Since that time I have been back to America around 4 times a year and have mainly been involved in smaller deals on behalf of clients. However the conclusion I have come to is revisit the first deals that I was involved in namely Commercial property which is made up of apartment complexes, shopping centers ect. The reason that I have done this is because I believe that commercial property represents better long term value.
Since the Global Financial Crisis in 2008, finance, especially to foreign nationals is not available for residential property. What that means is that if you want to buy a property in the United States you have to pay cash. There is a lot of rubbish being sold in the United States. Now if you think you can get a good property for $20,000 to $50,000, think again. In most cases these properties are located in slums or very low economic areas. So you go to the next level and buy a property between $70,000 and $100,000 what you have to consider is that if you are paying cash in most cases you are paying 6 to 7% interest on that money. The reality is that if you are going to pay $100,000 in cash you will make more money in Australia. In fact I partner with investors in Australia to build development projects where it produces a high profit on investment. So what are your returns? I often hear of high returns quoted but they are normally gross returns not net. For example in many parts of America there can be very high properties taxes, in Texas the taxes are around 3% annually, so on a $100,000 property that’s around $3000 property management runs at around 10% plus costs to maintain the property. So by the time you add in these costs often your real or net return can be well under 10%
However, when you look at commercial property there are some advantages. Firstly even as a foreign national you can borrow around 60% on low rates through a bank
. Some of the deals I have been looking at are returning around 17% net, that’s after all costs including Property Management, finance and of course property taxes. The second advantage is that even if you invest with other people you are generally buying into much higher quality properties, which is why the banks are prepared to lend around 60%. Thirdly apart from the cash flow we also believe that there will be strong capital growth over a 5 year period. The next point is if you buy a single house what happens if you lose a tenant. It means from day one your cash flow takes a 100% hit. However if you own ant Apartment complex, one vacancy short term will not dramatically hurt your cash flow. Finally you are able to leverage your money in other words if you put down 40% in cash you can borrow the rest allowing you to buy much higher value investments. However before you invest do your due diligence carefully and remember that the quality of people you work with on the ground will determine whether you succeed or not.
Nigel good post:
I agree with you on the single family side of things I think there is no argument that we both think that TRASHFLOW houses in the US are really poor investments and extremely risky.
Here is what I see happening.
The US and OZ marketing companies and fellows had a pretty nice run at higher gross rental returns for the last 3 years or so (that can be gotten in todays market) .. NETS were never what was represented at least for the average investor. But now Even gross returns cannot be Puffed (inflated on paper).. So these companies are looking for other vehicles…
So its out of necessity that these companies are looking at buying Multi and commercial… There is plenty of Run down derelict multi and commercial to find in the US.. With the exact same proforma stats like SFR of a few years ago.
However I think its important for the members of this site to know that commercial and Multi just like any other RE investment comes in different quality and grades.. So when you buy Multi that promises a high return like you quote above these are much more RISKY investments than a Multi that is say here in Portland Or. That will return 5 to 7% Net MAX..
Or any other market in the US.
When your talking those kind of returns and the companies bringing them to you are not brokering them they are building in fee's and profit on the front end, ( No one here is a non profit from what I can see and is doing charity work)
For investors to think Hey I missed the boat on that 20% or 30% gross return US single family home but now I can buy commercial or Multi your just trading one risky property for another.
There is a reason these Multi's are available at these prices. Its because those that came before you FAILED and walked away from them… One can certainly buy these and make a go of it. But to have an investment were your pooled in with a bunch of investors you do not know and a C class investment in the US at best.. This is anything but a safe secure investment its risky just like the cheapo houses you and I do not like…
I have seen first hand much better operators than I lose big properties in Texas particular… Tax's through the roof and no zoning per se creates an environment were tenants are raided from one apartment to the other.
But there are also very good deals and up side Just need to make sure you with a very experienced team..
The players that I know in this market, ( Multi family turn around) will put these deals together and pay a 6 to 8% pref return and then share some upside with the hopes of 10 to 12% the investors. Anything more than that are your dealing in the same asset class as I stated and you concur are cheapo houses its just slumlord Multi or slumlord Commercial..
Good update on the market here Nigel. Most markets nationwide have become stabilized and lenders are beginning to open doors again that we have not seen for years. A lot of the debt that was taken on in late 2007 and 2008 is not coming due so the properties that are over leveraged at that time are now finding their way back on the market and we are seeing some great deals out there.
Thanks Rob and Jay for your comments as well. However it is possible to look at higher returns. As mentioned we are seeing properties returning 17% and there are not c or d class properties
I am going to play devils advocate here and go based on what I am seeing as a MF broker myself. I broker most of my MF in NJ, but do some here and there in FL. A few questions and comments I have and please correct me if I misunderstood:
- Foreign national financing at 60% and good rates? Please point me to those banks. I work with 3 brokers in NYC who cannot even sniff that. 60% and low rates is practically domestic investor terms. If you are an investor, and buying out of state MF, banks will give you a hit to the down payment and push you down toward 60% on DOMESTIC investors. I have not seen anything for foreigners.
- 17% Return / Cap Rates on assets better then C's? Where? In FL, AZ, parts of TX, NJ, NY, the market is trading at about 7.5% for C Class properties on average. I see SOME getting 10% but not many. The MF market is very competetive right now. I don't buy into 17% net returns on MF. The market simply isn't trading there anywhere.
- How do you calculate Cap Rate on MF? Do you consider vacancies / deductions? Maintenance? Common area expenses?
I'm just a little skeptical of your post. I am far from a national broker, but I study MF trades in many areas. I look at the Marcus Millichap and CBRE reports constantly. Nothing is trading anything close to 17%. Maybe a needle in a haystack? But I don't see inventory doing so. That's crazy. Institutions would be all over anything trading better then 12%.
I am fairly certain there are those deals out there but they are in the hood,, Last guy that tried failed,
buddy of mine just bought one in Memphis, 70% vacant so if you run a proforma on it looks great on paper,
try to actually reno it and tenant it thats the other side of the coin.
Your right on the mark with your cap rates… Here in Portland and most of west coast its 5 % for A and maybe 8% for class C and below.
Its just like the houses that people get suckered into with profroma data not actual.. Anyone who has any experience in the US buying multi or commercial will not take a profroma as the gospel. The buyers and lenders will want 2 years of running cost with tax returns to back up the profroma only Rookies and risk takers will buy on profroma data..
JLHspeedy gonzalesMember@speedy-gonzalesJoin Date: 2010Post Count: 149
Lets put the numbers out there for all of us to see. I just don't see these sorts of returns as viable or ongoing for commercial deals. I know you worked with individuals in buying SFH in San Antonio so are you now saying to these investors this isn't the way to go ?
I have some business/investment partners in Houston and they are very experienced in commercial deals. I am presently sitting on some vacant land in Houston Ave (about 1 mile from downtown Houston) in a JV where in the years ahead we plan to develop a commercial building. This is in Houston's historic first ward where almost all of the housing has been bulldozed and replaced by shopping centres and office buildings & new townhomes. Running a ruler over the numbers the best we can expect is a cap rate between 6-8%.
Then further out we developed a 2.5 acres lot and have a 2 story medical/office building behind the new Texas Children's Hospital. Same sorts of cap rates around 7%.
Personally I can't see too many Aussie's taking the plunge in US commercial real estate despite the suggested returns. Aussie's are more akin to residential property investment and not many invest in commercial real estate in Australia let alone oversea's.
Speedy I agree that it is very difficult getting high returns in Texas. Because the market has not fallen and the economy is strong. However I am working with some developers in Texas. There is money to be made there. In terms of the returns they are available. I will get my business partner who works with one of the largest commercial firms in America to comment on some of the points you have made. Finally no I do not work with the person I was working with before in San Antonio. There are a number of reasons for this.
However in Australia I am involved in development projects where we are making a high return for our investors and that is why I am focusing more on larger projects rather than single family homes
sounds like the same story from the aussie marketing companies, WI posted about one of them that sold 400 plus C class properties and now has found Jesus and decided that A and B is better.
When the reality is C's are just too tough to manage and in Atlanta where this company has been buying the competiton has been intense and the only thing they can buy is the more expensive properties.. So some BS story about how they are changing tactics,,, OZ investors are too smart for this by and large.
Seeing how I partner with Nigel in the Property Know How America; I must side with Nigel and I can certainly back up the returns in question here.
As a Commercial Real Estate Broker for many years and given that fact that I am an agent with Marcus & Millichap; I can confirm with all confidence that the 17%, 20% and 25% net return on investment are real. Though my primary focus is in Florida where I live I also am very active in Texas, California and the entire East Coast of the United States. Even though I can’t personally be an expert in every market; the firm I represent can. M&M keeps an extremely close watch on each major market in every state from the vacancy trend of specific property types to how Wall Street will and is impacting the capital used to leverage these properties.
Again, I’m not an expert at everything but I can personally attest to these same returns in every State across this Country. As for the classification of property types, yes there is an expectation of higher returns when it comes to C & D grade properties due to the upside potential. And with the C & D grade properties the lenders become a bit more conservative and it helps to have a resume with prior experience in the investment arena with this type of asset. But let’s shift the higher return mindset to the A &B grade properties. Certainly depending on the inventory of the area is a factor but given the fact my firm leads the nation in sales of every commercial product type the facts are that A & B grade assets alike do trade in CAP rates north of 8,9 and 10%. Now when you leverage those same assets your returns are even more attractive. I could go on and on about this subject for days but there is simply no need to have to prove myself when I have the inventory and closed deals as proof enough.
Regarding the financing: As most agents in this industry have experience; lenders have tightened up their requirements on many fronts but as a broker who likes to insure my deals close I have resources that simply get the job done. For instance; I just received three different term sheets last week from three different lenders quoting 25-30 years amortization, 4.5% to 5.125%, with 25% to 35% down. And to top that off these lenders were fixing the terms and providing non-recourse debt. But the absolute best part of this lending scenario is that the buyers were foreign nationals. Now of course I would not simply give out the names of these lenders as I have worked my rear off to obtain such relationships and contacts in this industry. But I can certainly refer a deal to them for you.
Be it the reader or members of this site finds my comments true or not; I can support and back up with facts as to each and every mention herein. Should any reader wish to inquire more about how these same returns and leverage can work for you; simply contact Nigel with your inquiry.
Wish I had more time to chat about this but it’s midnight in Florida and I got to go. Later gents.Ziv Nakajima-MagenParticipant@zmagenJoin Date: 2012Post Count: 522
So now there are "D" properties in the states too? Wow, I thought the "C" was already ghetto/warzone…what's a "D" like, I wonder? Each property comes with its very own meth lab???
I feel privileged to be working in Japan. Here, a " C" class property just means its old and small, and you might make some extra bucks or get a new unit when its time to tear the block down.
Oh, and no guns or meth labs. At worst, a hard working factory drone or government supported bum who may miss a payment or two (and comes with a 3-mth payment and clean/vacating costs guarantee).
looking at many deals, one see's the commercial agents proforma ( best case scenario) then there are actuals backed up by financial statements and tax returns for 2 or 3 years.
are you saying 17 to 25% cap rates?
In my experience the hot deals never come to market and would never come to this kind of forum or be looking for Off shore investors per se the agent listing them would already have his buyers lined up. And of course some could be off shore but most domestic… and repeat clients.
Although I do know a Russian agent here in Oregon that goes to Moscow 4 times a year and does really well,, he double ends everything..And he is selling props at 7 to 8 caps… And does very well on the commish side.
What type of properties are you speaking about,,, Multi family, Strip malls, office,,warehouse tilt ups.. Just curious what your concentrating on.
John USA Commercial –
Sorry, but I had to stop reading when you said 15-25% Cap Rates were do-able in FL. What struck me harder was the fact that you said you work for Marcus Millichap. I don't want to name drop here but I work with 2 of the biggest MM reps in FL, one in Tampa and one in West Palm Beach. A good friend of mine is the analytical geek of the MM offices in the NY Metro area. That said, I get a lot of MM properties before they hit the market. Not because I am overly important, but because I have closed deals with them many times. I can assure you MM does not trade anything close to that. If they did, they would be out of business because they would be doing a huge disservice to their clients.
Let me be subtle: CLASS C ASSET CLASS INVESTMENT ARE NOT TRADING IN THE DOUBLE DIGITS!! It is simple common sense. There are gazillions of investors out there looking for an 8% Cap. WHY WHY WHY would sellers sell at double digit cap rates when they KNOW the market is just not trading there.
That's all I have to say. I can't believe I am dignifying this actually.
Jay: Class A and C trade almost the same nationwide. NJ, FL, AZ, CA, etc….. You and I seem to know where this conversation needs to end. It is brokers and reps preaching double digit impossibilities that anger me because it misleads the public.
I'm literally sitting at my desk shaking my head.
John: I can make you a millionaire in 30 days if you source me some double digit cap rate properties. Give me a 12% + Pro Forma and I can STILL sell it. Pro Formas are trading at about 10% right now maybe 12% in those really bad 15% occupied complexes that need 150% in cap X. Let's see some inventory. I'll sign an NCND with you just so I can look. I just don't believe it or see it. Sorry
the deals that I see that proforma out to high returns are clearly in the Hood, and are usually boarded up and or have 70% vacancy or better, and it takes a small army to move in and turn them around..
And I mean an Army,,, One needs fortifications to surround the project IE chain link with razor wire,,, Arm security gurards, Not the national guard, Dogs ( the kind that bite)… then ones you have gotten your units rehabbed then there is the rent up phase.
And with these types of properties your running cost will be higher you need depending on the size 24 hour armed security, On site management of course.. then pray your on sight manager does not steal you blind… ETC ETC.
I compare this to the Indian or Pakistani that opens a convenience store in the HOOD,,, be it any Hood Watts, in CA, East Oakland in Nor CAL, Detroit , Memphis, Philly, Harlem, etc etc..
You walk in and they are in a bullet proof see through BOX with a bank teller slider for the money to be exchanged… Security cameras and of course they have weapons…. Same scenario with high risk multi family Ghetto properties.
Now you take other commercial type of properties that are half full or empty and yes you can see sky high proforma's on those but try to fill them.. negative cash flow kills ya. Thats not to say like Cheeves said one could not find that needle in a haystack…
Would be interesting to see the product that is the subject of this discussion…
I posted the 2 bigger commerical free websites to see what type of commercial properties are being offering nationwide.
in a seperate post however will mention them below.
You can surf around and see what Nice commercial looks like and nice multi and then just go to the Inner cities of the mid west and you will see really cheap units and many boarded up properties… If the last guy could not make a go of it what makes another think they are better at it… Thats the question and some are, they do turn these around but they do it with alot of work and a vested interest. Do not expect a RE broker to turn your multi around for you…
In my experience the hot deals never come to market and would never come to this kind of forum or be looking for Off shore investors per se the agent listing them would already have his buyers lined up. And of course some could be off shore but most domestic.
Jay: You are correct with the above. No such properties exist on a forum level with 15% yields. Utter silliness and irresponsibility in misleading people as to what exists. No wonder I get calls from foreign nationals asking for 15% Cap Rates in New York City. I swear they do. I am not sure whether to laugh, think its a prank call, etc.. Let's face it, NYC is not Florida, but understanding where the market is trading is a commercial brokers first responsibility.
It's been awhile since I posted, but I check in from time to time. I had to set the record straight here on this topic.
Wow; the unbelievers out there. The LoopNet link below is to an active listing. The listing is marketed as "Make an Offer" however if those who are un believers out there want to see plain and simple facts just email me off line. I will respond with a Confidentiality Agreement for you to execute (this is for the purpose of not disclosing the owner's financials to just anyone). Once I get the CA returned I will then forward you the marketing package complete with rent roll, income statement and other data to confirm this deal generates a 16% return.
Now for clarification for those who may have not read my post correctly. A CAP rate and a Net Return are different. As I referenced the net returns for assets in the 17, 20 or 25% this is simply the net cash after debt service divided by the down payment or AKA / Cash-on-Cash Return.
Now to say properties are generating a 20% CAP rate is a far reach. Guys, I hope this clears up whatever misunderstanding is out there.
It is also important to remember that unlike marketing companies when people partner with us in America we supply them with professional reports and spread sheets. They are more than welcome to do as much due diligence as they like. In fact w encourage it