I receive commercial real estate auctions in my email box on a daily basis. As you can imagine, the amount of properties I have been receiving continues to pick up week after week.
I spend time running financial simulations on some of the more interesting properties to get an estimate of what I would offer for the asset if I were to attend. I can then check the tax records to see what the property was acquired for and get a better understanding of where the distressed market is today.
Let's take a look at an apartment community going up for auction down in Orangeburg, SC in August. The following are their actual income/expenses for 2009:
Total Income: $450,900 (Rent)
Total Expenses: $227,605 (Taxes, Insurance, Management, Supplies, Legal, Advertising, Etc)
Net Operating Income: $223,295 (Income - Expenses)
This is what an investor would receive every year if he paid cash for the property. I would not pay cash. (I wouldn't pay cash even if I had it, but that is for another discussion)
I would offer $1,800,000 for this property today.
Let's say I financed the property 100%. How much would that cost per year?
70% bank loan at 7% interest: $100,584
30% private loan at 15% interest: $81,000
Total cost to finance: $181,584
So what do I take home after all expenses at the end of the year?
Net Operating Income: 223,295
(-) Cost to finance: $181,584
Yearly Cash Flow: $41,711
I would make $41,711 in passive income with a full time management staff on the property with $0 put into the asset.
I am interested to see what this property sells for in August. I will update you when the info become available.
Why won't I be at the auction? Because it is extremely unlikely the winning bid will be $1,800,000. (or below) Investors are still paying too much for property. But that will soon change.