Tuesday, July 27, 2010

Commercial Auction Case Study

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.

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