You miss 100 percent of the shots you never take, and if you think it’s expensive to hire a professional to do the job, wait until you hire an amateur. FOR OVER 20 YEARS, I HAVE WORKED EXTENSIVELY WITH OWNERS AND BUYERS IN LAND, COMMERCIAL AND INVESTMENT REAL ESTATE IN PHOENIX, TUCSON AND THROUGHOUT ARIZONA. PLEASE LET ME KNOW HOW I CAN HELP YOU. Call me if you want to sell your property and need an estimated value. Phone: 480-948-5554 Prefer cell: 520-975-5207 or email me walterunger@ccim.net. – What is a CCIM. –
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Here’s one example of how returns can be greatly improved by knowing when to incorporate a loan.
By Todd A. Kuhlmann, CCIM | Winter 2020
When examining investment property as commercial real estate professionals, we are looking to buy future cash flow. We’re buying the potential income and assuming the risk that comes with it. It’s as simple as that.
In this piece, we’re going to talk about equity yield and how properly using leverage can greatly impact yields. Let’s look at a case study to see how these issues play out.
Detailing the Initial Investment
An investor is looking for a property where he’s willing to invest $6.75 million of equity if the annual return is 10 percent. He plans to own the property for five years and wants it to be in a strong, growing market.
We found him a proposed apartment complex in Austin, Texas, with 60 units. We want to be sure this is a stable property based on market rents and occupancy. The project, including land and construction costs, comes in at $6.5 million. Acquisition costs are 2 percent, so the total initial investment is $6.63 million. After five years, we predict disposition costs are 5 percent.
But before selling this property, we want to increase income by 3 percent a year. Laundry machines will provide another $4,000 in revenue with 2 percent annual increases. Expenses will run 40 percent of gross operating income, with an average vacancy rate of 5 percent and average replacement reserves at $250 per unit per year.
We next need to predict our future sales price. In order to calculate both the property yield and our equity yield, we must consider the future reversion, or sale, of the property. For income properties such as this, analysts and appraisers will use the income method using cap rate. For this case study, we will predict the disposition cap rate at 7.5 percent.
(As a disclaimer, predicting future cap rates can be very speculative. Several factors need to be considered, including cap rate trends from both historical and current cap rates, as well as cost of capital and future supply and demand in a particular market.)
With all these figures in place, what does this mean for your investor? Projecting out five years in the chart below, you can see that cash flow before taxes steadily rises from $500,400 in the first year to $564,984 in Year 5. That’s a nice chunk of change, but your investor was looking for 10 percent annual return. In Year 5, when income is at its highest, the cash-on-cash return is only 8.52 percent.
SEE IT ALL WITH GRAPHS: https://www.ccim.com/cire-magazine/articles/2020/winter/leverage-can-boost-equity-yield/
Exploring Other Options
But once your investor sells the property after five years, he will bring in another $936,750 above the purchase price. With this, along with the cash flow, the annual property yield (IRR) of the investment reaches 10.28 percent.
Let’s look at other options for this investment — namely how a loan could turbocharge returns. Let’s say the investor could get a loan for 80 percent of the apartment complex at 5 percent. (Based on the current 10-year Treasury rate, this is on the high side.) The bank will get 1 percent with 25-year amortization and a 10-year term.
The initial investment drops considerably, from $6.63 million to $1.482 million. But the overall return more than doubles, to 23.39 percent.
The chart below has three columns showing how a proposed deal changes with a loan. The first outlines the deal without financing, including an upfront investment of $6.63 million. The cash flow meets your investor’s requirements, while the property IRR remains the same regardless of financing. The second represents the annual financing cash flow, which includes the initial loan proceeds, annual debt service, and the final loan balance repayment in Year 5 of $4.97 million. The last column shows the investment with the 80 percent loan — this represents your money.
As you can see, using financing more than doubled the property IRR/yield for an equity return of 23.39 percent annually, an increase of 13.11 percent from the 10.28 percent property IRR. By making the most of available financing, you’ve positioned your client to more than surpass the initial goals for this multifamily development, while reducing the necessary upfront investment.
SEE IT ALL WITH GRAPHS: https://www.ccim.com/cire-magazine/articles/2020/winter/leverage-can-boost-equity-yield/
With positive leverage, you can boost the equity yield, literally doubling the returns for your client.
As an experienced, knowledgeable commercial real estate professional, you want to be able to deliver this kind of value add to your clients. In this case, you have a cash buyer with the funds to cover the $6 million-plus investment. But with positive leverage, you can boost the equity yield, literally doubling the returns for your client.
Editor’s note: This article was adapted from “Cap Rate and Rent Setting: Analyzing a Proposed Development,” Kuhlmann’s presentation at the 2019 CCIM Global Conference in San Diego, presented with Karl Landreneau, CCIM.
For more on this topic, check out CCIM Institute’s “Before and After Tax Discounted Cash Flow Analysis” course.
Todd A. Kuhlmann, CCIM
Todd A. Kuhlmann, CCIM, is President/ Founder of TheAnalyst PRO, a CRE Tech, Inc. company in Austin, Tex. Contact him at todd@TheAnalystPRO.com.
SEE IT ALL WITH GRAPHS: https://www.ccim.com/cire-magazine/articles/2020/winter/leverage-can-boost-equity-yield/
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You miss 100 percent of the shots you never take, and if you think it’s expensive to hire a professional to do the job, wait until you hire an amateur. FOR OVER 20 YEARS, I HAVE WORKED EXTENSIVELY WITH OWNERS AND BUYERS IN LAND, COMMERCIAL AND INVESTMENT REAL ESTATE IN PHOENIX, TUCSON AND THROUGHOUT ARIZONA. PLEASE LET ME KNOW HOW I CAN HELP YOU. Call me if you want to sell your property and need an estimated value. Phone: 480-948-5554 Prefer cell: 520-975-5207 or email me walterunger@ccim.net.
CLICK HERE TO VIEW ALL MY 60 MIL WORTH OF LISTINGS.
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http://walter-unger.com/gold-canyon-resort-sells-for-29-4m/
_____________________________________________________________________________________
You miss 100 percent of the shots you never take, and if you think it’s expensive to hire a professional to do the job, wait until you hire an amateur. FOR OVER 20 YEARS, I HAVE WORKED EXTENSIVELY WITH OWNERS AND BUYERS IN LAND, COMMERCIAL AND INVESTMENT REAL ESTATE IN PHOENIX, TUCSON AND THROUGHOUT ARIZONA. PLEASE LET ME KNOW HOW I CAN HELP YOU. Call me if you want to sell your property and need an estimated value. Phone: 480-948-5554 Prefer cell: 520-975-5207 or email me walterunger@ccim.net. – What is a CCIM. –
CLICK HERE TO VIEW ALL MY 60 MIL WORTH OF LISTINGS.
FROM ME: Now is the time, if you are thinking of selling or purchasing your Land or Commercial Building in Phoenix, Scottsdale, Maricopa County, Pinal County, Arizona / Office / Retail / Industrial / Multi-family / please call me on my cell 520-975-5207 or e-mail me walterunger@ccim.net. Investors and Owner / Users need to really know the market today before making a move. The market has a lot of moving parts. What is going on socio-economically, what is going on demographically, what is going on with location, with competing businesses, with public policy in general — all of these things affect the quality of selling or purchasing your Commercial Properties, Commercial Investment Properties and Commercial and large tracts of Residential Land Therefore, you need a broker, a CCIM (Certified Commercial Investment Member) who is a recognized expert in the commercial and investment real estate industry and who understands your needs. I am marketing my listings on Costar, Loop-net, CCIM, CREXi, Catylist, and various other web sites. I also sold hundreds millions of dollars’ worth of Investment Properties / Owner User Properties in Retail, Office Industrial, Multi-family and Land in Arizona and therefore I am working with brokers, Investors and Developers. I am also a CCIM and through this origination ( www.ccim.com ) I have access to marketing not only in the United States, but also international. Are you ready to sell or purchase your Land or Commercial Building in Phoenix, Scottsdale, Maricopa County and Pinal County, Arizona, please call me?
Click here to find out what is a CCIM: https://en.wikipedia.org/wiki/CCIM
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Walter Unger CCIM
Associate Broker
West USA Commercial Division
7077 E MARILYN RD.
Suite 200, Building 4.
Scottsdale AZ, 85254
Phone: 480-948-5554
Cell: 520-975-5207
History of Arizona from 900 BC – 2017 -Timeline.
History of Arizona from 900 BC – 2017 -Timeline.
History of Arizona from 900 BC – 2017 -Timeline.
WHY PHOENIX? AMAZING!!! POPULATION IN 1950 – 350 K PEOPLE; “NOW 5 MIL”. – “5TH. BIGGEST CITY IN USA”
- DEMOGRAPHIC FACTS ABOUT MARICOPA COUNTY:
Walter Unger CCIM – walterunger@ccim.net – 1-520-975-5207 – http://walter-unger.com
Timeline of Phoenix, Arizona history
Facts of Arizona – year 1848 to 2013
CLICK HERE: Arizona Opportunity Zones As We Understand /maps. Interested!!! Please contact me.
Feel free to contact Walter regarding any of these stories, the current market, distressed commercial real estate opportunities and needs, your property or your Investment Needs for Comercial Properties in Phoenix, Tucson, Arizona.
Walter Unger CCIM
Associate Broker
West USA Commercial Division
7077 E MARILYN RD.
Suite 200, Building 4.
Scottsdale AZ, 85254
Phone: 480-948-5554
Cell: 520-975-5207
FOR OVER 20 YEARS, I HAVE WORKED EXTENSIVELY WITH OWNERS AND BUYERS IN LAND, COMMERCIAL AND INVESTMENT REAL ESTATE IN PHOENIX, TUCSON AND THROUGHOUT ARIZONA. PLEASE LET ME KNOW HOW I CAN HELP YOU PLEASE CALL ME
CLICK HERE TO VIEW ALL MY 60 MIL WORTH OF LISTINGS.
https://www.crexi.com/properties?searchBrokerId=17513
Also Call me if you need an estimated value of your Property.
Call me if you want to see a map with what is in the Construction Pipeline for Apartments.
Prefer cell: 520-975-5207, or email me walterunger@ccim.net. CLICK HERE TO VIEW ALL MY LISTINGS.
Check out my professional profile and connect with me on LinkedIn.
Walter Unger CCIM, CCSS, CCLS
I am a successful Commercial / Investment Real Estate Broker in Arizona now for 20 years. If you have any questions about Commercial / Investment Properties in Phoenix or Commercial / Investment Properties in Arizona, I will gladly sit down with you and share my expertise and my professional opinion with you. I am also in this to make money therefore it will be a win-win situation for all of us.
Please reply by e-mail walterunger@ccim.net or call me on my cell 520-975-5207
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