Real Estate & Investing

Brice Sheppard asked:


How to Determine the Value of Commercial Property

Investing in commercial real estate is quite lucrative if you are an intelligent investor, who has a property purchase plan from the beginning. Before you ever make a move to begin the purchase process, it is wise to take a look at the property to project the potential value of your investment.

Not all valuation methods are created equal

Before discussing the actual valuation of commercial property, it is prudent to know the different methods of real estate valuation. The first is the market valuation, or sales comparison method. Residential homes are usually valued using the sales comparison method since the value of a home is directly related to the price a buyer is willing to pay compared to the sales price of similar homes.

Another method is the Cost Valuation Method, which is simply land value plus an estimate of what a building or other improvements would cost to reproduce in today’s dollars.

And the last method, which is used most widely in commercial and investment real estate valuation, is the income capitalization method, or cap rate method. Using this method, commercial property is valued by determining the rate of return on an investment, or capitalization rate, divided by the average net operating income (NOI) for the property. NOI is the gross income for the property less expenses, but not including debt service or mortgage payments.

For instance, you as an investor find a nice retail strip center for sale. The current owner provides details of the previous 12 months net operating income, and you find that the average yearly NOI is $75,000. The capitalization rate for the area you are looking is about 10%. Therefore, by dividing $75,000 by 10%, you can figure that $750,000 is a good estimation of the value of the property.

Enlisting professional sidekicks for your commercial portfolio

Remember that this type of quick estimate is a ball park figure only. A true and accurate valuation can be performed by a licensed commercial real estate appraiser. Also, if you use a commercial mortgage broker to help finance an investment, the broker can provide a clearer estimated cap rate valuation because he has access to databases that provide critical information, such as accurate cap rates in the area of your potential investment, typical vacancy rates, and average rent per square foot for an area.

Keep in mind that the seller may provide financial statements and data that are overstated or exaggerated. For instance, he may indicate no vacancy contingency in his expenses. Or gross rents may be higher than the average for the area. It is wise to carefully analyze the income statement and use the experience and knowledge of a broker or appraiser to figure accurate numbers when calculating the potential NOI for a property.

Befriending the PPU for valuation

Another type of commercial real estate valuation is the price per unit or PPU. The PPU may be used on commercial property, such as apartment buildings, where excessive vacancies may skew the financial data and the final NOI cap rate. By using the sales comparable method mentioned above, a commercial real estate appraiser can more accurately determine the value of an apartment building by comparing the recent sales of similar apartments, and determining an average price per unit. Simply multiplying the PPU by the number of units in a potential investment can provide an accurate valuation.

It is helpful for an investor of commercial real estate to know the methods of valuation for a property. By knowing the methods and working with a team of experts, an investor can intelligently determine whether a commercial property will be a profitable investment.

 

Matt Lahtela asked:


How to use a self-directed IRA with Entrust Carolinas, LLC to Purchase Real Estate

With a self-directed IRA, you can own the property in a variety of ways. Here’s an example on how to use a self-directed IRA to purchase land:

While doing some research, you find a 1-acre lakeview lot for sale for $100,000 in a booming part of North Carolina. In five years, you are certain that the lot will be worth much more than $100,000, and so you decide to purchase the lot.

You look over your finances to see what’s available. You currently have $150,000 in your retirement account.

Here’s a few ways to structure this transaction for your benefit:

1) Purchase the Lot in Cash with your IRA – With $150,000 in your retirement account, the lot could be purchased in full on the day of the closing. Purchasing the lot in this way would mean that there would be no mortgage payments and no debt associated with the lot, and all profits made from the eventual sale of the lot from the real estate would go directly into your IRA account tax-free or tax-deferred, depending on your plan. It’s just that simple. And remember that any expenses pertaining to the property, such as construction work or tax bills, will be paid out of your IRA; leave some cash in your IRA account so the expenses are covered.

2) Partner with Your IRA – A great way to use leverage with your IRA is to partner with yourself; specifically, you can use mortgage loans and IRA money to make a purchase. In the example, the $100,000 lot can be purchased using both your IRA and a mortgage loan. You could use your IRA to put down $30,000 (30%) at closing, and then you, as an individual, acquire a mortgage loan from a bank for the remaining $70,000 (70%). In this type of transaction, partnering with your IRA allows you to put a cash sum down without involving any personal money. When partnering with your IRA, the split of ownership must directly reflect how much each contributes to the purchase price. With the above example (the 70-30% split), the IRA cash is for 30%, and you as an individual contribute 70% via the loan. Of course, this example is just one way in which the split can occur. Any percentage split is permissible so long as it reflects the contribution amounts from each party and equals 100%. Keep in mind that the IRA is not responsible for any loan costs or loan payments. Once the lot is sold, the profits from the sale must also reflect the same percentage split.

The paperwork associated with this transaction is also easy & painless. Essentially, you would complete an Entrust Carolinas LLC application, a fee disclosure & a copy of your driver’s license, and that would create your self-directed IRA. From there, a simple transfer form would move your retirement account from the previous custodian to Entrust Carolinas, LLC (which is a non-taxable event) and along with the Buy Direction Letter and standard closing documents of any real estate transaction, the lakeview lot would be yours.

How would the property be titled? As an example, if the buyer’s names are Bill and Melinda Gates, the contract and deed are made out to Entrust Carolinas, LLC FBO Bill and Melinda Gates. The FBO stands for “For Benefit Of”. The folks at Entrust would actually sign the contract, paperwork, HUD, everything (think of Entrust as a “Power of Attorney” for Bill and Melinda Gates).

How much does this cost to setup? Entrust fees are: One time cost to setup is $50, and cost is $250 per property per year. Very minimal cost. If you own multiple properties, cost per year can be less.

These examples above are for illustration purposes only, and are not to be considered legal or tax advice.

Source of some information: Entrust Carolinas, LLC.

FYI – We just sold a lakefront lot for an investor that he bought in 2005 for $250,000, and sold it for $420,000. In 3 years, the property went up $170,000. Most lakefront properties here average 12-15% return per year. I have a detailed chart showing these results (if you want a copy, we’ll send it to you).

Contact NClakefront Realty at 800-659-6017 for more information

randy asked:


This is the perfect time to start Real Estate Foreclosure Investing. Here is why real estate foreclosure investing is a hot investment.

The economy is taking a deep dive and governments are turning, finding ways to alleviate the situation. Homeowners are selling their property or are behind their mortgage payments, in danger of having their property repossessed. Businesses are selling non performing assets to be able to continue operating at a profit. To say the least, banks are scrambling as they themselves are accumulating extra overhead for maintaining property they have seized.

These scenarios above are perfect for real estate foreclosure investing.

If you look around or ask around your own neighborhood, you may find some homeowners, cash strapped and needing to sell their houses. This is ideal since you will be dealing directly with homeowners.  It may sound like you are taking advantage, but the reality is if they are not able to make their mortgage payments, they stand to lose a lot more. Their house may be repossessed and they lose all their investment money. Also, if that happens, they lose a lot of credibility and may suffer bad credit standing.

Not all homeowners are wise enough to sell prior to being foreclosed. Others let it be, not knowing any better what to do, while others simply don\’t know where to go and who to run to for help. The banks take over and then the banks are the ones now with the burden of carrying extra cost for the property. 

Go to the banks and ask for their list of foreclosed property.  You will find that they will be very willing to assist you as they need your help.  The advantage of dealing with banks is that they make it easier for you to gain control of the property by offering good rates and better payment terms. You may find instances where you can gain control of the foreclosed real estate with 10% of the selling price, and to beat that, you can actually have a week to a month to pay for the 10%.

This is the ultimate deal if you can pull one of those no money down transactions.  This is just one way of doing this with Real estate Foreclosure Investing. Now that you know why real estate foreclosure investing is hot, go out and find these jewels in your neighborhood.  Visit your local bank and ask for their list of possible real estate foreclosure investing opportunities.  You never know what you will find unless you look.