Commercial Property

Investor 101: Putting it All Together

Putting the Basic Factors Together Sorry it’s been so long since the discussion about debt service coverage ratios, but it’s now time for the next part. In determining how you evaluate potential commercial projects/acquisitions, there are many factors including but not limited to: the capitalization rate aka cap rate; debt service coverage rates; cash flows; expenses; and deferred maintenance. Each one of these are important to the evaluation of not only the merits of purchasing but also whether or not it is a good short and long term investment. Since the criteria will vary depending on the project type (i.e. multi-family under or over 4 units, retail commercial, warehouse, mixed-use) specific criteria and how to evaluate them will be more thoroughly covered in the 201 series. In a previous blog, I related how easy it is to alter the value of properties by a more liberal cap rate than will be utilized in the appraisal. This means the cap rate is lower than it should be, with the result being a higher value than what may be used by the appraiser. Another way to alter the value is to not show the vacancy rate or all of the expenses. This has the effect of showing an artificially... 

AMAZING lodge for sale in Chilliwack, BC

I was up in the Vancouver BC area last week and my friend Laura Howren took me with her to see a property she just listed in Chilliwack. For those of you who aren’t familiar with the area, it’s a city in the Fraser Valley region in BC about an hour and a half away from Vancouver (home to the 2010 Winter Olympics!!) with an abundance of recreational activities…hiking, fishing, golfing, water sports, you name it. This log home is currently a short term executive rental, rented out on a nightly or weekly basis, and is in a perfect location as it’s only 35 minutes to Harrison Hot Springs and 25 minutes to Cultus Lake, a popular camping destination. Think 26′ ceilings with ceiling-to-floor windows that take advantage of light, beautiful Hans Rhodes natural rock fire place, large recreation room in the daylight basement and a private master suite on the upper level…it’s literally the perfect Getaway! With the exchange rates today at $1.08, with US dollars it’s like getting an 8% discount right off the top of the purchase price. The listed price is $969,000 and the home has 3 bedrooms, 3 bathrooms, about 2600 sqft and is just shy of 2.5 acres,... 

Investor 101: What is a Debt Service Coverage Ratio?

Why do I need to know about the Debt Service Coverage Ratio? In the course of purchasing commercial property or large multi-family properties, investors will run into the “Debt Service Coverage Ratio” (DSCR) and wonder what exactly does it do and why is it so important to the lending institutions.  First of all, the DSCR is a quick measure of how many times the Net Operating Income(NOI) covers the debt payment.  Normally, most lending institutions want the coverage to be between 1.20:1 – 1.25:1 or in other words the NOI must be high enough to cover the debt payment on either an annual level or monthly level by 20%-25% more than the payment.  This is to ensure that the property makes enough money to pay the debt with some leeway for one-time expenses.  If you have a variable rate, the lending institutions will also “stress test” the calculation to see at what point changes to the  interest rate will cause the ratio will fall below what is acceptable for them.  Since most banks do not have a long term commercial real estate loan product, this is important for them to know as the loan terms may change every 3 – 5 years.  Now the calculation... 

Investor 101-What is a “Cap Rate” and What Does It Mean to Me?

Facts and Fiction about “CAP” rates. After spending many years in the commercial banking industry and making the jump to real estate, it was very interesting to me that many people do not know what a “Cap rate” is.  First and foremost, it is NOT an indication of or a fixed rate of return.  “Cap Rate” is short for capitalization rate or a mathmatical rate that is assigned to a property based on the risk of the investment.  The higher the risk, the higher the rate.  For instance,  let’s say you’d put money into a 30-year investment that is yielding 5.6% annually and is federally insured so there is no risk.  That would be the base rate so anything higher in risk, would be a higher rate because why would you take more risk with your money and not get more in return..the answer is you wouldn’t!  Now let’s say a property has one tenant that pays income to the property owner and has been in the property for many years, has always paid on time and has no wish to move.  The income received from the rent is sufficient to make the mortgage loan and return’s a substantial amount to the owner.  This is more than likely to...