9/12/23 – Commercial and Cap Rates

I have been speaking with many agents lately who are expanding their market and taking listings of units or small commercial properties. Then they are asking me how to price it! LOL! I have been asked three times this month, so I wanted to share information about the commercial markets and what a CAP Rate means to a buyer.

If you are taking a listing, you first need to get the rental income and expenses to figure out the CAP rate and the eventual price. If your seller is receiving, say, $10,000.00 per month in rent and annual expenses of $35,000.00, that’s a good start. You will have to make adjustments for the new taxes and the new insurance costs, and you deduct all of those expenses, say $42,000.00, to come up with your net annual income.

In this case, it is $78,000.00. Now you have to analyze the rents and if the property is in a rent control area that is pretty restrictive like the City of Los Angeles, or if it is in the county or elsewhere where you can have annual increases in rent of 10%. Two identical properties can have extremely different values based on their current rental income. Too many landlords mismanage their properties and don’t raise rents, and when they sell a property, they feel that they can get the same price as a person with higher rents, which is not the case, especially when there is restrictive rent control. So, the property above has Proforma rents of $15,000.00 monthly, but they are receiving $10,000.00. That’s a difference of $60,000.00 to the bottom line. The $10,000.00 has rental upside, so there is value there, but at the end of the day, the property earning 15K a month receives $138,000.00 in net annual income, and the one getting $10,000.00 receives $78,000.00.

A seller wants to sell a property at the lowest Cap rate possible, and a buyer wants to buy a property with the highest Cap rate and upside. Let’s say, the two properties above sell at a 5% Cap rate.

The first one with a $78,000.00 net would sell at $1,560,000.00, and the one with $138,000.00 would sell at $2,760,000.00. If that were the case, then I would buy the first one, as it has huge upsides to the rents. So, that seller tests the waters at a 4% Cap rate, thinking that the tenants could return to market rents over time. Still, at a 4% Cap rate, the asking price will be $1,950,000.00. If you want to sell your mismanaged building for $2,760,000.00 like your neighbor, you would have to convince a buyer to take a 2.83% Cap Rate.

A 5% Cap rate equals earning 5% on your money if you pay cash for the property. You can see above that sales comparables do not hold for commercial like residential properties. You can also see that managing a building properly is very important, and most people who self-manage start to look at tenants as friends, which is a bad idea! Having a buffer (Property Manager) between the tenants and the buyers is always a good idea!

I know the above can be confusing, so if you have a listing appointment and give me the basics, I am happy to review everything and give you my 2 cents.

Condo / Townhome issues we know of now:

American Beauty Village – Insurance

Scenic Hills – Insurance

Mariposa – Litigation – Agreed upon, but not yet recorded

Bouquet Canyon Village – Insurance

Scenic Hills – Insurance

West Creek / West Hills – Insurance

Cornerstone – Insurance (I think they may be a few weeks away from renewal, so you may be able to sneak something in?)

Please let me know if you hear something new on Condos or Townhouses. We will see premiums increasing, likely increasing the HOA Fees soon!

Interest rates are flat this week. Have no fear, the CPI will likely change that tomorrow!

• 12-day escrows if your buyer is pre-approved - Conventional / FHA / Jumbo / Bridge
• We do loans in all states, so call me with anything you need.  
• Government Loans (FHA / VA) are in the low to mid 6’s.
• Conventional Loans up to $726,200.00 are in the low to mid 6’s and low 7’s.
• High Balance Loans $726,201.00-$ 1,089,300.00 are in the 6’s and 7’s
• Jumbo loans above $1,089,300 are in the 6’s and 7’s
• Bank statement loans - They are available with 10% down again! 7’s and 8’s + depending on down and credit score.
• No income qualifier – 40% down with reserves! In the 6’s!
• 0 down loans are in the mid to high 6’s – 660 credit score min right now, up to $740,000.00.
• Private Money lenders - hard Money Loans – 35% down!
• No Ratio Loans 30% down
• Debt Service Coverage loans with as little as 25% down
• Bridge Loans - are typically 7.99% with limited fees – But they get you where you need to go!
• 0 down California Dream for all Equity Share – Postponed until 2024!
• 3/2/1 Buydowns 2/1 Buydowns and 1/0 Buydowns are available at great start rates!

Interest rates are subject to change without notice! Above are LA County Loan Limits.

I am around all week if you have any questions or if someone is interested in buying a property! My cell is 661-714-6258, and my office line is 661-260-2970 ext. 2222. Please text me at 661-714-6258 or email me at Mike@AugustaFinancial.com. Have a great day and a better tomorrow! Please call me when you have a client that needs to borrow!