Author Topic: What kind of ROI are you seeing on property? (Read 11396 times)

eljefe3 · « **on:** September 27, 2012, 04:44:46 AM »

I've had some commercial property in California for almost 25 years with the same tenants (yay) but the downside is our rents are way below market value and roi is not even 4% of market value of the property. I want to raise the rents, but my partners ( my parents) don't want to as the tenants have been good to us.

A friend of mine here in Asia who is from Texas, says he's getting around 12% on properties in Dallas and Austin on condos.

Anyone have real world recent experiences with roi on property? Any hotspots where rents are high and prices are relatively undervalued in comparison to how much rent they bring in?

grnidone · « **Reply #1 on:** September 27, 2012, 05:12:27 PM »

Just a note. Good tenants are worth keeping the rent low. Really. They are *that* difficult to find.

rcjordan · « **Reply #2 on:** September 27, 2012, 07:55:35 PM »

What G said.

Right now, you're lucky if you're not running negative cashflow. One of my strips (16k sq ft in a resort area) is doing about 8% currently BUT that is because the appraised value has dropped by 30-40%. Some of the rents have had 'incentive' cuts to get them occupied.

Another older strip (30k sq ft) adjoining an old mall will barely cover its costs this year ...if I were servicing a mortgage, I'd have to borrow to keep it going.

Other properties vary but I wouldn't screw around with anything approaching 4% from a stable tenant right now.

>condos

Residential rentals, that's another story. I'm doing 6% net after expenses on one that I bought back pre-bubble. I've just acquired a nice foreclosure at 50% off the 2008 market valuations and I'm estimating ROI to be 8-9% on that one. I just made an offer on another bank-owned home this morning. If I get it anywhere near my offer (40% of 2008 valuations) the ROI should be close to 10%.

dogboy · « **Reply #3 on:** September 28, 2012, 12:35:29 AM »

My family has some commercial property we rent out. I know we adjusted the lease earlier this year so it tied the rent to the rate of inflation. In other words, should we experience high inflation or a hyperinflation event in the next few years, we won't be asking our tenant for a fixed amount of money every month, we will want more and more.

That's not to say our tenant will be able to keep pace either, but at least we aren't sitting around asking to get paid back in devalued dollars. The inverse could also be said: if you are buying, make sure you get a low fixed rate loan and that you have the option of paying off at a faster rate than the agreement says, without penalty, so if we have hyperinflation, you can pay off your debt in devalued dollars (on the assumption your wages are still keeping pace.)

eljefe3 · « **Reply #4 on:** September 30, 2012, 04:20:43 AM »

Thanks for the info. Being 8K miles away, it's tough to get a handle on market situations. The Cali property is in a city where building permits takes a few years and vacancy for commercial/industrial is very low, so I know we could do better,but some cash flow is better than no cash flow.

Dogboy, I too wanted to put in a cost of living adjustment into the lease, but for some reason the folks didn't see it that way.

Our tenants are only paying around .45 sq ft and market rate is around 1.00 sq ft, so I'd really like to bump it up closer to market rate.

RC, what's the sq ft rental rate in those strip malls?

dogboy · « **Reply #5 on:** September 30, 2012, 03:48:13 PM »

>I too wanted to put in a cost of living adjustment into the lease, but for some reason the folks didn't see it that way.

Oh, they see it the same way, they are just looking out for their own self interest:) I would suggest you do the same, because by agreeing to their terms, you are planning on losing money over the next few years, so might as well make your stand now. If you are making 4% interest in an environment with 4%+ inflation (which you already are) then you are losing real value as we speak, even if it doesn't appear that way at first glance.

Might not be bad to schedule have a person (similar in appearance to realtor) just walk quickly through .... then have another conversation with your tentants. See if they are more willing to accept the new terms.

rcjordan · « **Reply #6 on:** October 01, 2012, 03:29:09 AM »

>strip

$8

buckworks · « **Reply #7 on:** October 01, 2012, 06:25:48 AM »

Keep in mind that a low PITA factor can be worth a lot (pain in the ___ ).

Just like RC says about websites, one has to look at the "return on effort", not just raw dollars and cents.

How hard or easy would it be to replace the tenant if your new demands were not sustainable for them? Be keenly aware of the cost and effort involved, especially if someone else and not you would be stuck with the work of finding a new tenant.

Quote

my partners ( my parents) don't want to as the tenants have been good to us

Some aspects of ROI can't be measured in just dollars and cents.

dogboy · « **Reply #8 on:** October 01, 2012, 02:25:30 PM »

...And a good tenant that pays fair market price is even better.

It all comes down to 'fair market price'. If it's truly fair, than you are going to earn nothing over a long period of time and if these people are friends and family then that's one thing, but if you are treating it as a business I don't understand the rational. If these people are paying you under FMV, I'd give these people notice and start looking for a new long term tenant willing to pay you the FMV.... it shouldn't be that hard... again, if the price is truly fair.

In this case, sounds like you have a tenant for years that priced his goods and services based on cheap rent from you. That was his mistake you are are now accepting as your own. And it's the kind of mistake you'll talk about in 10 years as possibly one of the the worst business decisions you made, because it was a sizable asset that that should be compounding interest, and gaining value over time.... and instead you actually lost real value, especially when adjusted for any inflation.

So its up to you to define what is fair and reasonable and then set some boundaries. If you have to compromise some, then it's ok, I don't advocate cutting your nose to spite your face. But don't just take it because your are lazy or afraid of a little risk. Because in my mind, if these were my tenants, and they were in such bad shape they cant ever accept an increase without it dramatically affect their business, that business has a great chance of failure. And when that happens you will waste months, then possibly face eviction and losing huge.

If it were me I look hard at long at the FMV of the property, and what getting a new tenant will to pay me at least FMV will cost me.... the difference between the two... then cross reference that with how much I think these tenants are pulling my chain, and how far they could meet me in the middle... then I'd pull the trigger on the decision. If you have no hope of making money on rent, then sell it and invest in something else that has less risk.

eljefe3 · « **Reply #9 on:** October 02, 2012, 04:46:08 AM »

>>Oh, they see it the same way, they are just looking out for their own self interest:)

Folks is actually referring to my parents, so they're OK with being way under market as they have no hassles and now live in TX and the property is in CA, so it's easy for them. Still I would think a compromise beween FMV and what they are paying now would be acceptable to everyone.

>>How hard or easy would it be to replace the tenant if your new demands were not sustainable for them?

It would be pretty easy as vacancy factor is very low in this area and spaces are hard to find.

All of this being said, my parents want to sell the building and buy something closer to them and we already have a buyer lined up that owns the building next to us, so he can raise the rent when we sell next year. Currently the parents are looking at mini storage in an area close to big military base.

RC, is that $8 per year (.66/mo)? I would think it would be quite high if it were$8 per month.

rcjordan · « **Reply #10 on:** October 02, 2012, 08:10:44 PM »

per year.

littleman · « **Reply #11 on:** October 02, 2012, 09:24:45 PM »

Eljefe, what part of California? The Western part of the state is seeing rents go up, with most of the Bay Area surging -- East Bay, not as much. If you get away from the water its a different story. The central valley is dong terribly, with over 12% unemployment in most towns.

eljefe3 · « **Reply #12 on:** October 03, 2012, 04:41:23 AM »

Central Coast, San Luis Obispo, which seems to be doing pretty well through it all.

littleman · « **Reply #13 on:** October 03, 2012, 05:35:56 AM »

San Luis Obispo, an upper middle class college town -- getting new renters should be easy. College kids may not be the best tenants though.

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Author Topic: What kind of ROI are you seeing on property? (Read 11396 times)

eljefe3

What kind of ROI are you seeing on property?

grnidone

Re: What kind of ROI are you seeing on property?

rcjordan

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dogboy

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eljefe3

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dogboy

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rcjordan

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buckworks

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dogboy

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eljefe3

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rcjordan

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littleman

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eljefe3

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littleman

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