Commercial Real Estate Investing From A-Z

By Steffany BoldriniBusiness Education Investing How To

Commercial Real Estate Investing From A-Z episodes

January 09, 2020 What Are Entitlements?
Devin Lewis is a California Licensed Architect that has spent the last 10 years working with real estate developers determining the highest and best use for properties across the country, and around the world.

You can read this interview here: https://tinyurl.com/uj4bqos

What are entitlements?
Entitlements, in a simplified explanation is what you, as an owner, are promising the city that you or someone that purchases your entitled design will build and it ultimately determines the value of the property. An entitled design is thought out enough to where the city can understand what will be built, what’s propose, what taxes it will receive from any of its operations. And the entitlements are based off of what architects consider a schematic design. So the design of the building will, after entitlements, develop significantly. And development for an architect means something different than development for a real estate developer. But the project will architecturally develop after the project becomes entitled with engineering systems. In order to entitle a project, you need a good idea of the square footage, the functions and what you have planned for that piece of property.

What are some of the best pieces of advice that you can share with us in trying to get a smooth entitlement process as fast as possible in a very difficult city?
As a property owner developing a piece of property, I think the most important thing is to strive to have an understanding of the process. As an owner, you could experience a great deal of frustration if you’re not aware that an architect is your agent and the architect really is there to help you facilitate the process and that process In most cities it looks like this. You’ll get a schematic design, go to the planning department, set up a meeting and you’ll work with different departments like the police department, the fire department, traffic, public works, sometimes the trash management services for the city to really make sure that at a high level, your project will fit in to the city’s fabric, the city’s functions, and the way the city will tie in to what you’re proposing. You’ll work with a staff member and you’ll present to the planning department. The planning department will actually grant you entitlements. If it’s a large project, it’ll be presented to the city council. When the staff member feels that it’s ready, they will recommend the project for approval. During this process, the architect is folding in the requirements and desires of many different parties. The city is going to bring its requirements and you’re going to meet with community members in community meetings, folding in their desires.

Can they give an estimate of more or less how long it would take to get all the approvals from a particular city?
We put together a timeline schedule for each project. Entitlement is a difficult thing to quantify in terms of time, especially in San Francisco, because the neighbors have such huge influence over what becomes approved. And it's a great thing that the neighbors have say in the character of their city. One of the main drivers for the amount of time that a project will take is CEQA, The California Environmental Quality Act which requires an environmental impact report for large projects. It's tough to say how long a project will take to get planning commission approval because the neighbors can form large, powerful groups and create lawsuits that actually will stall projects for a number of reasons such as traffic in their neighborhood, the density, and type of use that is being proposed.

Devin Lewis
[email protected]
https://www.linkedin.com/in/devinjameslewis/
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22 min
December 31, 2019 Can You Avoid Paying Taxes - Legally - With Real Estate?
Dave Zook, an experienced real estate investor and syndicator will talk about the tax benefits of investing in real estate, as well as self storage, and a different kind of investment: ATMs. He has acquired more than $100 million worth of real estate since 2010. Dave has been actively investing in multi-family apartments, self storage, and ATMs.

You can read the entire interview here: https://montecarlorei.com/can-you-avoid-paying-taxes-legally-with-real-estate/

When you understood that you could have a lot of tax benefits to real estate, what happened?
What pushed me over the edge was that around the year 2011, I made my quarterly tax payments. I was getting the feeling that we might have a tax issue, but it wasn't totally prepared for what was coming. I got the call on April the 13th from my CPA saying that we took all the deductibles, you paid your quarterly payments, and you still owe $373,422. So I paid around half a million dollars in taxes that year. Prior to that time, I was having a lot of fun. I was busy. I was putting a lot of time and energy into the business, but it didn't feel like work. It was so much fun. But when I had to pay almost half my earnings back to the government, it wasn't so much fun anymore. After that, I realized during my research that multi-family apartments can be a really good tax shelter. I bought several hundred units of multi-family apartments and I've been tax free ever since. I haven't paid federal tax in a lot of years now.

You are not alone in the real estate world, which is great. So let's talk about taxes. What are some of the great real estate tax benefits that people may not know about?
The Trump tax law change that came through in late 2017, early 2018. There are some things there that really sweetened the real estate game for investors, and it now enables investors to take bonus depreciation on new or used equipment. Combine that with some leverage. Combine that with some cost segregation studies. It's a ridiculous amount of relief that you can get from investing in multi-family apartments.

Can you avoid taxes forever? Or are the people who will potentially inherit some of these properties end up having to pay these taxes?
That's a good question. I get that question a lot. There's a lot of people out there that think like I used to, that when you make a lot of money, you've to pay a lot of taxes. The next question is, well, you've to pay the tax sometime, so might as well pony up and pay it now rather than later. And those two questions are almost the same. Yes, if you don't know what you're doing, then you have to pay a lot of taxes when you make a lot of money. If you don't know what you're doing, you also have to pay the tax sometimes. So you're only just playing the deferral game. If you don't know what you're doing, you're going to have to pay at some time. But if you're strategic, and you have a plan and you've good team members around you, you can make a lot of money and you can pay no tax, ever.

As a syndicator, you actually are fundraising for a very interesting class which is ATM machines. Can you share with us how you came across that as an opportunity, and why did you decide to fundraise outside of real estate?
ATMs is a form of real estate. It doesn't sound like it. You're investing in an ATM location, and instead of having a building sitting on that real estate or instead of having thousands of square feet, you're getting a location agreement that 3 foot by 3 foot. So it is a real estate play, but you're extracting value from that 3 foot by 3 foot space

Dave Zook
[email protected]
www.therealassetinvestor.com
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17 min
December 19, 2019 New Year, New Life: How to Make Your Real Estate Dreams Come True
In the light of setting goals for the New Year, improving our personal lives, as well as our professional lives, we're going to talk about a course called the Landmark Forum that has had a huge impact in my life, as well as my friend Bronson Hill's life. Bronson has been investing in real estate since 2006 and is an active general partner in over 700 multi-family units.

Link to available courses throughout the world: https://www.landmarkworldwide.com/searchResults?prgid=7&pgid=117&crid=840&ctid=-1&sdt=-1&ofr=true

You can read this entire interview here: https://bit.ly/35DoNkb

Why did you decide to take Landmark after we were having a conversation at an event earlier this year?
I'd heard about Landmark from several people and they all were very successful people. Then I heard your endorsement when you said, hey, you have to take it, it's just going to change your life. I was like, OK, I guess I have to take it now. I guess it's going to change my life. That's what got me to sign up. I really didn't have much by way of expectations. I just kind of just went in with an open mind and the results of it were pretty profound. It really lived up to that endorsement that you gave that it really has substantially changed my life in the areas of communication, becoming more authentic, particularly in areas where I've been inauthentic with people, correcting some of those things, and really opening up all different types of new possibilities for business, and for relationships. Just pretty much in every way in so many aspects of my life. I have not found a personal development event that is better than this event.

One of the distinctions that is near and dear to my heart was when they told us to, "Give up being right, even though we think we might be right." I was thinking what do you mean? If I'm right, I'm right. What do you mean give up being right? And I vividly remember when someone close to me said something, and I was doing my homework of giving up being right. So I was going to react to what that person said. And I chose to zip it. And it turned out that that person was saying something completely different than what I thought he was saying. So that has been super helpful as well. What other distinctions are now part of your life?
Being right is an issue for a lot of people and of me, I've always right, but everybody else isn't. It's something that we all think that we're right. It can be hard to let go. And I felt like this gives a real, authentic way. And I keep using that word authentic. I think there's a lot of ways we can move forward, but we really lose connection with people or we don't really live out of a place of integrity with ourselves. And this program really gives the opportunity to walk in a way that feels more authentic, where you can actually be closer to people. And I've experienced that. I think when we can let go of having to be right, and this will give you tools on how to do that.

Landmark Forum classes available can be found here: https://www.landmarkworldwide.com/searchResults?prgid=7&pgid=117&crid=840&ctid=-1&sdt=-1&ofr=true

Let us know if you end up taking it: https://www.linkedin.com/in/steffbold/

Bronson Hill
www,growingcashflow.com/
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25 min
December 12, 2019 How to Deal With Politics & Problems in Real Estate Investing
In this episode we will learn how to find out about the political environment of a city that you’re looking at purchasing, How to deal with bank problems? How to prepare and ride the next downturn? We are interviewing Michael Flight, an expert retail real estate entrepreneur who has been active in commercial real estate over the past 34 years. Michael has handled more than $500 million worth of real estate transactions.
You can read this entire interview here: https://montecarlorei.com/how-to-deal-with-politics-problems-in-real-estate-investing/

How would someone go about understanding the political environment of a particular city?
The best thing to do is, when you have it under contract, to call up either the building department or the Economic Development Department and say “We’re interested in buying this. And here are some of the things that we’re looking to do. So what’s it going to take?” Your local retail brokers or commercial property managers will also know how difficult the city is to deal with. Then the other really good way to get a handle on how cities are is to speak with individual tenants, or you’ll hear about it. Because we deal with properties nationwide, there are nationwide brokers. For example, the guy that represented Pet Supplies Plus does Pet Supplies Plus and a number of other national tenants across the country. So I can just call him and say, we’re looking at this area and I see you guys did a store down here, how was it for you? And he’ll say, oh, it’s fantastic. Or “I’m just going to tell you, won’t be able to get any signage out there and everything. You’ll be pulling teeth. And then they’ll come out just randomly and inspect you and then create all kinds of other problems which we’ve had in the past.”

How do you sleep at night during hard times?
I had some real issues with the downturn of 2008. On one of them was that we had a very conservative loan and I had started to renew the loan with the bank a year in advance, And all of a sudden, everybody that I was working with was gone from the bank. The last guy who was let go, calls me up and says that they’re not going to renew my loan. So then this new woman comes in and she says, you need to pay this right away and we’re going to come after you and blah, blah, blah. And they sent the default notice to my house and my wife opens it up and asks if we are going to lose our house. I said, no, we’re not going to lose our house.

I called her up because I had done workouts before and I knew how to go about this. I said, look, I’ll move my loan in an orderly fashion over to this other bank. In the meantime, you’re going to extend my loan. And she said no, we’re not going to do that. And I answered, no, you need to listen. You’re going to extend my loan because if you don’t extend my loan, I gave her the name of my foreclosure attorney who was helping me out with some other things. And this guy actually argued about foreclosures all the way up to the Illinois Supreme Court. I said, “We will tie you up for four years, you won’t get any money, so we could do it the easy way, or we could do it the difficult way. I’m going to be out of here in six months. You can rest assured that if you touch any of my deposit accounts in the meantime and freeze anything, I will sue you, and I will throw all these other properties into foreclosure, too.

Michael Flight
www.concordiarealty.com/contact

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18 min
December 05, 2019 How to Go From 0 to $500M in Retail Real Estate Investments
In this episode we will learn the story of how a successful retail real estate investor got into real estate, what was his first deal like, what has been the best deal of his career, and we’ll also touch a little bit about a not so talked about topic: how to deal with political risks in the city that you invest in. We are interviewing Michael Flight, an expert retail real estate entrepreneur who has been active in commercial real estate over the past 34 years. Michael has handled more than $500 million worth of real estate transactions.

You can read this entire interview here: https://montecarlorei.com/how-to-go-from-0-to-500m-in-retail-real-estate-investments/

Tell us bout your best deal.
There are a few best deals. There's one that we're still working on. We started managing it in nineteen ninety and we've redeveloped it three times now. We've expanded or renewed most of the tenants in the shopping center. It's a 300,000 square foot shopping center in suburban Chicago. We've actually torn down and rebuilt forty five percent of the shopping center. We took a Walgreens that was doing phenomenal volume and moved them to an aisle parcel that was just vacant, a parking lot. Over the years, the managing partner that became partners with us on a few different projects that we've done, that's just been a great project for us to expose us to a lot of things, not only with that, but geotechnical problems with soil stability. I'm fairly certain that most of the environmental problems are corrected, but every time we stuck a shovel in the dirt over there a new underground storage tank would come up. The other exciting thing was that it was in two major motion pictures. Wayne's World, and Wanted with Morgan Freeman and Angelina Jolie. They blew up one of the stores that we were replacing anyway since they were going out of business.

You briefly mentioned that the city wanted you to have a different tenant, can you elaborate there?
We have run into that in a number of different municipalities all over the country. It really depends on how strict their zoning laws are. It really depends on the individual city. That's why if you're buying a shopping center, you're going to have to live with whatever is the political system in there. Even if it's in a good state like Texas, it could be a difficult city. You need to know about that in advance. Now, we've had situations where we were doing a facade renovation on our property in Connecticut, next to New Haven. Most of the guys that were on the zoning board, probably three of them, also taught in the Architectural Department of Yale University. They all thought that they knew way better than the property owner what was needed for the shopping center. We went in with plans and they actually redesigned a large majority of the plans.

And that's how much control they have over most of the time with the facade renovation. It doesn't require a zoning permit and you would just go in for a building permit. But some of these municipalities have very strict zoning code, signage code, design code. They're into the minute details. Another thing that triggers some things is if the municipality has traffic planners. So if you decide to change any part of the parking lot, they will tell you that you need to do this and that in the parking lot. You just need to be aware of some of the things that go into it. Slightly different than owning apartment buildings. They're more visible and so cities take a more active interest in it, and a lot of times they generate sales taxes, so cities take a larger interest in it as well. They're kind of your partner, but without putting any money into it.

Michael Flight
www.concordiarealty.com/contact
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25 min
November 21, 2019 Top 3 Things to Know Before Investing in Hotels
Today we’re learning what are the top things to watch out for when investing in hotels. We’re interviewing Jerome Yuan, CIO of ASAP Holdings. He has assisted with acquisitions and dispositions of over 33 hotels in the past 9 years.
You can read this entire interview here: https://montecarlorei.com/top-3-things-to-know-about-investing-in-hotels/

Why should investors invest in hotels, especially nowadays? I heard that where the economy might end up going, it might be a bit risky. But let's let's see what you have to say on that.
They say the hotels are probably the most sensitive to economic cycles. They're probably the first to get any type of effect, but they're also the first to rebound out of any type of recession as well. For us, investing in hotels is both a real estate play and also an operational play. We believe that hotels are like 50% real estate and 50% operations. Location matters a lot too, just like any other commercial real estate deal. But then you also have, depending on the hotel, 50 to 100 employees there that you have to take care of. You have guests checking in and out on a daily basis. The operational side is really where you can make a difference and improve the cash flow of the property. And we believe that improving hotels are are the fastest and easiest way to improve cash flows in commercial real estate just because of the daily transactions that you have with customers and hotel guests.

What is a typical management fee?
The property manager usually takes a 2.5-3% percent fee off of the of the gross income. It's pretty reasonable.

What are some of the top things that investors should keep in mind and watch out for when investing in hotels?
1. Investors should really look at the brand of the hotel, or if there is a brand, and if you're buying a boutique hotel or independent, those hotels rely on the location. If it's a beachfront property, you won't have any problems. But if you have an unbranded hotel in a suburban area where it's mainly business travelers, you're going to need to be careful and make sure that the brand is the right brand for the hotel.
2. The other thing is really the renovation costs after purchasing the hotel. Every brand requires the new owner to renovate it. They call it a property improvement plan that's issued by the brand. You've to make sure that you cost out every item and avoid any cost overruns because that just eats into your return on your investment. I think those two main things are the bread and butter of what to invest in for hotels.
3. Location. As long as you're in a good location, you might not need a brand. But some brands are stronger than others, so a Marriott would be stronger than a Four Points or something like that. So that's very important.

Do you look at Airbnb laws in that particular city?
We don't focus on that too much. The way we invest in hotels, they're mainly business travel hotels. We'll have hotels in the suburbs, or near office parks, and things like that. We don't really compete with Airbnb, at least we don't think we do as much. They definitely do affect hotels stay, I do believe that, but the business traveler is there for one night, two nights, and then they're out of the hotel most of the day at business meetings. If we were to start transitioning our investment to resort, luxury, or tourist type of hotels, then we would definitely be looking more at how the local Airbnb laws are changing.

Jerome Yuan
www.asapholdings.com

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15 min
November 14, 2019 Pros and Cons of: Retail / Office / Self Storage / Mobile Home Parks
In this episode we will learn the pros and cons of investing in a few asset classes: retail, office, self storage, and mobile home parks. We are interviewing Jeremy Roll, a passive real estate investor since 2002.
Read this entire interview here: https://montecarlorei.com/passive-investing-retail-vs-office-vs-self-storage-vs-mobile-home-parks/

What are some pros and cons of the following asset classes: retail, mobile home parks, self-storage and office?

Retail
What I don’t like about retail going forward is what’s going on in the next 10 years, as far as predictability. Some of the challenges that I see, some of them are continuing and some will be in the future include: are people going to continue to go stores or are they actually going to migrate online even more and more? And if the answer is online more or more, what does that mean for the retailers?

Mobile Home Parks
I love mobile home parks. And the reason why I say that is because if you do your research, you’ll find that it probably has the lowest turnover ratio in terms of tenancy of any asset class I can think of. I believe the national average turnover ratio is about 9%, which is very low. There are certain apartment classes that have 40 to 60% turnover, depending on the type of building and location. I love mobile home parks because of that. And I love the fact that they’re serving lower income people, and that I see a need for lower income housing and affordable housing for a very long time going forward. So there is that predictability that I was talking about. There is predictability of demand. Predictability in lack of turnover in terms of cash flow. And, if you buy the right profile, which is very important, where most of the tenants are owner occupied and not renter occupied. You’re probably going to have more predictability in terms of having less problems.

Self Storage
That’s another asset class that I really like. When you think about how the US is changing from a demographic profile, we’re aging over the next 10 years. We have a lot of people moving, and projected to move to Florida and to Texas to retire. What I love about self-storage is that when people retire, they typically downsize. And I see that there will be a need for self storage as a result when these people move, or even if they’re living there and they downsize. In certain locations, I think they can be great. One of the challenges with self-storage is that it’s very low cost to build and it can be built relatively quickly. The barriers to entry are low. If you’re going to invest in self-storage, the supply and demand factors in the market you’re looking at at the time are critical, because you may have a competitor pop up in a year or two that you weren’t expecting.

Office
I have multiple office investments right now as well. But I have the same challenge with office that I have with retail, for a couple reasons. And we didn’t get into one aspect of retail that’s a little bit of a predictability challenge, which is the same in office, which is tenant improvements. When you have a tenant that leaves, typically there’s some money to be spent to turn the unit around and make it ready for the next tenant. In retail, it can be quite substantial if they’re changing the entire use. Let’s say you have a record store that’s being turned into a restaurant. There’s a lot of money that has to go into that. And often you’re sharing that cost with the tenant upfront. The same thing goes with office. Between the tenant improvement requirements that may come up if you have tenants leave unexpectedly, that may come out of cash flow or reserves.

Jeremy Roll
[email protected]
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17 min
November 07, 2019 5 Things Passive Investors Look For in a Syndication Deal and the Operator
We will learn what do passive investors look for in an operator as well as in a deal. We are interviewing Jeremy Roll, a passive real estate investor since 2002.

Read this entire interview here: https://montecarlorei.com/5-things-passive-investors-look-for-in-a-syndication-operator-and-the-deal-itself/

You are a full time passive investor. That means that you are investing in other people’s deals. How do you evaluate an operator before investing with them?
Great question. I want to stress the fact that the operator to me is even more important than the opportunity. I would say that’s number one. Number two is the actual opportunity itself. And I want to be clear, too, that the actual opportunity you’re investing in is very critical, clearly. But who you’re making a bet on when you invest passively is absolutely critical. And the reason is because typically when you’re investing passively in the way that I do it, I invest in what’s called syndications, and what that means is that they’re pulling a number of investors together, it could be several investors into an LLC and we’re typically buying a property. When you do that as an investor, you’re considered a limited partner, or in the LLC or the actual entity you’re investing in.

1. The first thing that I look for is an operator who is conservative, who is looking to under-promise and over-deliver and have longer term relationships with investors. I try to avoid operators who are aggressive with their assumptions and their projections to make the numbers look really good so that they can attract investors based on the projected returns, but that may or may not perform to projections.

2. From there, I ask a lot of questions. It’s very common for me to ask 150 to 200 questions about an opportunity. Some of those questions are going to be purposefully designed and asked. I don’t necessarily care about what the answer is, but more how they answer it and reading between the lines. If someone’s answering me in certain ways and saying “Well, we believe this property is going to do X and Y, but we we use this assumption which is much more conservative because we want to make sure we were conservative for investors. We think it’s going to over perform, but we want to set the right expectations.” That type of an answer to me is very valuable, it tells me their mindset.

3. I do background checks every time on all of the key managers and the opportunity.
4. I don’t usually invest with someone unless I met them in person at least once. And that’s because I am a very firm believer in doing a gut check after doing all your due diligence. Are you 100 percent sure you want invest with someone or there’s this 5 percent question mark, you don’t even know why, but your gut is telling you that it’s not a perfect scenario and maybe you should pass. That’s a very important thing. And I feel like meeting in person is an important part of that process. I know it’s very hard for some passive investors to do, but it’s part of my formula.

5. If you look at the legal documents, which are very important, sometimes they may tell you a little bit if this operator is looking to make this a win win structure for investors, whether it’s preferred return, profit splits. I could tell you some examples of some rules where it’s very obvious that they’re not trying to make anything in favor of investors. They’re working at it to maximize the situation for themselves. When I see an operator not trying to get a balance between the investors and themselves as far as profits, I’m just not aligned with the operator properly from a philosophical perspective.

Jeremy Roll
[email protected]
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20 min
October 31, 2019 From Food Stamps to Millionaire Real Estate Investor: How a Single Mother Did It
Today we are interviewing an incredible woman, Heather Self, a multi-millionaire real estate investor that literally came from nothing. I am incredibly humbled to interview her, she was a single mother of FOUR when she started her journey into real estate investing.

You can read this entire interview here: https://montecarlorei.com/how-a-single-mother-of-four-went-from-food-stamps-to-millionaire-real-estate-investor/

I am so excited that you are here to share with our audience how you started from zero, or maybe negative, why don't we get started with how you got into real estate?
To make a long story short, otherwise we'll be here for three weeks, I'll start by saying that I got married directly out of high school. My first husband and I had our daughter and, shortly after that, I found out that my husband was using drugs. I then decided that my kids are not going to be raised like this, that this is not the lifestyle and things that I want them to know and be privy to. At the same time I also got an eviction notice on my apartment door. Keep in mind that I'm 18 years old at the time. My car was repossessed, and found out that my husband had robbed my boss at the time. I ended up losing that job too. Within a 48 hour period I had lost my job, my car, my apartment, and found out that my husband was on drugs and I was pregnant with my second child. Now I look at my calendar, and if it looks crazy for 48 hours, I don't worry about it. If I can handle all of that in 48 hours, I can do anything. Luckily, I had a wonderful, supportive family. And they told me to move back in.
I was able to take that time and rebuild myself and figure out what I wanted out of life. And since I was pregnant, it was really difficult finding a job, and I was in the middle of all this turmoil, so what do you do? I got to the point where I didn't see any other way out but to receive welfare benefits, I had to get on food stamps, and they started offering some classes with the Welfare Reform Act. These were called Fresh Start classes in order to receive the benefit of $185 per month. The positive with that, though, is that they were offering these classes. I couldn't work at the time, so what better way to take time off and go get a different perspective. Maybe get a paradigm shift. I needed to get out of that because I knew that's not how I wanted to raise my family.

Did you need a downpayment for that?
You do need a down payment. You have to have very reasonable credit, which is also something that I was working to fix. I had already made up my mindset that I don't want to be that person that depends on somebody else for my independence, or for my children's future, or what I'm going be able to offer. That was the first time that I said "This is my responsibility and my responsibility alone to get out here and make this happen". You have to have a job for a good amount of time. You have to have decent credit. You have to have a down payment and you make mortgage payments. It's not a free house. That's a big common misconception. It is something that you have to qualify for, and very few people qualify for that. In the summer of 2001, we started building and we moved in shortly after. Going through that process you start to see that all these choices that I felt were kind of stripped away, I now had control over. And that's what that program is able to do. And that's why I'm a contributor and a donor to it now. It's very important to my life's work and what I want to do.

Heather Self
www.heatherself.com
[email protected]
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24 min
October 24, 2019 How You Can Lose 50% of Your Property Value in One Downturn: The Quadruple Whammy
In today's episode I go over how you can potentially lose 50% of the value of your property in one economic downturn. You could potentially lose less, you could potentially lose more, the point of this episode is to share with you the key points that make property values go down in a downturn.

You can read this entire episode here: https://montecarlorei.com/how-you-can-lose-50-of-your-property-value-in-one-downturn-the-quadruple-whammy/

Let’s take an example of a commercial retail property that you purchased for 10 million dollars at a 5% cap rate. This means that that property is currently making $500,000 in NOI. Let’s say, for example, that this property has 25,000 square feet. You have now have a 10 million dollar property making $500,000 NOI.
1. In this great economy, the rents are higher. Let’s say you were getting $20 per square foot per year across the board on all of your 25,000 sf of property.
2. Your property is 100% leased.
3. The interest rates are low. When property prices are rising, that means that interest rates are decreasing and more people can buy more property. When interest rates are higher, you do not qualify for as big of a loan as when interest rates are low because you have a specific dollar amount to pay every month.
4. And that brings us full circle. When interest rates are low, you can buy more property. More people are buying properties and naturally cap rates compress, they get smaller and smaller. So that’s what brings us to the 5% cap rate that you bought this property for.

Quadruple Whammy Gone Wrong – Economic Downturn
Let’s say something pops in the economy. Here is what is going to happen to all these four bullet points that I just described.
1. Your rents are going to go down. Instead of leasing for $20 per square foot per year, let’s say that about 25% of the property is now renting at $16 per square foot per year because some leases are going to be long term. Therefore, 75% of your tenants are still going to be on the $20 per square foot per year lease. Now, we dropped to $16 per square foot per year just because people cannot afford the $20, and your neighbors are also charging $16/sf so you cannot charge more. The total net operating income on that property is now $475,000. Again, this is if you are 100% leased.
2. Vacancies are higher. You are going to get some vacancies in that property, and is going to take longer to get them filled. Let’s be conservative and have a 15% vacancy rate at that $475,000 that you are now making because you’re charging a little bit less rent. You’re now making $403,000 in NOI. Now that your property just lost almost $100,000 in that operating income, unfortunately everyone is selling, because nobody can afford their mortgage, because they bought at a super high price, and they don’t have enough rent income to pay for the mortgage.
3. Interest rates are up, and buyers can afford less “property”.
4. Cap rates are higher because it’s a buyer’s market. Let’s say that from a 5% cap rate, the market is now selling properties at an 8% cap rate. So that $403,000 net operating income divided by an 8% cap brings the value of your property to $5,037,500. You just lost five million dollars of property value. Let’s just let that sink in for a bit.

Another important side of this coin is the potential lost income of not making an investment. Let’s say that you found a great deal back in 2016 that was bringing you 20% cash on cash return. At a $1,000,000 cash investment, you’d have lost $600,000 so far in three years (we’re currently in 2019) if you had not made the investment at that time.

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