[Cross Posted from Business and Investing Board to possibly gather other opinions from those that don't frequent that board]

All,

I have an investment question that hopefully you all can provide some guidance. I am looking at investing in a passive activity to hopefully one day help fund retirement and college expenses instead of just using my salary. Unless market changes occur, the plan is to hold this property for 25+ years.

The deal I am looking at involves around 5 acres of land with a duplex and self-storage buildings. The Seller is asking $300,000 for the property. The 5 year average (2012-2016) of net income (I have adjusted for actual costs so ignoring things like depreciation expenses, etc.) is right around $20,000 for a pre-tax ROI of 6.67%. The land is not really situated where I could sell off some of the acres to lower my buy-in costs and the Seller will not break-up the sale into parts as they want to sell out from all of the property..

My plan is to add some other passive sources of income on the property to boost earnings (more storage buildings, additional rent houses, maybe rv park since property is in tourist town, etc.) but that will require additional capital from me to produce. To me, the $300,000 price is high when just valuing the business as a going concern as a 6.67% ROI is not that exciting when considering the risk exposure of dealing with real property versus other more liquid investments. I suspect the Seller is also attributing some value to just the price of the raw land as there is certainly a salvage value in the land but to me I have never seen separate value given to the land when the land is so intertwined with the value of the business operations. I see the real estate valued separately from the operations when the real estate is truly separate from the operations which is not this case.

What all do you consider a reasonable to good ROI or cap rate on real estate investments? I certainly like this deal and might be willing to accept a little lower ROI initially as I like the concept of using this property as a platform for other investments to hopefully boost the overall return but this initial purchase still has to make sense by itself as I don't want to bank on future projects to make the deal make financial sense.

There will be a bank loan so I know my return is higher when figuring cash on cash return but eventually the note will be paid off and the property has to produce on its own without the benefit of debt to leverage up the return so that is why I am excluding debt in this analysis.

Thanks in advance.

CAP rates and ROI are subjective indicators of a "good" deal.

Personally, I'd look at DSCR and work up a max loan analysis, as that's what the bank would likely do.

If you can find a friendly appraiser and see if it fits into a "standard" (as is). And, talk to your bank for guidance as well


As to the real estate - make sure you check for restrictions and that you've covered your bases with local jurisdiction (city / county / ETJ) so you know what you can/can't do now and in the future. Existing use/structures could be restricted if you try to expand or improve.

At the moment, I am getting about 8.9% return on investment not including capital

appreciation. However, property prices have gone up quite a bit so I am not sure

if I could get the same percent now.

That is a 7% CAP. I wouldn't buy that property on a 7 cap. You can invest in class A credit tenant buildings and get a 6 or better.

On a pure cashflow basis 200K would be my offer price not knowing anything else about it. As one poster said Cap rate is just one way to look at it. If you think you can increase the cashflow and or make a buck on appreciation then that needs to be considered.

What would be your exit strategy?

If you are starting from scratch doing some modeling, look online at property metrics as a source - some good free explanation of CRE investing there as well. They also offer some paid online courses for a relatively low cost.

You have to subscribe for their financial tools, but its month to month so you can cancel at any time. I think it costs around $35-$40/month

If you'd like a bank to do some initial underwriting and give you an opinion, let me know and I can facilitate - And of course that's free of charge

As others have said, unless you expect significant capital appreciation in the near/intermediate term, a 6.7% cap is too expensive for something like that.