I have a ten year rule that I apply to every real estate investment that I make.
My Rule is Simple - Normally in commercial real estate, loans are given out over 10 years. Either as interest only and then a balloon payment or like a typical housing loan just for 10 years. So the rule is simple, currently with a 10 year mortgage will the property be in the range of cash flow neutral to a loss of 3% per year on net asset value.
To put that simpler here is an example of an office building that I actually bought.
I bought an office building in El Paso TX for $400,000. We put 10% down and had a mortgage for $360,000 which meant that we were paying about $5000 a month on that loan to pay it off in 10 years. As long as this building was making up to $4000 a month in rent then it would be fine to buy.
The calculation is simple: 3% of $400,000 is $12,000. If the rent received is $4000 for a total of $48,000 plus a loss of $12,000 a year for a total of $60,000 it would cover the mortgage.
It has been about ten years since I bought that building. It is currently worth $600,000 and the rent we are getting is between $5000 to $6000 per month. So for the $400,000 investment the net return is currently between 15-18%, a fabulous return.
But to get to this stage any property you buy, you need to look at it in the long term with a horizon of 10 years. You will likely lose money or break even at best for 10 years, but after that you and your heirs are set for life.
Anyway Bobby and I had bought this building together, but I lost it in the divorce. But I am happy for Bobby that it has turned into a cash cow now.
This is a great time to buy commercial real estate, but make sure to buy it in high end area. Almost everything I have seen is selling for less a lot less than replacement cost.
I am looking and if I find something I will buy it. It will be a struggle for 10 years while the mortgage is there, but once it is over, it will be a great investment to own.
I know some people have a rule in real estate that says that if it stinks, it smells like money, but in the current market, I do not think that applies. Looks for solid properties with a 10 year time horizon.
