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tgrady

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Posts: 22
Reply with quote  #1 
I have an opportunity to invest in some family owned office buildings in ABQ, NM and am concerned about the overall health of the RE market.  I was so concerned that I sold my house in North County SD last May.  I have bought and sold houses in PHX and sold my last one in March of this year. I feel more comfortable with residential and land so I am looking for input with my situation from those of you that have experience in office/commercial RE. 

My father has two office buildings he has owned for over 10 years in ABQ.  He wants to sell these buildings (or portions of these buildings) for two reasons:
1.  He needs money to help keep his debt down on and industrial park he is building.
2.  He wants to be less involved in the property management of the office buildings.

I  have talked to him about selling 50% of  the interest in the properties to his kids.  The total value of the two properties is $1.7 million with 9% CAP. 

I am contemplating investing $450,000 into this $1,700,000 deal making me a 26.5% owner receiving 9% on my money.  No debt. 

My question to you all is this:

Does commercial/office follow residential in terms of cycles?  If residential RE in CA, FLA, Boston etc crashes, what is the impact on office? If  the residential  market in ABQ softens, what would the most likely impact be on office if any?
My overall goal is to start investing in projects that cover my monthly living expenses but I am tieing up a lot of captial in doing so. 

Thanks you in advance for your input.

tg


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mike

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Reply with quote  #2 

Quote:
Originally Posted by tgrady
I have an opportunity to invest in some family owned office buildings in ABQ, NM and am concerned about the overall health of the RE market.  I was so concerned that I sold my house in North County SD last May.  I have bought and sold houses in PHX and sold my last one in March of this year. I feel more comfortable with residential and land so I am looking for input with my situation from those of you that have experience in office/commercial RE. 

My father has two office buildings he has owned for over 10 years in ABQ.  He wants to sell these buildings (or portions of these buildings) for two reasons:
1.  He needs money to help keep his debt down on and industrial park he is building.
2.  He wants to be less involved in the property management of the office buildings.

I  have talked to him about selling 50% of  the interest in the properties to his kids.  The total value of the two properties is $1.7 million with 9% CAP. 

I am contemplating investing $450,000 into this $1,700,000 deal making me a 26.5% owner receiving 9% on my money.  No debt. 

My question to you all is this:

Does commercial/office follow residential in terms of cycles?  If residential RE in CA, FLA, Boston etc crashes, what is the impact on office? If  the residential  market in ABQ softens, what would the most likely impact be on office if any?
My overall goal is to start investing in projects that cover my monthly living expenses but I am tieing up a lot of captial in doing so. 

Thanks you in advance for your input.

tg

The commercial/office RE is a very different game from residential. So if the CA, FL, etc markets for sfr's collapse it does not necessarily mean office space rents will decline. I think you need to focus on the local economy and demand for space in that area. If you feel the economy will suffer but you have A+ tennets that will not be affected then you can sleep better at night. If you see economic problems and you tennats are being effected you might need to reconsider. This is where you want to do a lot of DD on the tennats and lease terms to understand your risk of them leaving you with big vacancies.

 

Mike

 

 

 

 

 

curious1

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Posts: 156
Reply with quote  #3 
See how much new office space is in the pipeline and make sure they are not overbuilding for the area.  Who are the building tenants?  Make sure they are happy and willing to stay around.
tgrady

Junior Member
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Posts: 22
Reply with quote  #4 
One of the offices is located about a mile from the busiest intersection in town and the other is located a few blocks from one of the largest hospitals in the state so the demand is good.  There don't seem to be any plans for large scale construction of new product on the market. 
Is a 9 CAP a desirable rate? 

tg


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RonaldStarr

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Posts: 1,440
Reply with quote  #5 

T Grady--CA---------------

 

Is a 9 cap desirable?   Depends upon two things: the investor's personal criteria and the particular market in which the properties sit.

 

The first is pretty obvious, it seems to me.  What desired return do you wish?

 

And remember that there are other benefits of owning investment property besides the cash flow: appreciation, the tax savings, and pride of ownership.  Driving people past your property and saying [proud voice]: "I own that property."  The latter benefit may be detrimental to your pocketbook.

 

The local market may show you that 9% is terrific or it may show you that it is not desirable.  You need to do analysis.  You need to know for what other similar investments sell.  You want to find out the typical cap rate and the range of usual caps from high to low. You can study properties currently offered for sale and those already sold recently.  You could also talk to commercial real estate brokers and investors in those types of properties in the area.   

 

Good Investigating*********Ron Starr*************

mike

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Posts: 607
Reply with quote  #6 

Quote:
Originally Posted by tgrady
One of the offices is located about a mile from the busiest intersection in town and the other is located a few blocks from one of the largest hospitals in the state so the demand is good.  There don't seem to be any plans for large scale construction of new product on the market. 
Is a 9 CAP a desirable rate? 

tg

That's nice and all, but you need to seriously review the leases with the tennets to assure they are solid. Look to what similar buildings are selling for (cap rate wise) to see how competitive the 9% cap rate is. If everything is selling at a 12% cap rate, then your getting screwed.

Mike

 

tgrady

Junior Member
Registered:
Posts: 22
Reply with quote  #7 
Mike and Ron and everyone that responded,

Thank you for your help, you have given me some things to consider and investigate.  The leases are all long term and fairly solid.  One of the things I like about this investment is that my father has owned it for some time now and will give me the straight scoop about tenents, expenses, etc..(the devil you know vs....)
Anyway, I will check speak to a couple of brokers who specialize in this area in ABQ and make my final decision.  Again, thanks for your help.

tg


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RonaldStarr

Senior Member
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Posts: 1,440
Reply with quote  #8 

T Grady---------------

 

Sure, you're welcome.  Do you need my address to send me my consulting fee?

 

Good Investigating************Ron Starr***************

 

niravmd

Senior Member
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Posts: 362
Reply with quote  #9 
since your dad's owned them for 10 years, i'd ask him first!

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AlexL

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Posts: 298
Reply with quote  #10 

I'm coming late into the discussion, so forgive me if I'm repetitive.

 

Albuquerque office market is not saturated because of the excessive new construciton, it can saturate because of a lack of new business growth. There is really not such a huge business base to support vast investments into office or industrial markets. Most of the initiatives, such as NAFTA and Sandia Labs employees being converted to private sector entrepreneurs failed for the most part, some companies, like Intuit, Phillips, and Motorolla scaled down their investments there, so I don't really see high quality growth in ABQ. Being near Big-I and near a hospital certainly helps, though.

 

As far as your dad's strategy goes, I'm not sure if I follow the benefits to him. I can see the benefits to you: investing your money passively into an established cash flow with 9% cap rate. However, if I were him, I would not sell parts of my business to anyone, incuding my children, because children might not be the best business partners. Bringing in a partner just to get the money, is the worst thing an investor can do, because he looses control. There are 1000 and 1 methods of getting money, bringing a new partner would be the last choice for me.

 

I would rather re-appraise this building, if I can appraise it at 7-8% market cap rate, it would give me a much higher value, I could then use part of the money from the building to finance the other industrial building that he's involved in. I wouldn't even refi it, I would just allow the lender on the industrial building cross-collateralize this office building for any additional funds necessary for the industrial buiding, which would be a much much cheaper source of money.

 

I think you need to decide about what are you bringing to the table, besides the money, and why is your dad trying to do it: to help you or to help him.

 

tgrady

Junior Member
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Posts: 22
Reply with quote  #11 
Ron,

You will be getting a % each month.  Checks in the mail.

Alex,

My Dad's goal is not strictly the bottom line.  I had mentioned to him that I would like to get involved in investments that would bring in monthly income and get away from speculative house and land deals.  At his age however he does not want to borrow anymore money and would like to keep his dept as low as possible.  From that perspective he is getting cash and not having to borrow but overall I clearly benefit more than he does and I believe he could probably sell the buildings at a lower cap rate.  Thank you for your input...it does give me some things to think about becasue I do need to think what I will be bringing to the table...i.e. management of buildings to free his time up

tg

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