What is happening with commercial property prices in this market given the latest interest rate hikes? What are some of the lessons learned over the last few weeks?
Remember 2.5 years ago when Covid started and we were all predicting a steep decline in all asset classes? And remember what happened? Not only real estate prices kept increasing and selling at all time high prices, but the stock market was growing exponentially even though the entire planet was closed. I don't know one person who could have predicted that.
Has our time to buy commercial properties finally arrived? I think so. The prices for commercial real estate are going down, I am getting at least one email per that that says “price reduction”. And I haven't seen these price reduction emails since I started investing up until the last couple of months. Today I even got a call from a broker that just 2 weeks ago said that the pricing guidance for a particular property was $10.5M, now it’s $8.5M, and they told our assistant that the guidance was north of $7M! So not only did we hear two different prices, but we also just got a 30% discount in 2 weeks. It is finally here, it is my prediction that prices will continue to drop well into 2023.
It's worth reminding you of my calculations that I shared a few weeks ago, where, when the cap rate increases just 1% on a $6M deal that was selling in 2021 at a 5% cap, and today it's at a 6% cap, you just got a $1M discount. At a 2% cap increase, you got a 1.7M discount. I predict a minimum of a 2% cap rate increase on average, depending on the asset class. And let's not forget that your mortgage payment is about $30k more per year, but when rates go down again 5 years from now (at the latest in my opinion), you'll be able to refinance, and sell it at a 5% cap again. You paid $150k in higher payment, for a $1.7M discount, which by the way the interest part of it is tax deductible. Not to mention that your downpayment is less as well, you keep an extra $600k that you don't need to put as a down payment. And then invest that at anything that gives you even a 10% return yearly, you get $60k per year, pay your higher mortgage at $30k more, and you still get to keep $30k! Brilliant!
1. Over the last several weeks I learned a few lessons that I thought would be beneficial for you to know. I've a friend that I believe is a billionaire real estate investor. Besides the fact that he is an awesome human being, he was sharing with me the other day about one of his huge deals, I don't recall what the issue was, but he had to work with a legal team, and he told me that he met with the entire legal team every Saturday morning to get an update. He said that we always need to be on top of everything and demand regular updates from everyone, otherwise they will let it slide. Imagine, he is already working with a top law firm that money can afford, and he is telling me that he is the one scheduling weekly in person meetings with the legal team to get updates and demand progress on the project. This same person, on another note, got to where he is today by working very hard for decades.
2. I recently asked George Ross, Trump’s attorney from the apprentice, what should I do to get bigger deals, not only from a mindset perspective but also a team's perspective, etc. He said it’s as easy as adding a zero. With regards to team, he said I could join an experienced team, or build one myself.
3. When doing anything related to your real estate investments, make sure to involve your lawyer, even for standard sales agreements. Our attorney caught a few things in a recent standard sale agreement we were about to get in contract for.
4. Regarding my follow up, follow up, follow up tip that I often mention. I just want to update you all that my spreadsheet that has 715 people that I have met in the industry over the last few years is paying off. Now that I’m in fundraising mode and reaching out to people to see if they’d like to invest, I have learned that, especially in this first syndication, we all must create an email from scratch for each person. For example, I will say something like, we met at XYZ place and we now have a few properties in contract at 14% returns to our investors, do you happen to know anyone who may be interested? The notes I took on each person have made all the difference.
Join George Ross's Mastermind here: www.victorjm.com/mastermind-series