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REIA Quick Edition is a compact a very affordable quick analysis of any income-producing property.
We designed it so you can key in just a few key items and get a single-page report that can help you to decide whether you should pass or examine the property in create detail. It will calculate your NOI, Cash-on-Cash, Debt Coverage Ratio, IRR, potential resale price and more.
Get more info at https://www.realdata.com/products/reia-quick
Inflation, interest rates, concerns about recession, pandemic-inspired work-style changes, taxes. There are enough wild cards in the deck to give any economic forecaster vertigo.
Not all real estate markets or all sectors are created equal, so to paraphrase an old TV auto ad, your mileage may vary. Nonetheless, we think it’s possible to make at least some reasonable and general forecasts about the near-term prospects for commercial real estate. Here is some of what we’re hearing, and thinking.
Multifamily
The multifamily sector seems likely to continue showing positive revenue growth. Freddie Mac predicts 3.5% increase in gross income nationally from apartment rentals in 2023, and a 5.1% vacancy rate. The multifamily market was outrageously strong in 2021, has cooled off somewhat since then, but still looks like a propitious place for investor dollars. With mortgage rates at their highest level in years, and the inventory of single-family homes for sale in short supply in many areas, there should be a lot of folks who must opt for apartments — hence, continued strong demand. Globest suggests that “multifamily remains a front-running investment choice.”
Office
The office market seems a bit harder to get a handle on. Many office workers have become very comfortable with working from home and are reluctant to go back into the office. They’ve been saving on commuting costs, especially in a time of high gas prices, on child care, and sometimes even on the cost of business attire. Some employers are demanding that workers return full time, but many are agreeing to a hybrid model, a few days a week in the office and a few at home. For many businesses, this means they need less office space. An in-depth interview on Co-Star with three industry analysts concurs that hybrid work is here for the long term and that demand for space is likely to decrease.
These analysts also noted that the suburban office market has been more resilient than the central business districts, and that suburban vacancies have actually been lower than those in CBDs. Finally, they note that while office leasing appears to be stabilizing, rising interest rates have been putting a damper on sales.
Industrial
If there is one clear winner right now, it would appear to be the industrial sector. In an article on trends in industrial real estate, commercialsearch.com says, “Onshoring efforts, coupled with a continuation of last year’s e-commerce boom, have only added to the already sky-high demand for industrial real estate.” It further quotes an analyst who believes this sector will be “among top performers across the commercial real estate sector in 2023.”
Similarly, NAIOP’s Industrial Space Demand Forecast says, ”Despite rising interest rates and growth in the supply of new space entering the market, the outlook for industrial real estate remains bright as supply chain conditions steadily improve. Low vacancy rates will continue to support growth in rents and property values.”
Retail
Retail, like politics, tends to be hyper-local. A recent article in the Wall Street Journal, The Decline of the Five-Day Commute Is a Boon to Suburban Retail, puts this in the context of the post-pandemic environment. The trend of businesses moving their office out of the central business district has led to fewer people shopping in downtown locations; but on the flip side, the suburbs have generally been the beneficiaries. “In the second half of last year, urban retail availability surpassed suburban availability for the first time since at least 2013, according to real-estate firm CBRE. Asking rent growth in the suburbs also outpaced urban areas last year.”
Overall — Sustainability
One phenomenon that looks like it will cut across all sectors is the growing interest in sustainability. It seems very likely that this will drive demand for green buildings. As we all become more aware of the impact that buildings can have on the environment, there is a growing demand for green buildings that are designed to be energy-efficient and environmentally friendly. This is creating opportunities for developers who can build green buildings. There are also financial incentives to commercial property owners, including reduced operating costs, increased asset value, and higher rents. We’ll be having a follow-up post with more on this soon, so stay tuned.
— Frank Gallinelli
Users of our Real Estate Investment Analysis program sometimes call us with questions that are not about the software but about the underlying analysis. If we had a “greatest hits” list for those questions the all-time winner would be this: “My cash flow goes up each year; the value of the property goes up each year; but when I look at the Internal Rate of Return, it goes down almost every year. What’s up with that?” To see how this can happen, let’s take a look at two very simple examples.
Example #1: We purchase a property for $100,000 all cash. It has a Net Operating Income of $10,000, so the capitalization rate is 10%. We are going to assume that 10% is the right cap rate for this market (primarily because it make the math in our example easy to follow). Because we bought the property for cash there is no debt service and so we can also assume that the cash flow is the same as the Net Operating Income. For those who require an instant (and very abbreviated) refresher course on these concepts, use the following:
The property is in good shape and is running well when we buy it. Our initial cash flow occurs on Day One when we spend $100,000 in cash to make the purchase. We project that we can raise the rent 4% during the first year to $10,400. The property is well-located, so we believe we can get a bit more aggressive over time. We’ll project that we can increase the revenue 5% in the second year, 6% in the third, 7% in the fourth and 8% in the fifth. Here is what our projections look like:
Notice that, if we sell the property at the end of one year for its full value (i.e., with no selling costs, to keep matters simple), our Internal Rate of Return (IRR) is a pleasing 14.4%. If we sell at the end of year two, our IRR for that holding period is even better, 14.92%. If we hang on to the property for five years, we see that we can expect a 16.38% IRR. The rents go up each year, the value goes up and so does the IRR. All is right with the world.
Example #2: At the same time we buy another property, also for $100,000 cash. It too has a $10,000 NOI, but this property needs immediate management improvements to control expenses and to get rents in line with the market. We feel sure that we can get the NOI (and hence the cash flow) to $12,000 in the first year. That should get it on a stable footing, from which we expect a more modest 3% increase in rent each year thereafter. The rents go up each year, the value goes up each year, but what about the IRR?
At the end of the first year, we’re thrilled by a robust IRR of 32%. We worked hard; we deserve it. But if we hold the property for a second year the Internal Rate of Return drops to 22.76% — still not shabby but significantly lower than at the end of the prior year. Indeed, the longer we hold the property, the lower the IRR becomes. What, to coin a phrase, is wrong with this picture? Nothing is wrong, actually. The numbers are correct. Remember that Internal Rate of Return is a time-sensitive measurement. The biggest jump in cash flow and in the property’s value came early. The earlier it arrives, the less severely it gets discounted — it’s the “time value of money” concept. The increases that occur in years two through five are smaller to begin with and they get discounted over a greater number of years, shrinking their worth to us today even more.
Simply put, if we hold the property two years instead of one, then that second year dilutes the overall rate of return because it didn’t contribute as much (especially after an extra year of discounting) as the first year did. If we hold the property for three years, the return gets diluted still further.
At this point, someone in the back of the room is surely asking the insightful question, “So what?” Here’s what: The first property is telling us that it will perform better as an investment if we hold onto it for a while. Its rent increases are accelerating each year. Even though the increases have to be discounted — it’s that time value of money again — they’re growing at a pace that makes them worth waiting for. Hence the IRR gets higher with each year we hold on. The second property, however, has a bit more of a roman candle quality to its performance. The big flash comes early; after that, it just sputters along.
Does this mean you should immediately sell such a property? If you’re happy with the long-term IRR and could not find a replacement property with a greater yield, it might make sense to hold. Or you might be more comfortable following the words of immortal Janis Joplin: Get it while you can. To put that in more businesslike terms, you might decide to sell the property when the IRR peaks; then take the proceeds and reinvest them. Whichever way you go, the important thing is that you’ll be making an informed decision.
Better than being like this guy.
If you found this example helpful, I have a lot more educational material for real estate investors and developers. For example, check out these video lessons…
Real Estate Investment Case Studies where I take you step-by-step through the evaluation of five different property types: apartment, mixed-use, triple-net leased, retail strip center, and single-family property
Value-Add Real Estate Investments where I show how you might do something tangible or intangible to a property, but in either case, something that increases how much a person would pay to acquire that asset from you when you’re done.
Or if you’re ready for a complete training series in real estate investment, development, finance, partnerships, and more, consider Mastering Real Estate Investing.
—— Frank Gallinelli
The information presented in this article represents the opinions of the author and does not necessarily reflect the opinions of RealData® Inc. The material contained in articles that appear on realdata.com is not intended to provide legal, tax or other professional advice or to substitute for proper professional advice and/or due diligence. We urge you to consult an attorney, CPA or other appropriate professional before taking any action in regard to matters discussed in any article or posting. The posting of any article and of any link back to the author and/or the author’s company does not constitute an endorsement or recommendation of the author’s products or services.
If you’ve taken my video course, read any of my books, listened to some of the podcasts I’ve been on, then you’re very aware that I often rant about how important it is for you to account for just the real operating operating expenses when you evaluate the worth of a property — no more and no fewer.
There is one mistake I see really often, and I want to call it out here in this video blog.
If you’re not an all cash buyer, then when you purchase a piece of income-producing real estate you’ll probably need to secure mortgage financing to complete the deal. It’s essential for you to understand what your lender is looking at when underwriting that loan.
And — If you guessed that he or she is not admiring your millinery — ok then, stick with me here. I’m going to discuss briefly a couple of key yardsticks.
Of course, this short video blog post is just the tip of the iceberg when it comes to evaluating, financing, and acquiring a successful real estate investment.
For in-depth insight into on all the key metrics and methods, check out https://realestateeducation.net/
And you’ll find the software that will do all the heavy lifting for your analysis and presentation at https://realdata.com
The information presented in this article represents the opinions of the author and does not necessarily reflect the opinions of RealData® Inc. The material contained in articles that appear on realdata.com is not intended to provide legal, tax or other professional advice or to substitute for proper professional advice and/or due diligence. We urge you to consult an attorney, CPA or other appropriate professional before taking any action in regard to matters discussed in any article or posting. The posting of any article and of any link back to the author and/or the author’s company does not constitute an endorsement or recommendation of the author’s products or services.
We’re very excited to announce the release of new Version 20 of our Real Estate Investment Analysis software. This application has been the go-to solution for thousands of income-property investors since its first release in 1982.
(No, that’s not a typo. We’re proud to report almost four decades of enhancements based on users’ feedback.)
Version 20 has big new features and a whole new outlook on both development and investment properties. It has you covered on all fronts — buy and hold, build and hold, fix and flip, value-add — now you can model them all with one software program.
At its core, Real Estate Investment Analysis (REIA) is income-property investment analysis software for all who deal with commercial or residential income properties: individual and institutional investors, developers, brokers, lenders, accountants, portfolio managers, financial planners, builders, and architects.
It helps you make detailed income and expense projections, before- and after-tax cash flow calculations, key ROI measurements, partnership analyses, and a great deal more.
New functionality in v20 brings you month-by-month development cash flow planning, with drawdown construction loan for value-add, renovation, even construction from the ground up. Evaluate the development phase, then see how holding the property produces returns over time.
Get the full scoop here about new version 20.
Copyright 2020, RealData® Inc. All Rights Reserved
The information presented in this article represents the opinions of the author and does not necessarily reflect the opinions of RealData® Inc. The material contained in articles that appear on realdata.com is not intended to provide legal, tax or other professional advice or to substitute for proper professional advice and/or due diligence. We urge you to consult an attorney, CPA or other appropriate professional before taking any action in regard to matters discussed in any article or posting. The posting of any article and of any link back to the author and/or the author’s company does not constitute an endorsement or recommendation of the author’s products or services.
The Commercial Income worksheet in RealData’s REIA Pro software is one of its leading power features that makes it a stand-out tool for investment analysis.
It’s designed to allow you to enter income from any number of tenants with great flexibility, and to model a lease scenario of any size or shape.
In this video we’ll have a quick overview of how this feature works, and how it can help you when you’re evaluating a commercial income property.
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Copyright 2020, Frank Gallinelli and RealData® Inc. All Rights Reserved
The information presented in this article represents the opinions of the author and does not necessarily reflect the opinions of RealData® Inc. The material contained in articles that appear on realdata.com is not intended to provide legal, tax or other professional advice or to substitute for proper professional advice and/or due diligence. We urge you to consult an attorney, CPA or other appropriate professional before taking any action in regard to matters discussed in any article or posting. The posting of any article and of any link back to the author and/or the author’s company does not constitute an endorsement or recommendation of the author’s products or services.
The end of the year compels many people to think about tax planning, which in turn prompts us to highlight a feature of the new tax law that could provide significant benefit to real estate investors. It has to do with what are called “Opportunity Zones.”
These zones are economically distressed, low-income communities, and according to the Wall Street Journal the zones encompass almost 9,000 census tracts with a population of nearly 35 million. A list of the zones can be downloaded from this IRS page.
In a nutshell, the benefit to investors is that they can defer the capital gains on an existing investment until the end of 2026 by rolling those gains into an Opportunity Zone project. In addition, they can avoid capital gains on the new investments in the zone if they hold them for at least 10 years
Like a number of provisions in the Tax Cut and Jobs Act, not all of the details were in place when the law was passed, but the IRS did in fact release regulations about this on October 19, 2018. Apparently there are still some loose ends and the IRS in their FAQ says they will be “…providing further details, including additional legal guidance, on this new tax benefit” over the next few months.
Those who enjoy parsing the tax code can peruse the current version of the regulations. You can find more readable summaries at National Real Estate Investor or here if you have an online subscription to the Wall Street Journal.
A key takeaway from the Journal article is that this tax break appears to have been designed to give investors reasonable flexibility. For example, it cites that “…as long as 70% of a business’s tangible property is in a zone, the business doesn’t lose its ability to qualify for the tax break.” The regulations so far don’t seem to have a lot of hidden trap doors or “gotchas.”
It would appear that this tax break provides an opportunity for investors to free up capital that is sitting dormant in properties they’re reluctant to sell because of what would otherwise be a capital gains tax burden. Now investors should be able to benefit from at least one if not two tax breaks, and at the same time do something positive for their communities.
What do you think? Are you likely to pursue a project in an Opportunity Zone?
— Frank Gallinelli
View a sample lesson from my video course,
“Introduction to Real Estate Investment Analysis”
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Copyright 2018, Frank Gallinelli and RealData® Inc. All Rights Reserved
The information presented in this article represents the opinions of the author and does not necessarily reflect the opinions of RealData® Inc. The material contained in articles that appear on realdata.com is not intended to provide legal, tax or other professional advice or to substitute for proper professional advice and/or due diligence. We urge you to consult an attorney, CPA or other appropriate professional before taking any action in regard to matters discussed in any article or posting. The posting of any article and of any link back to the author and/or the author’s company does not constitute an endorsement or recommendation of the author’s products or services.
Professional education is a great thing. And being able to broadcast news of your success makes it even more valuable.
That’s why I’m announcing a new benefit to students who enroll in my course, Introduction to Real Estate Investment Analysis. I’m now awarding a digital Certificate of Achievement and badge to students who successfully complete the course.
Here are some questions you probably want to ask:
What does it cost? For my students: nothing. RealData is picking up the cost of issuing and hosting the certificate.
What do you mean by “digital certificate?” Your certificate will be hosted by Accredible.com, an industry-leading credentialing platform. As you’ll see below, it’s designed so you can share it easily.
Does that mean I don’t get a physical certificate to hang on my office wall? No, you also get a pdf version you can print.
What’s so special about this digitally hosted certificate? So glad you asked. Here are a few things you couldn’t do with a traditional certificate:
Your personal certificate page includes a dashboard, as shown at the left. From there you can…
How do I obtain my certificate?Within a few days after you complete the work to earn your certificate, we’ll send you an email with instructions to access it. If you believe you’ve completed the requirements but haven’t heard from us, please contact us at mailto:education@realdata.com
Terms of Use: Please review our common-sense Terms of Use
I believe our online video course provides a solid educational opportunity for those who want to learn about real estate investment and development. I hope this digital certificate will recognize your efforts and will benefit you for devoting the time and effort to pursue that education. I look forward to contacting you when you complete your coursework!
Frank Gallinelli
Making assumptions and entering data about commercial lease revenue — especially rollovers — was often a tedious undertaking. Until now.
Enter our latest game changer: REIA Professional’s Lease Rollover Assumptions
Our new Lease Rollover Assumptions feature (LRA) is a way for you to store sets of parameters about different commercial lease rollover scenarios, parameters which you can use over and over when entering tenant information in REIA Professional. What is the probability that a current tenant will renew? How long do you think the space will be vacant if a tenant chooses not to renew?
Build your assumptions sets, add your tenants, and apply the LRAs. Done.
You rely on our products to crunch the numbers quickly and accurately so you can make the best and most profitable commercial investment decisions. LRA brings you a whole new level of power and speed.
First, create a set of assumptions on the new LRA worksheet. Enter values for months vacant, rollover probability, new and market rent, etc.
Then apply those assumptions to a tenant just by selecting the option on the Commercial Income worksheet:
If you already own a license of REIA Professional version 18, then you just need to download the latest build from your customer account at realdata.com
If you have a previous version, consider upgrading. Upgrade costs can be found here.
We have a knowledgebase article which walks you through the setup and configuration of the LRA feature.
