Posted by Brent on July 08, 2009 at 11:43:51:
In Reply to: Re: Help me analyze the deal posted by john on July 08, 2009 at 10:17:05:
You will know more about the long term potential for the location, but I am seeing many 8%+ cap class A retail opportunities in the market. I never said 10%+ class A, at least not at the moment.
I think that we may get there, though. Remember that bad borrowers can and do own good real estate that will need to be liquidated. That is the time when you can get a deal.
If you are willing to invest in class B, the cap rates are much higher. I consider class A to be investment grade, with a long term lease from a BBB or higher rated credit (by S&P). I doubt that your small retail deal is a BBB or better rated credit.
The mortgage payment will be 8.1% (6.5% rate, 25 yr amort.) X 75% = 6.1%. You are just barely cash flowing at a 6.5% cap rate. You need to deduct allowances for vacancy (credit loss), future tenant improvements (or brokerage fees) and building replacement reserves from your rent in order to figure out your true yield.
If you want a low risk, no headache passive investment, I would instead advise you to invest your equity with a good sponsor who will structure a current return with future upside.
Good luck and do not be afraid to walk away if you do not feel comfortable in the opportunity.