Reaching a Target Yield

How many times have you looked at an investment in Commercial Real Estate, and liked it, but it was only showing a 6% CAP. I am going to show you how to go after the property you want at a price that will get the yield you need for the risk.

Face it, in 2005, all of us were willing to take a 6% return on a commercial properties, because, we perceived there was very little risk, and we knew that the potential for appreciation would make it worth the wait and risk. In 2010 we are not wasting our time on 6%, 7% or even 8%. If it is not returning 9% or better, investors will not touch it. I have seen some really good TRIPLE NET Leases recently at 9% or better, on large publicly traded company properties. These are held by groups who have to sell them to raise quick cash so they can keep other properties, or acquire even juicier properties.  So it is a good time to be looking,  if you have cash.

Let's crunch some numbers to see how it works. If an owner lists a property for $1,000,000 promising a 6% cap, then they are telling you that you will 'net' $60,000 per year on this investment. The current owner calculated the property's expected net income, then backed into the value, dividing the net, by the cap. $60,000 divided by 6% = $1,000,000. Some owners can afford to sit on properties until the 6% market returns, but those that can't will be willing to give you your yield.

To calculate the price to pay, to get your yield, just back into it. Net Operating income, divided by desired yield equals the initial investment price, or stated another way, the Net Present Value of this property to YOU.

Divide NOI $60,000 by Desired yield 9% = $666,666.67. So instead of paying one million, you offer what it takes to get the yield to 9%, which is $666,666.67. Whenever I write an offer for a buyer for a substantial price reduction under what the owner is offering, I accompany the offer with my calculation and explanation, so the current owner knows where we got the number and what yield we need to make this investment. It keeps the owner from trying to counter back closer to their listing price, because they see quickly what we want, why and that we know what we are doing.

Try it yourself. It works. Or call me and let me crunch the numbers for you.