Pushing Dirt

Market rent growth is as important, if not more important, than in-place cash flow. Novice buyers focus solely on barometers of the “here and now,” e.g. capitalization rates and in-place returns. Learn to make cash flow projections and calculate an internal rate of return. You can buy a fancy program from Argus or you can do it in Excel. Don’t know where to start? Take the ccim 101 class. Take all their classes for that matter. They will pay for themselves many times over if you are making a career in real estate. Doesn’t matter if you’re flipping houses or buying million square foot warehouses, it’s a great program.

I sell warehouses for a living, so I think a lot about roofs.

When I’m underwriting a warehouse, I use these rules of thumb:

-flat roofs generally last around 15 years. You might get more out of a particularly well maintained one, and you might get less if the job was poorly done…particularly if the new roof was laid over the old.

-It’s costing about $3 to $4 per square foot right now in my area to rip off an existing roof to the deck and replace it with a new rubber membrane roof.

Loan constant = annual debt service ÷ loan amount.

So for example, $100,000 annual debt service ÷ $1,000,000 loan = 10% loan constant.

Who cares?

If I’m buying a property at a 11% return before the debt, the debt is improving my return.

If I’m buying a property at a 9% return before the debt, the debt is worsening my return.

Use a loan constant to quickly evaluate the impact of a loan on your return.

We use this calculation more often on the commercial side of the real estate business because commercial loans are often locked out from prepayment or expensive to prepay.