Musings of a deal junkie
I was out this week looking for a property I might purchase.
With higher interest rates and requirements from financial institutions increasing down payments, it’s been difficult to buy properties that cash flow.
I love hunting for an opportunity, and I have been looking at value add deals for some time now. The searching process keeps me in the market and gives me a chance to exercise my brain muscles. Here are some case studies.
Case Study 1
Retail Strip Center
Recently, I stumbled across an opportunity. A small three tenant building with one vacancy. It was hidden on a side street in a retail corridor.
I drove out to look at it. It was next to Walmart and a PetSmart. It looked tired, the brick walls needed to be washed, the driveways replaced, and the landscaping cleaned up. It needed improved signage. It had good bones and three tenant spaces, with limited parking. Two of the spaced were leased for one more year, but I figured that as part of the negotiation process, I could get lease extensions, especially if I cleaned up the property and modernized it. It was built in the 1970”s.
My gears were turning , I was excited. I was ready to make an offer, but much to my chagrin I received an email that indicated it had just gone into contract. I missed that opportunity.
Case Study 2
Medical Tenant
A second opportunity hit my desk the same day. It was a triple net leased property with a national tenant located in a close by New Jersey town. I drove out to look at it and it seemed like an OK building. It too needed some work. The mansard roof needed to be replaced, and the main roof needed to be inspected, the asphalt driveways had to be completely torn out and replaced and striped. The location was OK as there was a lot of traffic, and the tenant was a national tenant with a very strong national sponsorship. It was a regional eye clinic that specialized in retina issues. Most of the clients are elderly and suffer from macular degeneration or other similar eye diseases like glaucoma. So, from a use standpoint and from a demographically aging population, this property would stay busy for a long time even in an economic downturn. The only challenge might be that Medicare could be under siege and many of the patients are Medicare or Medicaid patients because they’re over 65 years old. I ran the numbers estimated repairs for the asphalt and then looked at the tax assessment which was significantly above the market value of the property.
Where did that leave me. It left me thinking that with the right rental income I could get a deal done. But with the current rents I couldn’t get the financing to work because interest rates are too high. I was never going to be able to reach the pricing that the owner and the broker wanted to obtain even with a 40% downpayment.
It’s a tricky time to buy as interest rates are going up instead of down, but the location and the use were excellent, and this triple net lease assigned the cost for rehabilitating the driveways to the tenant. The landlord only pays to replacement/repairs to the exterior siding and roof.
The tenant still has nine years to go on this lease. There is an opportunity here, but the financing is challenging given the current rents.
Case Study 3
Can you trust a listing agent?
In this case we found another single tenant deal ( industrial use) with a triple net lease. It had a 7% return but was located twenty miles away from the next closest major city. The lease was guaranteed by a regionally based landlord with one hundred locations. It was an almost brand-new building that was multi-use and had four docks and lots of parking spaces. It made you feel good because it looked almost brand new. It had a nine-year lease with annual 3% increases.
It felt looked a home run deal. Unfortunately, the deal did not pass the most important question, what happens if this tenant fails, can I release the building at the same or better.
Lease rate. Its Lease rate was $12 NNN/yr. In that submarket only one deal had been closed in the last four years in a similar building and the rent was $6NNN/ yr. There were over ten vacant buildings in the marketplace at rents ranging from $6 -$13 NNN/yr. When I asked the listing agent if the property could be released at asking rate, he emailed me back with a strong yes. Clearly my research differed a lot. I passed on that deal as well.
Summary
Hunting for deals is in my blood, but I am also very careful to underwrite every deal and do pre due diligence research. Unfortunately, I have not been having much luck lately. I think it’s time to be searching daily if I want to close a deal. Just looking on a weekly basis means I miss the best deals as I am not the only deal junkie out there.
Could I do better? Some buyers do well with long-term relationships with brokers and off market deals, but that seems to be the exception, not the rule. The biggest challenge is that Sellers still believe that their properties are worth more because they purchased them with low interest loans (three or four percent). 2025 is going to be a red-letter year as owners find their properties need to be refinanced( approximately twenty five percent of the existing loans will need to be adjusted this year).
What does that mean to an investor? It means keep looking until the right deal falls into your lap. We know that over the next ten years many investors will be aging out and rents will probably increase, creating opportunities for property ownership.
Clifford A. Hockley, CPM, CCIM, MBA
Cliff is a Certified Property Manager® (CPM) and a Certified Commercial Investment Member (CCIM). Cliff joined Bluestone and Hockley Real Estate Services in 1986 and successfully grow the company from 10 to almost 100 employees, with over Two Billion dollars of real estate under management. He then merged with Criteria Properties in 2021 to establish Bluestone Real Estate Services, where he still serves as an associate broker.
In 2023, Cliff formed a real estate consulting practice, Cliff Hockley Consulting, LLC. designed to help real estate business owners, managers and investors improve their bottom line.
Cliff holds an MBA from Willamette University and a BS in Political Science from Claremont McKenna College. He is a frequent contributor to industry newsletters and served as adjunct professor at Portland State University, where he taught real estate related topics.
Cliff is the author of two books 21 Fables and Successful Real Estate Investing: Invest Wisely Avoid Costly Mistakes and Make Money, books that helps investors navigate the rough shoals of real estate ownership. He can be reached at 503-267-1909, Cliffhockley@Outlook.com.
