QUOTE (Luxmal @ Nov 12 2010, 10:01 PM) In US, average occupied rate is around 60%. This one only 40% , got room to improve. If get 50% or 60% lease up, the return would higher than 12%. I like to get it cheap. but the seller won`t sell it for $1.2m. Maybe an offer $1.6m?
As with any RE investment the devil is in the details. The due diligence on this type of project is similar to other RE activities but you have to go a few steps further. This type of project also has to be regarded as a `retail` operation, and not just `passive` real estate; it is a specific use, in this specific area, of the city in question.
How long has it been on the market, there are large scale operators with very substantial cash cushions making acquisitions, is this below their radar or have they given it a pass (and if so why)?
Do you have on your team the necessary skills to manage this and if not can it be acquired and still provide the target return?
Have you researched the markets ability to support this project, is it well located by the metrics of the industry, what is the competitive landscape, both in terms of existing competition but new entrants? Is the market over built?
Is this rent up rate reasonable for the locale or has there been mis-management? Are the expenses accurate or is this a `mom & pop` who have not included their salaries? How much of the cost structure is variable to the occupancy rate vs the ability to pump the bottom line? What is the type of construction, as this will dictate the maintenance cost curve.
There is a reason it is 40% occupied at this point and you need to be absolutely positive that you know why and that you can sufficiently improve that. Is this down from a higher level or is it still improving?
I don`t mean to sound discouraging but the link below indicates declining occupancies and rents, with increasing incentives to attract clients across most regions of the US, don`t assume you can buck the trend unless you have the experience. I suspect that lenders are well aware of this trend and will be wary of an inexperience operator with a weak revenue stream.
http://blackswanzine.com/2010/01/11/self-s...nd-development/
It is not a good deal if you can`t get the numbers to work. My points are rhetorical and only meant to stimulate your thinking, if you haven`t already covered them off.
I wish you well.
