Category: FY Minute

Commercial Real Estate (CRE) Investor Question #81: I invested in a CRE deal with a 15% IRR over 5 years, but I am only getting 7% annual returns in the first couple of years. What gives?

IRR is based on all the cash flows during the duration of the deal i.e. 5 years in this case. Whereas, cash on cash returns are based on monthly or quarterly cash flows and the distribution check is sent to you.

IRR includes income from operations AND capital events (refinancing or sale). Cash on Cash primarily consists of operational cash flow, absent any capital events. During the first couple of years there will likely be income only from operations and hence the 7% annual returns. You can expect a bigger distribution during the capital events.

Commercial Real Estate (CRE) Investor Question #80: Mary has saved $100k for her first real estate investment. Her aim is to add a passive source of income, in addition to her corporate salary. She is considering an equity investment in a syndicated multi-family deal that produces 7% Cash on Cash in Year 1. How much monthly income can she expect in Year 1?

We’ve seen in earlier posts that Cash-on-Cash return indicates the percentage of your investment you’ll get back, on an annual basis. It is the before-tax cash flow (i.e. Cash Flow after Financing) of an investment in a given period divided by the equity invested as of the end of that period.

• Equity Invested = $100,000
• Cash-on-Cash Return = 7%
• Annual Income = 7% x $100,000 = $7,000
• Monthly Income = $7,000/12 = $583

Mary can expect $583 monthly if the deal is executed as planned.

Commercial Real Estate (CRE) Investor Question #79: What are the key long-term decisions facing an investor?

Here are the key long-term decisions facing an investor. This will form the investor’s long-term investing approach or strategy:

• What is the investor’s overall investment thesis/strategy?
• What is the investor’s portfolio strategy for Real Estate?
• What property type(s) and markets to focus on?
• What size (# units) and price to focus on?
• How many deals to do and the returns expected?
• Who to invest with for the deals and the investor’s role?

Commercial Real Estate (CRE) Investor Question #78: What are the top 10 issues facing Commercial Real Estate?

The Counselors, a commercial trade group for CRE designees, surveyed its members to identify current and emerging trends in the commercial sector for its annual list of issues affecting real estate for 2020–2021:

1. COVID-19
2. Economic Renewal
3. Capital Market Risk
4. Public and Private Indebtedness
5. Affordable Housing
6. Flow of People
7. Space Utilization
8. Technology and Workflow
9. Infrastructure
10. Environment, Social, and Governance

The full article can be found at https://magazine.realtor/daily-news/2020/06/30/top-10-issues-facing-commercial-real-estate

Commercial Real Estate (CRE) Investor Question #78: What are the top 10 issues facing Commercial Real Estate?

The Counselors, a commercial trade group for CRE designees, surveyed its members to identify current and emerging trends in the commercial sector for its annual list of issues affecting real estate for 2020–2021:

1. COVID-19
2. Economic Renewal
3. Capital Market Risk
4. Public and Private Indebtedness
5. Affordable Housing
6. Flow of People
7. Space Utilization
8. Technology and Workflow
9. Infrastructure
10. Environment, Social, and Governance

The full article can be found at https://magazine.realtor/daily-news/2020/06/30/top-10-issues-facing-commercial-real-estate

Here are some key ways to improve the IRR (Internal Rate of Return) of a property:

• Increase the amount of debt in the deal. It will increase leverage and the pros/cons need to be weighed.
• Buy at a discount or attractive price. It is important to buy at the early stage of the real estate cycle, if possible.
• Increase the rental income and/or reduce expenses through tenant improvements or efficiently running operations. For e.g. providing additional amenities.