What kind of returns are owners looking for these days? Cash on cash? IRR?

In Market Conditions - Asked by Jon R. - Jun 11, 2010
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Real Estate A.
Appraiser
Maryville, TN

Jon, you may want to check out www.realtyrates.com. Just remember that returns these days include the risk of holding an investment for a long period of time.

Jun 11, 2010
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J.P. D.
Owner/Investor
Paso Robles, CA

Jon,
Great question. It's going to vary market to market, and even more so - niche by niche. Of course, we all want a stable deal, room for growth, and a heavy profit margin- but what we're actually going to get at the end of the day is going to vary.
To get a feel for what the market is looking for- my advice would be to dive deep into the specific market you are talking about. Go to meetings, join groups, and attend conferences and seminars specifically about the area of real estate that you are asking about. You will get a grasp of what the market wants very quickly.
Also, keep in mind, many sophisticated/institutional investors may not be as interested in specific cash on cash, caps, or IRRs. I know for myself and others of my colleagues, we look at other factors other than income to make a buying decision. Sometimes, we'll look at property that doesn't make sense from an income standpoint- but, we know that the city is going to be spending millions in renovations in that area, etc.
Jon, all the best to you my friend.
Jonathan D.

Jun 11, 2010
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Anand B.
Broker/Agent
Arlington Heights, IL

Unfortunately a lot are looking for ridiculous bargains instead of thinking investment sense. A "REAL" investor will consider that liquid money makes less than 2% in even an aggressive account and would be a fool not to leverage his cash to yield 6% or more! Investors that are using the economic state as an excuse and are insisting on 10% yields and more (or else they won't invest at all) are not to be taken seriously.

Jun 13, 2010
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Jim G.
Broker/Agent
Sacramento, CA

Dear Jon: This question needs a bit more clarification. When you say "owners" do you mean a return that will get someone to sell or do you mean a return that will motivate someone to buy? Returns and Rates are a functions of each party's perspective.
I think in these times it is very important to return to some fundamentals. Including having "positive leverage" for instance. So if you are going to "buy" something -- find out what prudent long term mortgage rates for the kind of property are quote at... Say Office Building mortgages are quoted at 8% for 10 years... You would want to buy at a cap rate higher than 8% to achieve "positive leverage".
Also remember that commercial real estate is a Lagging Indicator in the economy ... Because of high unemployment and the recession --vacancies are likely to continue to grow for a while longer-- until we have job creation associated with the recovery. Therefore it will be difficult to hold rents and increase them... So when you are building your cash flow model don't forecast much rental $ growth and figure in stabilized occupancy with double digit vacancies equal to or greater than your current area vacancy rate.
More fundamental to your question is are owners/buyers looking for a quick double digit return or long term steady income from quality properties? The former is very difficult to achieve and the latter requires good hunting and good underwriting... Buy Quality... You might find a recent blog that I wrote with my colleage of interest..
The Blog is about "Scouts chasing Quick Hits... 20% Returns" Unreasonable expectations that aren't supported mathematically or through prudent underwriting.
Good luck ! Jim Gray, CCIM jgray@ctbt.com

Jun 20, 2010
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