Commercial Rate Snapshot 12-5-2022

Commercial Rate Snapshot 12-5-2022

These are the average available rates from eXp Commercial's Capital Partner CommLoan database of 700+ commercial lenders as of 12/05/22 and are provided for comparison purposes only. Actual rates are dependent on property and sponsor.

[ux_html label="Need Financing Now?"] [/ux_html] https://www.creconsult.net/market-trends/commercial-rate-snapshot-12-5-2022/

Mason Square

Just Listed! Fully Equipped Car Wash For Sale
1250 Douglas Rd | Oswego IL | 3,750 SF | 6 Bays | 1.19 Acres
Mason Square Car Wash, a fully equipped and operational 6-bay carwash in southwest suburban Chicago’s Oswego, IL. Ideally located on an out-lot of the Mason Square Shopping Center along heavily trafficked Route 34, averaging 45,000 vehicles per day,
Listing Agent: Randolph Taylor 630.474.6441 | rtaylor@creconsult.net
https://www.creconsult.net/fully-equipped-car-wash-oswego-il-route-34/

Renter incomes continue to grow but the pace is moderating

Renter incomes continue to grow, but the pace is moderating ... and interestingly, the moderating pace of growth mirrors the trend in asking rents. Still, this is an encouraging trend for renter affordability -- with household incomes among new lease signers up 8.1% year-over-year in November.

This data is specific to market-rate, professionally managed apartments (which cater to mid- and upper-income renters) and looks at household incomes from lease applications versus the effective asking rents for new leases.

Of course, the sheer number of lease signers was significantly higher in 2021 than it is in 2022 -- given the historic wave of demand in 2021 followed by the big slowdown this year. That's a remarkable part of the story that hasn't gotten widespread notice... that the demand wave of 2021 was notable not only for its size, but also the big incomes behind those numbers. It's also a big reason why rent collections have held up consistently better in this segment of the rental market than what Census HPS has shown from the broader rental pool.

Remember this data (neither rent nor income) will match Census data on the overall population, since market-rate professionally managed apartments cater to mid- and upper-income renters

 

Source: https://www.linkedin.com/posts/jay-parsons-a7a6656_renters-apartments-multifamily-activity-7006272451416391681-FMUW?utm_source=share&utm_medium=member_desktop

https://www.creconsult.net/market-trends/renter-incomes-continue-to-grow-but-the-pace-is-moderating/

1120 E Ogden

Retail / Office Space For Lease | 3,674 SF | $20/SF NNN
1120 E Ogden Ave, Suite 101 | Naperville, IL 60563
Broker: Randolph Taylor rtaylor@creconsult.net | 630.474.6441

https://www.creconsult.net/retail-office-for-lease-1120-e-ogden-ave-suite-101-naperville-il-60563/?wpo_all_pages_cache_purged=1

What is an Estimated Net Proceeds Sheet and How is this Important to Estimate Capital Gains Tax Exposure

A seller's net proceeds sheet is a document that estimates the amount of money a seller will receive after all closing costs have been paid. The amount of the net proceeds will vary depending on the purchase price of the property, the seller's existing mortgage balance, the amount of real estate taxes due, and other closing costs.

The following factors affect the net proceeds of a sale:

• Purchase price: The higher the purchase price, the higher the net proceeds.
• Mortgage balance: The lower the mortgage balance, the higher the net proceeds.
• Closing costs: Closing costs can vary depending on the state and the type of transaction.
• Other expenses: Other expenses, such as real estate taxes and home warranty fees, can also reduce the net proceeds.

The net proceeds of a sale are important to capital gains tax exposure because they determine the amount of profit that is subject to tax. The seller's taxable gain is calculated by subtracting the adjusted basis of the property from the net proceeds. The adjusted basis is the original purchase price of the property plus the cost of any improvements that have been made.

For example, if a seller sells a property for $500,000 and has an adjusted basis of $300,000, then the seller's taxable gain is $200,000. The seller will owe capital gains tax on this amount.

The amount of capital gains tax that a seller owes will depend on the seller's income tax bracket and the length of time that the property was held. For example, a seller in the 22% income tax bracket who held the property for less than one year will owe a capital gains tax of 22% on the $200,000 gain.

Selling a property can be a profitable transaction, but it is important to understand the factors that affect the net proceeds and how this can impact your capital gains tax exposure. By understanding these factors, you can make informed decisions about when to sell your property and how to minimize your tax liability.

Here are some tips for sellers to minimize their capital gains tax exposure:

• Hold the property for at least one year: If you hold the property for at least one year, you will be taxed at the long-term capital gains rate, which is typically lower than the short-term capital gains rate.
• Make improvements to the property: Any improvements that you make to the property can increase the adjusted basis, which will reduce your taxable gain.
• Donate the property to charity: If you donate the property to charity, you may be able to claim a charitable deduction, which can offset your taxable gain.

By following these tips, you can minimize your capital gains tax exposure and keep more of the money you earn from selling your property.

https://www.creconsult.net/market-trends/what-is-an-estimated-net-proceeds-sheet-and-how-is-this-important-to-estimate-capital-gains-tax-exposure/

Basics of Real Estate Syndication

Real Estate Syndication is the phrase used to describe the concept of pooling the resources of and bringing together several different real estate investors in order to do a large commercial deal. In this video, you'll discover the basics of real estate syndication; from the 4 most important things to know when raising capital, to the 3 way you can profit from syndicating real estate, how to find private investors, how to convince investors to invest with you, the top 3 questions all investors will ask you (and how to answer them) along with a very detailed real deal example.

What is Real Estate Syndication?

Real estate syndication is when you raise capital from private individuals. It is an effective way for investors to pool their financial resources together to invest in properties much bigger than they could afford on their own. If you were to find an outstanding deal but didn't have the funds to afford the down payment, you could syndicate it by finding other people to help fund the deal. Or, if you had the down payment but no real experience or confidence to operate the property on your own, you could use real estate syndication to get experienced partners to help with the project. Real estate syndication allows you to close more deals because it allows you to leverage partnerships and other financial resources.

You can even use real estate syndication for retirement planning. Many people, including myself, use syndication as our pension. You might want to consider doing real estate syndication because you can make a nice amount of monthly income through asset management and acquisition fees, or if you are the agent, you can earn lots of commission from selling your own deals.

 

The Four Most Important Things to Know When Raising Capital

1. It is a relationship-based business

It is important to relax and be yourself. I want you to be genuinely interested in the potential investor you are dealing with. Be sure to call them back when you say you're going to call them back and do the things you tell them you are going to do.  Commercial real estate is a relationship-based business. If you do not understand that, you're not going to be successful in raising capital.

2. Put the Investor First and Yourself Second

When you’re raising capital, I want you to have the mentality that your grandmother is the person investing in your deal and that she is doing so with her life savings. If this is the mentality you have, then you will be very careful with the money and not put it towards any iffy deals.

3. Your capital raising efforts need to be structured for efficiency and legal reasons

Real estate syndication is about compliance with the strict laws, rules, and regulations that are set up to protect the investor. Before syndicating a deal, make sure you understand those laws and regulations.

4. Get an attorney who's experienced in real estate syndication

Do not try to set up a real estate syndication without the help of a good attorney. An experienced attorney will make sure you have the exact documents you need, give you the lawful disclosures you need, and provide legal protection when you close a deal with a private investor.

If you were to forget just one of these things, you could open yourself up to a lawsuit or worse. There is a government agency called the SEC, the Security and Exchange Commission, and their purpose is to protect investors from dangerous or illegal financial practices or fraud by requiring full and accurate financial disclosures by you, the syndicator. This is something an attorney can handle for you.

 

The Three Ways You Can Profit From Real Estate Syndication

1. Acquisition Fees

A syndicator of real estate will receive compensation for finding the deal, doing the due diligence, and even structuring the deal. These fees can range anywhere from 1% to 5% of the project size. For example, if it was a 5 million dollar deal, 5% of that is $250,000 dollars. Or you can choose a flat fee, like 25 or 50,000 dollars. These fees are generally negotiable with the investors that you bring into the deal, but make sure your fees aren't too high, or the investors may be leery of investing with you.

2. Asset Management Fees.

The asset management fees are generally  1 to 5% of your gross monthly income on the property. To get an asset management fee, your role is to manage the partnership and deal syndication. You must send out notices with updates for investors, oversee property management, and help organize tax preparation. This role does not include property management, it is just asset management, so you are overseeing the property management and the entire structure of the partnership. When you take over all of these roles, you're entitled to a monthly asset management fee.

3. Equity participation.

You can be compensated through equity participation in a project, which is basically your ownership stake or your equity stake in a project. It can range between 5% ownership to 50% ownership, depending on your experience and what you bring to the deal. Are you bringing money and experience, or just money, or just experience?

You can also participate in the equity splits on the back end. On the back-end means, when you sell the property, there's a split between you and the investors that decides how much you are going to give them and how much you are going to keep for yourself. For example, your deal might stipulate that 50% of the profits go to you and 50% go to the investor when the deal sells. This allows you to almost double or triple, an investor's rate of return on investment.

 

How to Find Investors

When you are talking to a potential investor,  there are three things going through their mind.

1. They’re thinking about you "Can I trust you?"
2. They’re thinking about the deal. "Is it a good deal?
3. They’re thinking about the risk. "How risky is this deal?

 

Where to Find Them

If you are a beginner investor, your humble beginnings will probably be the same as mine. You have to start someplace, so start by going to real estate club meetings, like REIA meetings and meetup.com, or other get-togethers that are real estate meetings. You can also check out Chamber of Commerce meetings, but I suggest you start in your inner circles, such as your friends, family, coworkers, and former coworkers.

Now, I know some of you might be thinking, "Peter, I don't know anyone with money. All of my friends and family are broke, and I'm too embarrassed to ask my coworkers.” This is a lame excuse.

The truth is you do not know anyone with money YET. There is a lot more money out there today than there are deals. Deals are difficult to find, but money follows good deals.
Your job is to put together good deals, and the money will follow it.

Challenge:

I want you to make a list of 24 people you know that have money or might know people with money. Once you have this list, I want you to contact them and send them the executive summary. An executive summary is a one-page summary of the deal. If you go onto YouTube and look at this video called "The Basics of Real Estate Syndication," there is a link there that you can download, and it's the exact same copy our students use that we send out to potential investors, just to gauge their interest.

If you send this out to 24 people, out of those 24 people, 12 will look at it. That means the other 12 are not even going to read it. Out of the 12 that did read it, 6 are going to show some interest, and the other 6 are not going to be interested. Out of the 6 that show interest, 3 are going to want to talk to you, and out of those 3, 1 will invest. The ratio for beginners is a 24-to-1 ratio. There's no shortcut because no one is going to hand you, investors. You have to go out and find them yourself.

How Many Investors Do You Need?

The short answer is you need double, but here's a long answer. If you need 250,000 dollars for a down payment, then your goal as a beginning syndicator is to raise 500,000 dollars.

Why?

It's because people will be people. Some will back out, some aren't ready, and some just don't want to do it. So to raise $250,000 dollars, you need commitments of double, $500,000 dollars.

What comes first? The deal or the investor?

If you are a beginner, find the investors first. If you are a seasoned investor, the deal comes first.

How to Convince Investors to Invest With You?

When you are sitting face to face with investors, or you have them on the phone, they are wondering, "Can I trust you?", "Is this a good deal?", and "Is this a risky deal?" I'm going to address you, the deal, and the risk in seven components that you must have to convince an investor to invest with you. These seven things will position you for the investor to say yes.

1. Your deal must be underpriced.

It must be priced under market value, so people know it's a good deal.

2. The deal must have some income upside, meaning that there's potential to raise the rent.

There's a potential to get higher lease rates because in commercial real estate, as your income goes up, so does your property value, so if your deal has that attribute to it, it's a good one.

3. You need to have excellent cash and cash return.

Your ROI must be better than what they're getting with their IRA or their 401(k), so make sure you have excellent cash and cash return. I would suggest a minimum of 8%.

4. Your deal must have good demographics

This means that the investment must be in a good neighborhood with good job statistics. Basically, the area of the market must be capable of sustaining your investment for years to come.

5. Your exit strategy must be realistic and conservative

If your exit strategy is too aggressive, they will see that as too risky, and they will not invest.

6. Have a track record

It doesn't have to be your track record. You can bring in someone else's track record and make them a partner in the deal.

7. You need to prepare an executive summary

As I mentioned before, you can go on to my blog "Basics of Real Estate Syndication," to view this executive summary.

If you have those seven things, you put yourself in the best position for the investor to say yes. I'm going to leave you with one word of wisdom on convincing your investor to invest with you. The word of wisdom is to start small. Don't start off by having to raise millions of dollars. Make it easy for yourself.

Top Three Questions Investors Will Ask

1. Is there a guarantee that I'll get my money back?

The answer is no. There is a risk in every investment on the planet, and it's not just the investment; it's everything.  Investors lost a lot of money in 401(k) and stocks in the last market bust. Let them know that the investment is secured by the property, which is in an LLC.  Property insurance will protect them against loss, fire loss, flood loss, vandalism, and things like that, so they'll have that security, but you can't guarantee them anything.

2. "When will I get my money back?"

It depends on the exit strategy. When you meet your investor, have the exit strategy in terms of years already figured out. For example, you can tell them, "The deal goes on for five years, then I am planning on selling the property."" It’s deal-dependent, but most investors don't want to see their money tied up for more than five years, so typically, an exit strategy is three to five years.

3. "Do I get tax benefits?"

The first answer out of your mouth should be, "Please contact your CPA to get advice on tax benefits because I am not a tax professional.” You can also let them know that the IRS will probably call them a passive investor; therefore, they would not qualify for tax write-offs directly from the property.
The cash flow they receive might be sheltered by the LLC's write-offs, such as property expenses and depreciation. This means that it's possible a good portion of their cashflow won't be taxed. It's going to be sheltered by the LLC's expenses, but each deal is different, so check with your CPA.

Real Deal Example

This example is from a student in our protégé program who purchased a 24-unit apartment for 925,000 dollars. The down payment was $200,000 dollars, and he was able to raise the down payment from two investors. The great thing about this deal is the rents can be raised by 150 dollars per unit. That's substantial because the seller lives in another state and has virtually no debt on the property, so there's no large mortgage. The seller has been getting steady cash flow but kept the rents low, so he has not optimized the rents.  If you do the math, $150 per unit x 24 units is  $3,600 income per month, or multiply that by 12 months, that's $43,200 more per year.

In this case, if I divide my additional income of $43,200 by 8%, my 8 cap property value increase is $540,000. If I were to take that $540,000 increase in value and add it to the purchase price of $925,000, the apartment building is now worth $1,465,000. The question is,  "How did he structure the deal with his investors?"

He agreed to pay his investors an 8% return per year for the use of their money for 5 years, and then at the end of 5 years, he's going to sell the property and do an equity split with them. He's going to give them 25% of the profits when he sells the property.

His Exit Strategy

His exit strategy is to complete the rent increases over the next 18 months and then do a cash-out refi and pull out all of the investor money to pay back the investors. In that case, investors would have their money back, but he wants the investors to maintain a small piece of ownership, so they'll get checks every quarter. The investors would have no money in, but they'll still be getting money from the property.  This increases the chances that the investors would be willing to invest in him again. So that's how he structured his deal, kept it nice and short and simple.

 

 

Source: Basics of Real Estate Syndication

https://www.creconsult.net/market-trends/basics-of-real-estate-syndication/

Midwest spotlight: A look at multifamily performance

The multifamily market saw record-breaking rent growth that was backed by high demand in 2022, but that is no longer the case for several regions in 2023. While the volatility in the current market has taken its toll on the sector’s high-paced expansion, not every region in the U.S. is experiencing setbacks. In fact, the Midwest has recently emerged as a thriving area for multifamily investment.

The Midwest offers several advantages compared to other U.S. regions, including its diverse economy, growing population, and stable housing market. All of which makes the region an excellent place for investors looking to expand their portfolios.

Why Invest in the Midwest?

The level of transaction activity in the multifamily market can be influenced by factors such as population growth, government regulations, property taxes, income levels, supply trends, real estate regulations, and more. In the past, larger metros like Chicago and Minneapolis attracted more capital to the Midwest because they offered high levels of the listed market drivers. However, recently, secondary markets have become popular as well, indicating that there is a strong demand for multifamily properties that are well-located.

The region has experienced steady economic growth and low unemployment rates, which provide a stable market for commercial real estate services. The cost of living and doing business is lower in the Midwest than in other parts of the country, leading to lower property prices and higher rental yields.

Additionally, developers are finding it easier to acquire land in the Midwest’s secondary markets and receive the necessary permits to build in a timely manner due to lower barriers to entry compared to other regions.

The region’s transportation infrastructure, including highways, airports, and railways, makes the Midwest a strategic location for businesses and residents. Finally, the region’s diverse economy, with a mix of manufacturing, agriculture, and healthcare industries, ensures a stable demand for commercial real estate.

The Midwest’s growing population, with approximately 68 million residents, creates strong rental housing demand. The median household income for the Midwest was $66,143, according to the 2021 Census Report. The demand for rentals is further boosted by the fact that many people prefer renting to owning due to financial or lifestyle reasons. In fact, homeownership has declined nationwide, with 36 percent of American households now renting instead of owning.

The Midwest generally has more tax-friendly regulations for investors, making the region more attractive. South Dakota is income tax-free, while other Midwest states boast some of the lowest state income tax rates, such as Indiana at 3.16 percent and Michigan at 4.25 percent. Capital gains taxes are also lower in the Midwest compared to coastal markets. North Dakota, with a capital gains rate of 2.90 percent compared to California’s 13.30 percent, is one Midwest state worth highlighting.

Key Midwest Players

Multifamily real estate has been booming in the Midwest in recent years, with several states experiencing strong growth in the rental property market. Chicago has been the epicenter of multifamily investment in Illinois and is currently one of the leading markets for new deliveries. Smaller cities such as Rockford and Aurora have begun providing more affordable rental options. Ohio has seen investment in the cities of Cleveland and Columbus, focusing on redeveloping historic buildings. Columbus, in particular, experienced substantial growth with an expanding downtown to attract young professionals to the area.

In Minnesota, the Twin Cities of Minneapolis and St. Paul have been a hotbed of multifamily investment, with a high demand for rental properties and substantial capital investment. Meanwhile, in Missouri, St. Louis has experienced significant investment in the downtown area and surrounding neighborhoods due to the revitalization brought by the growing tech industry and talent pool. On the other hand, Kansas City has been focusing on suburban construction.

Overall, the Midwest has experienced substantial growth in the multifamily real estate market, driven by a growing population, a robust economy, and a focus on urban revitalization. With a mix of large and small cities experiencing significant development, the region offers a range of opportunities for investors and renters alike.

Illinois – Chicago, Rockford, and Peoria

From Q1 2022 to Q1 2023, around 5,600 units were absorbed in Chicago, which exceeds the average annual net absorption of 4,100 units for the market. Strong demand has led to a decrease in vacancies, further contributing to rent growth in the market. Year-over-year rent gains posted a 4.1 percent increase. The area experienced $5 billion in annual sales volume with an average cap rate of 5.7 percent from Q1 2022 to Q1 2023. Chicago’s two largest submarkets, Downtown and North Lakefront, experienced a high percentage of sales from Q1 2022 to Q1 2023.

In Q1 2023, apartment rents in the Rockford market increased by an annual rate of 5.3 percent. There are 33 units under construction in Rockford, the largest under-construction pipeline in over three years. As of Q1 2023, vacancies in the metro area were slightly below the 10-year average but have remained relatively stable from Q1 2022 to Q4 2022; currently, the vacancy rate is 3.5 percent.

Apartment rents in the Peoria market increased by an annual rate of 9.2 percent in Q1 2023. The current market cap rate decreased since last year to seven percent. This is the lowest rate observed in Peoria in the previous five years, although the city’s cap rate is typically higher than in other regions. The area has had an annual sales volume of $118 million within the last 12 months. Within the past three years, 390 units have been delivered, a cumulative inventory expansion of 3.4 percent, and 160 units are currently under construction.

Ohio – Cleveland and Columbus

The Cleveland market experienced its most active year for deliveries since 2015, adding over 2,000 units in 2022. From Q1 2022 to Q1 2023, total multifamily sales in Cleveland amounted to $159 million, approximately 16 percent higher than the annual average, with a market cap rate of 7.5 percent. The average monthly asking rent in Cleveland is $1,100 per unit, making it a cost-effective market for renters.

From Q1 2022 to Q1 2023, multifamily sales in Columbus amounted to $2.0 billion, which is almost twice the prior three-year average. The majority of development and delivery activity within the submarket occurs in neighborhoods that are adjacent to downtown Columbus and surrounding Ohio State University, playing a significant role in contributing to the submarket’s strong overall performance. In the second half of 2022, quarterly volume reached record levels, with more than $650 million worth of transactions occurring in the third and fourth quarters combined. The market’s affordability and potential for higher yields likely contribute to the substantial sales volume in recent months. ¬¬¬

Minnesota – Minneapolis, Rochester, St. Cloud

Minneapolis achieved an all-time high in annual net deliveries for the fifth consecutive year, with 11,000 units added in 2022. This number is approximately 15 percent higher than the previous record set in 2021. In 2022, the annual sales volume in Minneapolis reached the second-highest level on record, totaling $2.1 billion. Minneapolis’ multifamily investment market has remained strong and durable, thanks to investments made by all types of buyers, including private and institutional capital. These investors are focusing on areas with lower volatility and higher yields that are less vulnerable to the potential impact of rising interest rates and a potential recession in 2023.

In Q1 2023, apartment rental rates in the Rochester market increased at an annual rate of 2.4 percent, and over the past three years, they have increased by an average annual rate of 3.6 percent. There are 940 units under construction, the highest under-construction pipeline in more than three years.

The St. Cloud rental market saw a 3.3 percent rise in apartment rents in Q1 2023, with an average yearly increase of 3.8 percent in the past three years. Home to a state university, the area experienced a 12 month sales volume of $92 million and a market cap rate of 6.7 percent. Additionally, there are currently 210 units being constructed in addition to the 670 units completed in the past three years.

Missouri – St. Louis, Kansas City, Springfield

Over the past year, the St. Louis area has delivered 3,700 units, significantly higher than the annual average of 2,300 units over the past five years. The price per unit is $140,000, representing a 48 percent rise in the past five years. The region’s multifamily market is still considered affordable, with rental rates 30 percent lower than the national average, at $1,140 per month.

The number of units in the Kansas City construction pipeline is 7,900, which accounts for 4.6 percent of the total inventory, one of the highest levels in the Midwest. The 12-month total sales volume is $1.1 billion, with more than half contributed by the sale of Class A properties.

Springfield’s population has increased by 19,000 individuals in the last five years, representing a four percent growth rate. During this time, the number of households in Springfield has grown by 9.7 percent. The yearly sales volume has averaged $49.0 million in the past five years, with a peak investment volume of $160 million during that period. From Q1 2022 to Q1 2023, $1.9 million of multifamily assets have been sold.

Takeaways

Overall, investing in multifamily properties in the Midwest can be a good option for those looking for a stable, income-producing investment with the potential for long-term growth. Many units are currently underway throughout the region, posing additional opportunities for years to come. As more investors move to this area to take advantage of the low cost of living, high demand, and steady economic growth, the region is set to thrive. Multifamily remains resilient despite economic volatility, and Midwest markets are excellent examples of adaptability in times of high-interest rates and slowing rent growth.

 

Source: Midwest spotlight: A look at multifamily performance

https://www.creconsult.net/market-trends/midwest-spotlight-a-look-at-multifamily-performance/