The following is the transcript from an abridged and edited demonstration video.
Tim Vi Tran 0:00
I wanted to demonstrate to you what we typically do when we’re looking at a at a deal, especially when we’re, you know, looking to sell or even buy a property. This is really, not really applicable to a lease, although it could be so we have, you know, built this spreadsheet. We took this spreadsheet that was provided by CCIM. When you take a course with CCIM, this spreadsheet is provided to you for use. What we’ve done is we customize this spreadsheet so that we can analyze more in depth, certain details related to a particular property. There’s a couple sheets, okay, there’s some assumptions on your tax bracket, right? And then there’s some assumptions on vacancy rate, and there’s some assumptions on income escalators and rental annual expense escalator, okay, there’s also assumption on when you’re going to
Tim Vi Tran 0:54
sell it at what cap rate. And then there’s also, you know, when you go to sell the property. There’s some expenses like commission, for example. So these are all basic assumptions that you want to put in there. Okay? And if you look under here, there’s a pod, which is the annual property operating data. There’s a cash flow worksheet analysis when you go to sell. This is called an alternative sales cash worksheet. And then there’s an IRR net present value, and then again, these are just assumptions. So, so in this particular deal, let me just start, let’s just say I’m looking to buy investment property. The address is 123, Main Street, Fremont, right. I’m just throwing out some example. And this is a, let’s say it’s an industrial property, okay? And it’s, you know, 3000 square foot property, okay. So, so this property, it’s
Tim Draper 1:45
one and a half million, okay,
Tim Vi Tran 1:49
in the acquisition cost, you know, we just kind of set it at 1% of the price of the building. So, so the yellow fields are all the fields that we can, we can put in, okay, so let’s just say I’m buying this property, and I am looking at the rental rate that this property can generate. Okay, so 48 bucks a square foot. If you, if this is annual number, if you, if you, if you divide that by 12, then you get four bucks a square foot. Okay, so, so the these are the basics, okay, and then property taxes, you know, it’s going to be about 18,000 a year. Okay? You know there’s no personal property taxes. And then repairs, maintenance and all that. I’m just going to estimate, and I’m going to throw in some number, right? So at the end of the day, if I were to buy this property and I pay 1.5 million for it, plus some upfront
Tim Vi Tran 2:42
acquisition costs could be like the cost of,
Tim Vi Tran 2:46
let’s say, the loan cost, right? For example, if you need to get a loan, that’s typically a one point kind of fee, right? That’s part of your acquisition cost. There’s something, you know, escrow and title fees, and, you know, city sometimes county transfer taxes. But it it can be whatever, you know, it could be 1% it could be 2% so, so we’re estimating the taxes, we’re estimating some repairs and maintenance of water and utilities, and then at the end of the day, we can figure out what our operating costs are, and then we can figure out what our net operating income is. This is your noi, right? So once, once you get your noi,
Tim Vi Tran 3:23
you can go to this cash flow worksheet. Okay, so here’s where it gets interesting. So the question becomes, what’s my down payment? How much is the interest rate? There’s all these different factors. And when, when you go to a bank, they’re going to look at this and say, Okay, I can maybe loan your 65% LTV loan to value, or maybe the debt coverage ratio needs to be, you know, 1.35 okay, and the bank is going to loan you on the on the lower amount. They’re not going to loan you on a higher amount. Because, you know, banks are very conservative these days. This particular property is a is a
Tim Vi Tran 3:58
industrial property. So when you come back to here, it’s got a
Tim Vi Tran 4:05
depreciation schedule of 39 years. If this was like an apartment, then you change it to 27 and a half years. So, so interest rate, you know, six and a half percent, it’s going to be amortized over 25 years. Okay, that’s a typical commercial amortization schedule, the term is 10 years, meaning, even though it’s amortized over 25 years, the loan is due in 10 years, right? And then you’re making 12 payments a year, okay, so based on some preliminary numbers that we put in, we’re buying this or 1.5
Tim Vi Tran 4:35
and we’re adding in another 15,000 based on that, it’s going to calculate your mortgage for you. Okay, so now I’m looking at about 6583 per month for my mortgage. Okay, remember this part right here, where we put in the income, if I can get four bucks a square foot per month, right? And then, and then that annualized to 48 then this is, this is where the income is for.
Tim Vi Tran 5:00
Potential rental income. It becomes 144,000
Tim Vi Tran 5:03
a year. And I put in some vacancy loss, and you go back to the assumption where we’re saying there’s a 5% vacancy factor, okay, even though your property may be 100% occupied the the the the
Tim Vi Tran 5:21
bank still is going to say, hey, you know, we’re still going to use a very conservative, you know, 5% vacancy factor, right? Okay, so with that being said, you know, your effective rental income is basically your potential rental income minus your vacancy becomes, you know, 136 800 that’s 144 minus 7200 equals 136, 800 and then so that also becomes your gross operating income. And then there’s all these other things, like operating expenses. Your operating expenses are coming straight out of here. Okay, okay, your garbage, your water, electric, you know, some legal fees that you’re paying. Maybe you can throw in a management fee, if you want to. That’s your operating expenses. So, so your noi becomes $111,000
Tim Vi Tran 6:05
150 if you take the gross operating income minus your operating expenses, you get 111 150 for your noi. Okay, so, and then this is going to calculate your mortgage. Okay,
Tim Vi Tran 6:20
it’s basically 60 583 times 12. Your mortgage is going to be about 62,901
Tim Vi Tran 6:26
per year, and then your cost recovery improvements. This is all calculated based on this formula, okay? And that’s based on the useful life, okay? It also is based on when you put this property into place, in, you know, in in service. And this particular case, we made it easy. We call it January, right? But let’s say you bought the property and and you know, you know, you it was in June that you place it in service. That’s going to impact this cost recovery, right? And then there’s ammo, say, amortization and loan fees and costs. So at the end of the day, when you get this income, you get this noi, and you’re able to take advantage of all these depreciation your your real estate. Taxable Income is 17,004 95 per year. And then there’s tax liability. If you’re really in a 39.6%
Tim Vi Tran 7:16
bracket. If you’re not, then you can go ahead and and change that number here in the assumptions column, right here, right that’s where the 39.6 comes in. So when you look at this, you go back to the cash flow. You said, okay, my NOI is 111,000
Tim Vi Tran 7:31
minus my debt service, which is your mortgage minus. You know, at the end of day, you’re looking at your cash flow of 32,001 51, before taxes, okay, remember, tax is going to eat into your cash flow, right? So, so, so after taxes, your your your your your cash is, you know, 25,000 it’s a little bit less, right? And then, so you look at this and say, Okay, does this investment make sense? Let’s look at the cap rate, seven, 4.41%
Tim Vi Tran 8:03
cap rate based on this, based on this purchase price, and based on the fact that I can rent it out for $4 a square foot. So does this meet your criteria? 7.41 on year one and year two is going to go up. Year three is going to go up. Year four, year five, and this worksheet only looks at it for on a five year. If somebody you know was looking at this and say, I hold this investment for 10 years, then you know, we can we, can we, can we can extrapolate this out to year 6789, 10, so they’ll just be five more columns. Okay, the so if you look at the first year, your cap rate 7.4 second year, 7.6
Tim Vi Tran 8:44
this is assuming you’re going to be able to increase rent for five for 3% every year. And it’s also assuming that you got some rental escalator expenses, that that’s 3% every year, right? So again, and it gets better, because every year your rent, your rental income goes up, your rent, ask your expenses, hopefully can be controlled or, you know, stay steady, okay, so, so now that’s one way to look at it. Where it gets more interesting is,
Tim Vi Tran 9:15
hey, you know, I, I bought this building for one point
Tim Vi Tran 9:20
1.55 right? And if I were to go ahead and sell it in year five at a 3.75%
Tim Vi Tran 9:27
cap rate this building, I can potentially sell it for 4.45 if you were to price it at, you know, 4% cap, 4.1 have you priced it at 4.25% cap is 3.9 right? So, so you look at this and said, Okay, wow, if I can really get that kind of rent, that I can that assume I can get at $4 a square foot.
Tim Vi Tran 9:50
Can I really sell this in five years and, you know, and really exit at this price? And maybe not, you know. And if you need to, you can go and just your assumption.
Tim Vi Tran 10:00
Right? Maybe the cap rate is really four, five and six. And when we do that, if you go back and look at the sales, if I were to sell it at 4% cap, 4.1 at 5% cap, the sale price is 3.3 at a 6% cap, I’m selling at 2.78
Tim Vi Tran 10:18
right? So that’s how you can decide whether it’s right time to sell and how much equity you’re going to gain out of it, right? And I won’t go into all these numbers, because a lot of these numbers are kind of repeated, but it factors in again, your cost of, you know, your basis, which is what you pay for it, across all the depreciation that you took and all your expenses that you had over the over the term of the five year, right? Again, this is looking at five years, okay, and then you look at this as Okay, here’s your IRR calculation. IRR is internal rate of return right over a five year period based on
Tim Vi Tran 10:55
this alternative column one, column two, alternative two and alternative three,
Tim Vi Tran 11:02
I can say, Wow, I made 44.61%
Tim Vi Tran 11:08
return
Tim Vi Tran 11:10
based on a 4% cap rate sale, right? So. So this chart here explains to you what your calculation is, what your IRR is your internal rate of return, right? And again, we just have it before and after tax, okay? And so you can look at this again to say, hey, you know, has it been a good investment for five years if my IRR was 45 you know, 44.61%
Tim Vi Tran 11:35
almost 45% Well, that’s up to you to decide whether that that that works, right? So, so this is a very basic, basic, basic analysis that we run more so for investors who are looking to buy, but sometimes owner user also want to know, even if they’re buying the property and they’re, you know, intending to occupy the building, they still want to know, you know, you know what, what my exit looks like, right? And these are just,
Tim Vi Tran 12:05
you know, projections on five year term based on some you know,
Tim Vi Tran 12:11
you know, annual increases and everything. So here’s what’s cool about this spreadsheet. If I say, You know what, if I can, if I can negotiate a 5% increase instead of 3% increase for, for, for this property, annual increases like you go, and you look at the the
Tim Vi Tran 12:29
IRR on the sale, assuming a 4% cap rate sale, I just increased this another you know, was It 44.61 to 48.34
Tim Vi Tran 12:41
IRR. If I also look at the sale it also, you know, increase the sale price too, right? So, so a lot of times again, I’ll go back and I’ll change it to three, and you’ll see, right? Oh, sorry, yeah.
Tim Vi Tran 12:56
So if I again, when we first looked at it, we were, you know, assuming the 3%
Tim Vi Tran 13:02
annual increase on the rent, that yields about 4.71%
Tim Vi Tran 13:07
I mean $4.71 million based on based on a 4% cap, but if I just simply add a 5%
Tim Vi Tran 13:15
now on a sale, I can make. You know the difference between what 4.1 and 4.6 it’s like almost $450,000
Tim Vi Tran 13:25
price adjustment higher, right, based on just a 2% increase on the rent for the next for the five year that we’re, you know, assuming on this calculation. So it becomes very important when you’re negotiating a lease with with a tenant, you know, the difference between a 3% and a 5% is very, very big number in terms of the final price. And a lot of times when you’re when you’re going through, these are things that you got to pay attention to. Small numbers can mean a big difference. The beauty of this is we can put all these numbers on a spreadsheet. You can run whatever numbers you want that suits your needs, and it’s all customizable, right? So this is how we typically do a a
Tim Vi Tran 14:08
cap rate, IRR,
Tim Vi Tran 14:11
this particular,
Joanne Tan 14:13
this particular scenario, doesn’t factor in your your equity, your multiple but we could go back to the cash flow and add in another, you know, row here to calculate what your multiple is, calculate your cash or cash return. That’s a completely different spreadsheet that we can use for that, but we can also add it here. So, so hopefully, you know, this is kind of give you some idea on what we normally do. You know, when we when we’re looking at a property,
Joanne Tan 14:42
my question number one, this spreadsheet is available to you through CCIM, but for average folks of a street who are new to real estate investment, do they have access to something like this?
Tim Vi Tran 14:55
They don’t. There’s, there’s, I’m sure you can go and, you know, build a tool like.
Tim Vi Tran 15:00
This. It’s not hard to do, but the but the issue is, even if I gave you this tool, if you have no idea what you’re plugging in numbers wise, and it’s you know, let’s say you know, you think interest rate is 5% Well, that makes a difference, right, right? So, so you got to understand what’s behind the numbers and how it’s calculated. It’s very simple to when you went to grade school. I can give you a calculator multiply 13.8 times 12.4 Well, I can’t do that in my head, but I know how to get there. But unless you know how to analyze it and you know how to plug in the numbers, you’re going to be lost, right? And our numbers are based on real world experience is based on real interest rate, is based on real lender scenarios, right? So, so all it is just some so a bunch of numbers and calculations. It’s very, very calculation intensive. I would say not everybody knows
Tim Vi Tran 15:58
how to do the calculations and but it needs a little bit explanation. So remember, we did a we did an Article. Article,
Tim Vi Tran 16:09
cap rate has an inverse relationship to price. Well, as a seller, I want the lowest cap rate possible, because that means the highest price possible. And as a seller, I want to sell the highest price. As a buyer, I want the highest cap rate possible. That means lower purchase price for me as a buyer, right? So, so, so, again, you know it depends on which which position you’re taking, right? So, again, I can throw out this number at you, seven, 4% cap rate. What does that really mean? It doesn’t really mean a lot unless you know how to interpret a cap rate. Because, again, are you a seller? Are you a buyer?
Tim Vi Tran 16:44
Are you
Tim Vi Tran 16:48
are you looking to sell immediately, right? You know, the cap rate, by the way, it’s only a one year projection based on that year’s income and operating expenses. Remember, income goes up, operating expenses also go up, you know? So how do you how do you structure your deal so that your income goes up faster than your operating expenses? Because, if not, your cap rate can actually go down, right? So again, it’s easy to just provide spreadsheet run the numbers, but it takes a little bit of more effort and knowledge and experience to actually
Tim Vi Tran 17:20
get the numbers to work for you. When your expenses go up, your noi goes down, okay? When your noi goes down, your your your value of your property is going to go down as well, right? So that would mean your cap rate is going to go down.
Tim Vi Tran 17:39
I mean, just look, if this, if I, let’s just theoretically, I changed my assumption. Let’s just say my expense went up 10% and I’m using 10% just just, you know, if I go back here, right? I went from 7.81 to 7.7 so when your expenses go up, your cap rate goes down,
Tim Vi Tran 18:01
right,
Tim Vi Tran 18:03
right? So, so, you know, I mean, do, do income, do expenses, go up 10% not really, but it could, right? So, so, if my, if my income, if my income doesn’t go up faster than the expenses, I’m actually going to lose value. That’s what that is telling you, right? Yeah, I went from year two. I went from 7.8 to 7.7
Tim Vi Tran 18:27
Okay, again, if again, for dramatic reasons, I would just use 20% income escalator, right? You see, I went from, you know, 7.8 to 7.5 right? Again, if my income is not keeping up, then, then then you’re in trouble, right? When we negotiate an investment property lease for on behalf of the landlord,
Tim Vi Tran 18:47
what we usually hear is, what kind of annual increase would you like landlord? And like, oh, you know your typical 3%
Tim Vi Tran 18:54
Well, that’s not good enough, because number one, typical 3% what it was in the past. You’re right, but in today’s world, your 3% is not even keeping up with inflation, and so you’re actually going to lose value, right? If inflation is six, 7% and you’re only getting 3% increase,
Tim Vi Tran 19:13
then you’re, you’re, you’re losing value on your property, right? So, so that’s the first thing we looked at. Was that, okay, maybe not quite 5% but even if you were able to change it from three to even 4% it means a big difference. Right? 3%
Tim Vi Tran 19:30
on the income, 4.73
Tim Vi Tran 19:33
okay, 417, 3 million, okay. And if I’m lucky enough to get 5% on the annual increase, I just went from 4173, to 4594, that’s about a $450,000
Tim Vi Tran 19:47
difference. Right? Cap rate is relative to the market, is relative to the, you know,
Tim Vi Tran 19:52
you know, the type of asset, even within the Bay Area, multifamily, cap rate is going to be different than than
Tim Vi Tran 20:00
you know, industrial property, right? And even within industrial property, you may have five unit industrial one property that’s five units, and all of them are mom and pops
Tim Vi Tran 20:13
tenant that has, you know, very little experience, but they’re still renting from you. They’re paying rent. But if I have one unit and, and as a it’s a public traded, you know, defense contractor. That’s 25 billion years. I’m gonna, I’m gonna analyze that cap rate very differently. The five unit, multi tenant industrial property I might price it on, you know,
Tim Vi Tran 20:37
as a seller, I might price it at five and a half percent cap rate. But that one unit with the, you know, with the with, with Teledyne, for example, I might want to price that at 4% cap rate.
Tim Vi Tran 20:50
You see the difference?
Joanne Tan 20:51
Yes. So the number one is cap rate is relative to other similar properties in the market,
Tim Vi Tran 20:57
location, asset type, tenant base.
Tim Vi Tran 21:02
It’s also based on time, right? You hear a lot about cap rate compression versus expansion, because the market compresses and contracts, you know? You know?
Joanne Tan 21:11
Yeah, yeah, right, right. So just the number, cap rate is four, cap rate is six – it doesn’t make any sense, unless you gave me the context.
Tim Vi Tran 21:21
Yeah, that’s why you know to answer your question earlier. What if I just give you a spreadsheet? Well, it takes a little bit of explaining to how to analyze a spreadsheet, right? And you have some very good questions. It’s like, when, until I said, Hey, I’m running this spreadsheet based on an analysis as a buyer. Then everything comes clear. Yeah, the cap rate went down. That means, you know, you know it, you know the, you know, I the price is going to get adjusted accordingly, right? And the, the other point is that a cap rate is, is always chasing the changing target. Because, yeah, all the assumptions change the interest rate, change the market change, right? Property change. So you have to update this all the time to have a realistic, accurate number Exactly, exactly. So. So again, you know, you know, if I go back and I change this back to three, right? And then I change this back to three here, that’s what we and then you look at the IRR, my IRR, on a five year exit, we’re looking at about 44.61%
Tim Vi Tran 22:22
IRR, again, if I, if I went back and I, and I assume that I can get 5% increase, and I kept the expense escalator to be 3%
Tim Vi Tran 22:34
and I look go back to look at my IRR, wow. This is me looking at it as a seller now, wow. I gained another 3.2% increase in my IRR simply by changing the rent from three to 5%
Tim Vi Tran 22:49
okay, this is very powerful. You have to know which which worksheet you’re looking at and why you know. And you gotta you know, at least plug in some real good assumptions, not just any number, right? And then you walk through this. You walk through with this, with some experienced agent who help you analyze this, right? And by the way, this, this worksheet, doesn’t even account for the fact that, if I were to buy this for 1.5 million, this is just, you know, when it runs through and it does all their, you know, cost recovery and depreciation. It doesn’t account for the fact that you can actually use a Cost Segregation strategy to get a complete 100% write off. So this is just purely saying, I’m going to own this property for five years. I can amortize it over 39 years, and I’m just taking the five year depreciation on the five years that I’m gonna plan on owning this property, right? So, so again, it doesn’t tell the full story, but, but at least it gives you some aspect of it,
Joanne Tan 23:49
Right. So if I’m the property owner first timer, and I want to keep the pulse on my property
Joanne Tan 23:57
by monitoring all the variables, the interest rate, the rent and all of that. I need something like this,
Tim Vi Tran 24:05
yeah,
Joanne Tan 24:05
how do I get this?
Tim Vi Tran 24:08
You come talk to us. We can build something for you that specifically, specifically made to your property. We can also, you know, need to understand whether you’re planning on holding this for five years, seven years, 15 years, right? So we walk our clients through this,
Joanne Tan 24:25
Okay. Another question is, when someone asks you a very quick and fast question, say, I have a property and cap is five, give me some ideas about how to rent it to the highest paying tenant? It’s located in San Leandro,
Tim Vi Tran 24:44
yeah.
Tim Vi Tran 24:46
I mean, that’s a very generic question. You really have to dig deeper, right? What type of tenants? How long have you had it? What’s the condition of the property look like? What tenants are you considering? You know, you know, maybe, maybe you know.
Tim Vi Tran 25:00
You know, we seen landlords have properties, but they structure as a, as a, as a full service lease, meaning they pay the property taxes, insurance and everything. So we’ll go in, we’ll simply restructure the lease, and call it a triple net. So now all of a sudden, you know, you’re you’re pushing all the expenses to the tenant. That means a big deal. Now, basically you have no expenses. So all you know, your taxes now become zero, right? You know, right? Even though there’s real property taxes, you’re not, you are the owner not paying for it, right? All these utilities now have become zero, and so let’s go and look at the cash flow. Remember, we were at 7.41 before by pushing the expenses over to the tenant, you increase it from eight point 7.41 to 8.94 cap rate.
Joanne Tan 25:48
So that person who said “cap five” really means nothing.
Tim Vi Tran 25:52
It doesn’t mean anything. That’s why cap rate is so often used that that it is misleading. It’s also,
Tim Vi Tran 26:04
you know, misinterpreted. And there’s limitation of what the capital A will tell you. Okay, that’s exactly right. And so, look, look, remember this was at this IRR was at 44.461%
Tim Vi Tran 26:17
when, when I change it so that I have zero expenses, meaning, you know, I structure as a triple net, my, my, my, IRR, is now almost 51%
Tim Vi Tran 26:29
so you can go back to your investor and say, Look, we were going to sell this building and we’re going to get maximum dollars out of the sale.
Tim Vi Tran 26:38
Yeah, you have some investor partners in this deal.
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