Discover how a seasoned commercial real estate expert analyzes a LoopNet listing and determines if its a good deal, in just a few minutes!
How to Analyze a LoopNet Listing Step by Step
For this tutorial, we’ve picked a random LoopNet listing, an 11-unit building listed at $1.75 million in Norwood, Ohio.
Disclaimer: Unless you are in Norwood, Ohio, do not use the numbers given today to analyze a deal in your market.
Executive Summary
The first thing you see on a LoopNet listing is the executive summary. As a highlight reel of the property, it showcases the property’s best aspects. Below this section, you’ll find attachments, including the Offering Memorandum (OM) – this is where we’ll be focusing most of our time.
Before diving into the OM, always make it a point to scroll to the bottom of the listing to check how many days the property has been on the market. This particular property was listed on July 8th, and today is August 7th, making it a month on the market. In the current real estate climate, that’s not extremely long, but it does indicate that the property has been listed for quite some time. It’s essential information, although not a deal breaker. If the deal was listed yesterday, don’t feel that you need to put in an offer tomorrow. That’s not how it works. We need to make sure that the numbers make sense before we move forward.
Understanding the Offering Memorandum
Now, let’s dive into the offering memorandum. You’ll see a PowerPoint presentation with photos of the property and a total property overview. The introduction page is crucial, especially understanding the concept of Caveat Emptor. When it comes to residential real estate, there are disclosures required, but for commercial real estate we have something called Caveat Emptor, or “buyer beware.” You can’t hold anybody liable, which is why there’s a disclaimer in all commercial real estate listings stating that the information is accurate to the best of their ability.
Knowing the exact condition and accurate details of the property is essential, so we need to ensure we’re doing our due diligence to confirm the accuracy of the information provided. And that comes with having a knowledge base and the right team behind you to help you know what is accurate and what’s inaccurate.
Property Overview
Within the OM, the Property Overview delivers a snapshot of the financials. One key number to examine is the cash-on-cash return – here highlighted as 9.14% in year one. That sounds fantastic, however I will fact-check that with you and see how accurate this is based on our numbers and knowledge.
Income Analysis
First, I look at the gross potential vs the actual rent collected. The gross potential is from the rent roll, while the actual collected is from the Trailing 12 Months (T12), showing the last 12 months of income and expenses. Ideally, the variance between the gross potential and actual numbers should be within 10%. If it’s not, that usually indicates a possible issue with the property.
Contract Rent
Looking at the rent roll, I am looking at the “contract rent” or the rent that is currently being charged on that unit. A rent roll will usually show the market rent as well, but this is not the rent that is currently being collected; rather it is the potential rent for that unit.
On this deal, the contract rent gives an annualized total of $182,016 if fully occupied. One thing to note here is unit 11. It’s vacant/unavailable which tells me that it’s a down unit. I don’t know the reason why, although the executive summary may tell us. But Unit 11 is a down unit, resulting in a loss of rent.
Market Rent
Comparing this to the actual T12 number found in the financial analysis page, they listed the gross potential market rent at $208,260, what they would collect at market rate. Then below that is the Loss to Lease, meaning how far they are under market. With this deal they are $10,344 under market, plus the vacant unit with a loss of $15,900, which brings us down to the annualized total of $182, 016. Now, an indicator that these numbers are likely estimated is the 5% vacancy assumption. This is an industry standard that we use when we don’t have accurate financials and that’s what they did here.
Contract vs Market Rent
So, when I do my comparison between the gross potential versus the actual rent collected, as I mentioned earlier, I want to see less than a 10% variance. Here, it’s only 5%, indicating a relatively stable property (again, the 5% is simply the estimated vacancy so I am unsure of what the true collection number is). The only way to find out the true income number for this property, would to be to get the property under contract and begin due diligence. As a note, when I am looking at this comparison, I want to look at solely rent. Not other income.
Expense Analysis
Next, let’s look at expenses. For an 11 unit in this market, total operating expenses should run around $4,000 to $5,000 per unit annually, but this property shows $5,618 per unit. Although $5,618 is a bit high, there are a lot of factors that play into that. Let’s break down the expenses a bit further:
Repairs and Maintenance: Expected between $500-$650, listed at $496.
Insurance: Expected between $550-$650, listed at $723. Insurance has gone up nationwide so this is not unusual, but I would be shopping insurances if this was a property I was pursuing.
Property Management: Generally, this ranges between 4-10% of your collected income. That number range is solely based on the size of the property and volume. A larger high cash flow property will be on the lower end that range, and a smaller property will be on the higher spectrum. This property is listed at 7% which sounds about right. Although, it’s a little bit low for an 11 unit in this market.
Taxes: We assume that the taxes listed are current taxes. It’s important to check current vs. future taxes as they likely will increase when the property is reassessed after purchase. And again, it’s a number that you need to find out what the mill rate is for the market or how they do the tax analysis: is it based on the property assessment or the sales price? It differs between areas so that’s another big number I would look at.
Now that we’ve looked at the income and the expenses, in my opinion, the income is estimated. The expenses seem accurate although $5,618 per unit is a little high. However, we’ll leave it like that for now to calculate the numbers.
Evaluating Financials
The next step in evaluating this listing is to calculate the deal cap rate, cash on cash return and debt coverage ratio. We do this using our Commercial Property Advisor’s financial analysis program. I input the given numbers into our financial analysis program and here’s what I came up with using their numbers for actual income and expenses.
Actual (Current)
Deal Cap Rate: 7.06%, which is the same as the listing.
Cash-on-Cash Return: Assuming 25% down at 7% interest, the cash on cash return comes out to 2.78%, which is lower than ideal.
Debt Coverage Ratio: 1.11 (below the 1.25 lender preference)
Occupancy Break-Even Point: 93% (higher than ideal, closer to 80% is preferred)
These numbers indicate that investments might not be favorable under current conditions.
Pro Forma (Projected)
Using their year one assumption numbers, the pro forma gave:
Deal Cap Rate: 7.63%
Cash-on-Cash Return: 5.08%, this is a low and certainly lower than their 9.14% claim.
Debt Coverage Ratio: 1.2, remains below lender preference of 1.25.
Occupancy Break-Even Point: 88%, which is an improvement but still not ideal.
These projections still show a challenge, notably with the cash on cash return predicted at only 5.08%, much less than the initial 9.14% claim. This pro forma analysis is just year one and these number can get better as you increase rent and lower expenses. However, some expenses like taxes and insurances we can’t change, and they will continue to increase.
Final Analysis
In conclusion, this LoopNet listing seems priced correctly, but if I were considering this deal, I’d examine the income estimates and higher expenses more closely. And while the property’s deal cap rate seems decent at 7.06%, the high expenses and uncertain income could lead to negative cash flow. Always make sure the property is performing well from day one and if it’s not, be prepared financially for that period when you aren’t collecting rent.
Questions or Comments? Text PETER to 833-942-4516.
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