An investor asked us to give him a rental rate that would quickly lease his vacant space. The problem with this question is that it’s only half the problem. The other half of the question should be: “At what rate would you recommend I quote in the market to lease my space quickly while maintaining my debt service coverage ratio and building a long term positive cash flow?”
How easy is it to get to cash flow positive with your commercial investment property using this technique in your commercial real estate cash flow system?
The first half answer to the question is to lower your rent until tenants start making proposals, being aware not to fix a discounted rate because it could eliminate or trap your equity investment in the property. The second half answer asked for the following pieces of information: your existing leases, your prior year’s operating statement, your mortgage, your note, and any additional information regarding the property that you want us to know.
Then you create an analysis of your investment as it operates today followed by the lease up assumptions from the first half answer. Next, you build your proforma including your lease up assumptions and annual debt service information from your mortgage and note. Once you’ve generated a cash flow before taxes analysis, you can see how your investment will operate based on the first half answer. The second half answer will give you the next 3 steps:
- What are the required rate escalators to maintain your debt service coverage ratio?
- If new and existing leases are signed at lower rates, what’s the lowest rate you can accept without defaulting on your loan?
- If you’ve paid down the principal on your loan, run an analysis on what a new loan payment would be based on the reduced principal balance at today’s interest rates. Would it make sense to call your lender to discuss a modification or refinance?
Upon completion of the following 3 steps, you should have a clear, 5 year plan for turning your property in a conforming, positive cash flow producing investment. You’ll know exactly what to do to achieve your goal, and it doesn’t look promising or you don’t think you can make it happen, you can always consider your other options.
By the way, where should we send your free 10 part email mini course? It’s 100% commercial real estate investing focused and you can get it here.