Why Wholesale Properties Are Great Real Estate Investments

Why This Market is Perfect for Buying and Selling Wholesale Houses?

Real estate market’s like this one come once in a few lifetimes. The conditions that create such a unique time are the perfect storm of economic and market unfortunate events. Prices change dramatically and residential inventory becomes abundant. This type of recipe has the ingredients to creat what’s called a “buyers market”.

What is a Wholesale Property?

Wholesale properties are some of the most popular choices when it comes to investing. The price of wholesale properties are usually 20% to 60% below the average market value. Some are in need of repair while others are in move-in condition. These types of properties are one of the best investments this day and age due to the desperation and anxiousness the market’s created.

Why Wholesale Properties are Now in High Demand

As I said in the beginning of this article, market conditions have changed. Times like this allow many to themselves in above average situations. Investors are much different from your traditional agents. Instead of paying for closing costs, real estate agent fees and possible costs of repairs, real estate investors usually buy properties as-is and are able to pay you in full.

Why Homeowners Should Wholesale Their Homes

Wholesalers don’t care what your situation is when it comes to purchasing your home. They see them as golden opportunities to secure another property to make a profit from. This is an advantage for homeowners who cannot or chose not to sell their home the traditional way. Many reasons arise as to why homeowners are put in the positions to sell and sell quickly. Some of those reasons included:

  • Simply want to sell quickly
  • Moving out of town, state or country
  • More owed on the home than it’s worth
  • Foreclosure
  • Cannot afford to make repairs
  • Unwanted inherited property
  • Divorce
  • Death

How Wholesalers are Changing the face of Real Estate

Wholesalers are a form of investors. They look for homes to buy at below market values and turn around and sell them for a profit of their own. They’re able to do this due to the list of investors and buyers that they’re able to turn to once they’ve secured a wholesale property. This is how they’re able to give you a time frame of sell that traditional real estate agents usually can’t. Because the bottom has dropped out of the real estate market, tons of wholesalers see it as the perfect time to stock pile their inventory and make great profits.

Buying and selling wholesale properties has kept the real estate industry alive. After the devastating downfall of the real estate marketing in 2007-08, the way of buying and selling homes took a dramatic turn and has taken the traditional real estate sale out of the equation.

Commercial Real Estate Terms

In order to understand investing in commercial real estate, you need to master a few commercial real estate terms. Some of the more important terms are as follows:

Capitalization or Cap Rate: Net operating income (NOI) divided by the purchase price.

Net Operating Income (NOI): Gross Operating Income minus Operating Expenses.

Cash on Cash Return: Cash Flow Before Taxes (CFBT) divided by the initial investment. Best indication of the quality of the investment.

NPV (Net Present Value): Method for calculating the present value of future cash flows. Useful for comparing different investments and their returns. Most calculators provide NPV calculations.

IRR (Internal Rate of Return): Calculated by setting NPV = 0 and finding out what the discount rate would be. Use a calculator to do this calculation.

Debt Coverage Ratio: NOI/loan payment. This is what your banker will want to know before lending you money for the investment.

Return on Equity (ROE): CFBT divided by equity. Equal to Cash on Cash the first year, then decreases because your equity grows faster than NOI (due to depreciation and mortgage retirement).

Discount Rate: Rate of which future cash flows are discounted (devalued) per year.

Yield Capitalization: More complex form of income capitalization which looks further into the future and attempts to estimate return over a projected holding period (typically 10 years).

Credit-tenant property: A single-tenant commercial property occupied by a tenant who has a credit rating by Moody’s or Standard & Poor of BBB or better.

Projected Gross Operating Income: Property’s annual income if all spaces were rented and all of the rent actually collected, minus an allowance for vacancy and credit loss.

Optimum Holding Period: Number of years to hold a property in order to maximize ROE. After this period it’s best to sell or exchange the property.

Triple Net (NNN) Lease: This is lease whereby the tenant pays for the common area maintenance (CAM), real estate taxes and insurance for the building and property. Most retail leases are considered triple net. Tenants who have a triple net lease are responsible for payment of these items in addition to the base rent on a pro rata basis.

Useable square feet: Total square feet within the walls of the space being leased. Actual space available for Tenant’s exclusive use.

Rentable square feet: Total square feet used to calculate the rent rate; may include an apportionment of lobby, hallways and other areas in the building available to and used by all the building tenants. Expressed as a multiplying or load factor of Useable SF. Example: Rentable SF = Useable SF x 1.15 (multiplying or load factor).

Load Factor: If the tenant has rights to hallways, elevators, restrooms outside their space, lobby, etc., the landlord will determine how many square feet of this area exist and prorate it to the other tenants. The tenant will pay rent on their prorata share of this number when the landlord calculates minimum rent.

If you can get to understand these commercial real estate terms, you can begin to understand commercial real estate.