The wealthiest person I know prints millions out of thin air in the real estate business.

This is what he does...

A thread.

He finds a distressed retail plaza. Let's say 50% of the space isn't leased.

On a 300,000 sf plaza that might mean 150k square feet is vacant.

If asking rent is $8 per square foot per year, that means the building has a "potential revenue" figure of of $2.4MM.
So in this retail center 50% is leased and 50% is vacant. So the actual revenue, right now, is $1.2MM.
Most retail leases are whats called "Triple Net" or "NNN". This means the tenant pays the taxes, insurance, maintenance and CAM (common area maintenance).

They basically pay all of the landlord's expenses (except debt service on any loans he/she has, of course).
Commercial properties are valued based on something called a "cap rate".

The equation is:

net operating income / (cap rate) = value

The cap rate is a %.

Think about it as the return on your money, annually, as a percentage, you spent to buy a property.
If you want a 7% return on your overall spend (not taking into account debt on the property) you'd buy at a 7 cap.

An 8% return would mean an 8 cap.
Cap rates (as a measure of value) change based on risk, upside, trends and investor appetite for a certain type of asset.

But the bottom line is this:

Commercial real estate is valued based on how much money it makes (Net Operating Income)
Increase NOI --> increase value

Decrease NOI --> decrease value
Back to my friend.

He's looking at a distressed asset. Half vacant. So there is some upside potential. That potential is baked into the cap rate he can buy it at.

So he makes an offer to buy at an in-place 6 cap.

The NOI = 1.2MM

Cap rate is 6

A quiz -> what is the value?
You guessed it. $20MM.

So my friend gets the property under contract for $20MM.

And while its under contract, before he buys it, he pulls an ace out of his sleeve.
You see my friend owns several Planet Fitness franchises and also several trampoline park franchises.

So he prepares his plans to sign long term leases with both of these businesses the day he closes on the property.
And the day he closes he does so and they both move in.

And now the retail center is 100% full.

Bringing in $2.4MM a year in NOI.
So now what cap rate would we use to value this full retail center with long term leases in place across the board?

The upside is gone, so the cap rate will go up slightly, and my friend generally achieves an 8 cap valuation here.
So with $2.4MM in NOI, what is the new value at an 8 cap?
You guessed it. $30MM.

So my friend just bought a building for $20MM, signed two leases, and now its worth $30MM.

So he created $10MM of value out of thin air.

And he does this to two or three retail plazas a year.
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More from Nick Huber

Don’t have much cash but want to invest in real estate?

Want to get SBA loans and special loan programs so you can buy real estate investments with only 5-10% down?

One word for you:

Don’t.

Here’s why

👇👇👇

Leverage can be a beautiful thing.

Appreciation takes over and all that value you bought with debt grows and you amplify your returns.

But there is another, darker side of debt.


Values drop 5 or 10% and you’re underwater. You have zero equity or negative equity.

Ask the folks who were over-levered in 2007 what happened on 2011?

Real estate is a frothy space right now. Money flying everywhere and values higher than they’ve ever been.

Debt is cheaper and easier to get than ever.

Will it continue?

Probably.

Money could stay cheap for a long time. There is a ton of negative yielding debt abroad and liquidity ready to flood our market at the drop of a hat.

Rates will likely stay low. Gov will probably keep subsidizing these loans. You’ll probably be okay.
How to get smarter very fast:

Interact with smart people here on Twitter who have different world-views than you do.

And let them change your mind on something.

Here are the 30 people you should follow (along with my favorite tweet from each)👇👇

Twitter can be terrible if you follow negative people.

It can also be more valuable than a college degree if you follow (and network with) the right people.

You get to look right into their brain and read a daily narrative of HOW they think.

Ok lets go:

#1: @ShaanVP

You know he's all about venture capital based entrepreneurship. I'm about small (non-sexy) business. We disagree on a lot of stuff.

But he's done it and he's won. Bonus follow: @theSamParr (@myfirstmilpod podcast


#2: @fortworthchris

He is where I want to be in 15 years. Has built a massive real estate private equity firm from the ground up. Super grounded with what the way he does business and his podcast @theFORTpodcast is top


#3: @Julian

I'm a scattered thinker and procrastinator.

Julian is a master of clear thinking and simple but effective writing. A world class example of content marketing and

More from Business

My top 10 tweets of the year

A thread 👇

https://t.co/xj4js6shhy


https://t.co/b81zoW6u1d


https://t.co/1147it02zs


https://t.co/A7XCU5fC2m

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