3 ms·

I can get a 4.5% cap rate on real estate in a hot market like Los Angeles. I can get a 50% loan on the property as well. The property will likely appreciate on

I can get a 4.5% cap rate on real estate in a hot market like Los Angeles. I can get a 50% loan on the property as well. The property will likely appreciate on the backend and when it's time to sell I can 1031 exchange in to another property or do an opportunity zone to defer taxes. I can get a conventional loan from a bank against that property if I ever need to pull dollars out. A 5% return royalty is largely illiquid, can not likely be collateralized at a low interest rate, has limited ability to appreciate in value, etc. etc. I don't see it as that valuable...especially with the decline of major CPG brands. The remaining risk with this investment is completely unknown to me.

Red_Leaves_Flyy 4y ago
Considering the volatility in the housing market, and the growing populous demand for affordable housing I think you’re valuing real estate extravagantly.
- noduerme 4y ago
  >> and the growing populous demand for affordable housing Not unless you expect a communist revolution in the next ten years
  - deleted 4y ago
    [deleted]
  - JohnJamesRambo 4y ago
    No one ever expects the Spanish Inquisition.
  - cannaceo 4y ago
    Maybe not a full-blown communist revolution but I expect the rules surrounding residential investment properties to change. Whether that's rent control, eviction moratoriums, increased taxes, or whatever other concessions populists will make. There's considerable regulatory risk going forward.
- weq 4y ago
  The worst thing about earning money is the stage where no you longer spend based on reason, but instead based on capital potential. The housing bubble has been building and building and building flames fumed by apparent risk-free-Xing your net worth. Its a house of cards. When you have 20 properties, you are 20x'ing your risk of getting the lemon. My uncle started down this path 30 years ago and eventually got royally screwed. Its a chain, this choice of investment chains you to a wage.
  - bennysomething 4y ago
    Genuine question, what happened to your uncle? Was he screwed in the 2007/8 crash? A close family member of mine was nearly bankrupted when the banks tightened lending policy.
- cannaceo 4y ago
  I'm not referring to housing--although I think it's anyone's guess what happens to housing. Bonds are currently dead as an asset class and people see RE as an inflation hedge. I do see an upper limit to what individuals can afford and we're beyond that. The only two groups I'm interested in as tenants are low income housing and corporate tenants. That's why I'm in industrial real estate. Either way, this royalty agreement by comparison does not look like a good investment. The illiquidity of it means I need much higher returns IMO.
brightball 4y ago
Isn't the current admin trying to stop 1031 exchanges?
noduerme 4y ago
idk about the remaining risk, but there's definitely a kind of conservative investor who would be happy for a 6.5% return from a forever holding; also there's no reason to think you couldn't auction it for higher later. (Say, a decade from now when interest rates start falling again). It's a bad time to buy this thing, maybe... if you think you'll fetch higher returns next year. I'm a fan of tobacco, (don't shoot me, I'm a chain smoker, it's my future health plan), but it's just another thing people buy without thinking about what it costs. A lot of people are looking for stability versus maximizing growth. This always gets a bad rap - people think I'm insane for keeping almost all my portfolio in utilities and basic necessary goods. I'm 10% in tech and 10% in retail... the rest is utilities, commodities, real estate, and whatever kicks out at least 4% annual dividends. I'm in my early 40s, and have followed this strategy since my 20s. Could I be richer if I were more aggressive... probably. Although giving my track record in Vegas, maybe not. But I don't try to time the market, I basically never sell anything. I drip dividends and accumulate. I never got struck it rich on a hot ticket but I worked $100k saved in my 20s up to $1m or so now, rotating and seeking dividends. What I'm trying to say is that for some people, the marginal cost of risk - even from real estate - is worth a few points on a "sure thing". A sure thing is hard to find.
refurb 4y ago
For a $1M property, a 4.5% cap rate would be $45,000 in net operating income (after all expenses). At least for residential property, you'd be lucky to get $45,000 in gross income on a $1M property in Los Angelas. Are you talking commercial property?
- cannaceo 4y ago
  Yes, I'm talking commercial.
Reason077 4y ago
If I’m understanding correctly it’s a “flat rate royalty”, ie: not 5% or 0.5% or whatever but rather is specified in a fixed “$ per units sold”. It doesn’t seem like it rises with inflation, so it’s value in real terms will decline over time if Listerine’s sales volume remains constant. This will be particularly noticeable during periods of high inflation, which is probably why it’s on the market right now!
mortehu 4y ago
This sounds like it involves a lot of labor and transaction fees, and perhaps some liability. What would be the returns if I paid someone to do all that?
- cannaceo 4y ago
  I do commercial (specifically industrial) so there's not that much labor. With NNN leases you shift most of the burden to the tenant. The big issue is, of course, the creditworthiness of the tenant.

Red_Leaves_Flyy 4y ago

Considering the volatility in the housing market, and the growing populous demand for affordable housing I think you’re valuing real estate extravagantly.

noduerme 4y ago
>> and the growing populous demand for affordable housing Not unless you expect a communist revolution in the next ten years
- deleted 4y ago
  [deleted]
- JohnJamesRambo 4y ago
  No one ever expects the Spanish Inquisition.
- cannaceo 4y ago
  Maybe not a full-blown communist revolution but I expect the rules surrounding residential investment properties to change. Whether that's rent control, eviction moratoriums, increased taxes, or whatever other concessions populists will make. There's considerable regulatory risk going forward.
weq 4y ago
The worst thing about earning money is the stage where no you longer spend based on reason, but instead based on capital potential. The housing bubble has been building and building and building flames fumed by apparent risk-free-Xing your net worth. Its a house of cards. When you have 20 properties, you are 20x'ing your risk of getting the lemon. My uncle started down this path 30 years ago and eventually got royally screwed. Its a chain, this choice of investment chains you to a wage.
- bennysomething 4y ago
  Genuine question, what happened to your uncle? Was he screwed in the 2007/8 crash? A close family member of mine was nearly bankrupted when the banks tightened lending policy.
cannaceo 4y ago
I'm not referring to housing--although I think it's anyone's guess what happens to housing. Bonds are currently dead as an asset class and people see RE as an inflation hedge. I do see an upper limit to what individuals can afford and we're beyond that. The only two groups I'm interested in as tenants are low income housing and corporate tenants. That's why I'm in industrial real estate. Either way, this royalty agreement by comparison does not look like a good investment. The illiquidity of it means I need much higher returns IMO.

brightball 4y ago

Isn't the current admin trying to stop 1031 exchanges?

noduerme 4y ago

idk about the remaining risk, but there's definitely a kind of conservative investor who would be happy for a 6.5% return from a forever holding; also there's no reason to think you couldn't auction it for higher later. (Say, a decade from now when interest rates start falling again). It's a bad time to buy this thing, maybe... if you think you'll fetch higher returns next year. I'm a fan of tobacco, (don't shoot me, I'm a chain smoker, it's my future health plan), but it's just another thing people buy without thinking about what it costs. A lot of people are looking for stability versus maximizing growth. This always gets a bad rap - people think I'm insane for keeping almost all my portfolio in utilities and basic necessary goods. I'm 10% in tech and 10% in retail... the rest is utilities, commodities, real estate, and whatever kicks out at least 4% annual dividends. I'm in my early 40s, and have followed this strategy since my 20s. Could I be richer if I were more aggressive... probably. Although giving my track record in Vegas, maybe not. But I don't try to time the market, I basically never sell anything. I drip dividends and accumulate. I never got struck it rich on a hot ticket but I worked $100k saved in my 20s up to $1m or so now, rotating and seeking dividends. What I'm trying to say is that for some people, the marginal cost of risk - even from real estate - is worth a few points on a "sure thing". A sure thing is hard to find.

refurb 4y ago

For a $1M property, a 4.5% cap rate would be $45,000 in net operating income (after all expenses). At least for residential property, you'd be lucky to get $45,000 in gross income on a $1M property in Los Angelas. Are you talking commercial property?

cannaceo 4y ago
Yes, I'm talking commercial.

Reason077 4y ago

If I’m understanding correctly it’s a “flat rate royalty”, ie: not 5% or 0.5% or whatever but rather is specified in a fixed “$ per units sold”. It doesn’t seem like it rises with inflation, so it’s value in real terms will decline over time if Listerine’s sales volume remains constant. This will be particularly noticeable during periods of high inflation, which is probably why it’s on the market right now!

mortehu 4y ago

This sounds like it involves a lot of labor and transaction fees, and perhaps some liability. What would be the returns if I paid someone to do all that?

cannaceo 4y ago
I do commercial (specifically industrial) so there's not that much labor. With NNN leases you shift most of the burden to the tenant. The big issue is, of course, the creditworthiness of the tenant.