Commercial Investment property - Please advice

You're missing property management, legal, maintenance fund, accounting, pest control, trash, and other expenses.

You didn't mention anything about the down units and leases. Do the down units require any immediate repairs? Do the tenants have NNN leases? Does the seller have a ground lease? If so, then that's yet another expense.

You also didn't mention anything about the cap rate, purchase price, or ROI.

I don't have enough info to determine whether or not this is a good deal to me. Yet, based upon those numbers (and some gestimates), I'd tweak that deal before pulling the trigger to buy.

Thanks for responding. Here are some more details form the listing

List Price - 199,900, cap rate - 10%

The other three units are ready to rent and not in need of any repairs. Can you please explain what an NNN lease is? or a ground lease?

Will the bank terms - interest rate etc., defer if the property is commercial and not residential? I am still debating if commericial Vs residential , which would be better for getting a good cashflow. I agree that either should be good if I can get it at a good price but trying to understand the differences and advantages. Any help is greatly appreicated.

A NNN (aka triple-net or net, net, net) lease is commercial real-estate (RE) jargon for a lease that requires the tenant to pay a pro rata portion of the taxes, insurance, and maintenance along with the rent.

A ground lease is commercial RE jargon. I'll explain what it is after I introduce another concept. Many people are used to buying properties via fee simple sales; that's RE jargon for stating that the buyer purchases the land and improvements (ie the house, building, etc) together. Not all sales are fee simple. A seller could sell the improvements, retain ownership of the underlying land, and charge that buyer rent for using that land. The seller would use a ground lease to enter into that kind of rental relationship with the buyer.

Henceforth, any sale of those improvements would be subject to the terms of that ground lease.

Yes, the loan rate/terms will differ for commercial loans. Most--not all--commercial loans have terms that essentially are ARMs--only with a twist. Many of them have a call (or come due) in 3 or 5 years. (Technically, things get a little more complex than this, but I don't want to confuse you with too many details.) Interest rates on most commercial loans tend to be at least 1% higher than the ones for residential.

I see that my estimate purchase price ($189.6K) wasn't too far off.

Assuming that the current tenants are strong, the location is desirable, and the immediate repairs figure is $0, then I agree that this property would be a good investment (at least based on the numbers). You'd still need to do your due diligence to ensure that the property checks out in reality too.

Thanks Londell for all the information, I had no clue about those commericial terms. Went and looked at the property,seems pretty good. 3 tenants in place with a one year lease. The other thing I noticed when I was there was there were 2 or 3 other spaces for sale in the same complex. One of the recently sold ones went for $120 per sqft. The place I am looking at the owner has listed it for $172 per sqft which seems pretty high when I compare with others. The only difference I see is this place has all the interiors done and is divided to 6 booths and each booth is rented separtely (total area -1159sqft) and each booth generate a rent of $525. The other space which is available is around 1500 sqft and is listed for a price of $120 per sqft. This place can be leased for around $2000. What I am trying to understand here is how do I compare the commericial spaces, do I just take per sqft or do I consider how much it is rented for and how much potential it has got. Any help in understanding commercial spaces would be great.

Maddy

No problem. I saw your PM--without checking here beforehand--and replied. I'll re-post the answer here, so that others who are interested in commercial might benefit from the answer too.

You need to compare the NOIs, ROIs, rents, and amount of rentable space for similar types of properties (in that order). Also, keep in mind that you're buying/selling NOI and ROI.

Other factors also affect the value, but those were the 4 most important factors.

If the rent for similar properties is around $120/sqft, then I'd probably make an offer based on that figure.

Maddy, you first stated that each booth rented at $575 per month, then in your subsequent post you stated they rent at $525 per month?

thank you so much for your advice. If I compare this property with others in the same area, my offer should be around $135,000, but this place has got more potential for rents than the other places as it can be rented as 6 individual booths. My rental research shows that other places in the same area are rented for around 17 psqft, but this place can be rented for much more because of the individual booths. Not sure how much can I add to the offer price for this setup. I have information that the seller invested around 30k for the customizations for this setup, so how much do you think I can increase the offer price by?
If the seller is motivated enough she would come diwn on the price, in case she is not very motivated, I would also like to include a creative financing offer of asking her to loan me the down payment for 25% @ 6% for 5 years and offering higher price 175 - 180k. Do you think this offer is higher? I did some calculations and seemed ok but this is the first time I am trying to come up with creative financing offer so not very familiar with the terms and price. Please advice.

sorry for the confusion, the rents for each booth are $575, but the owner needs to pay for the utilities so I discounted $50 from each booth to cover the utilities for my calculations.

Regardless of what the seller put into the property, you should base your purchase price on the actual income. For example, you mentioned the following: the average rent for similar properties in that area is $17/sqft/year, similar properties have sold for $120/sqft, this property has 1159 sqft of rentable space, and the occupancy rate is 50%. Although it's nice to know the amount for which other similar properties sold, that figure doesn't mean as much to us.

We need to determine the NOI, and I usually like to check run some other numbers too.

actual NOI: ($575 * 3 - ($1,200 + $142 + $28 + $110 + $250)) * 12 = - $60
estimated NOI (based on average rent): .5 * $17 * 1,159 - ($1,200 + $142 + $28 + $110 + $250) * 12 = - $10,908.50
comparable rent/unit: $17/sqft/year * 1,159 sqft / 12 months/year / 6 units = $273.65/month/unit
proforma NOI: ($575 * 6 - ($1,200 + $142 + $28 + $110 + $250)) * 12 = $20,640
proforma rent ($/sqft/year): $575 * 6 * 12 / 1,159 sqft = $35.72/sqft/year

I'd double check those rental comps if I were you, and I'd run that proforma rent figure ($35.72) past some of those property managers that you contacted last time. After all there's a big difference between $17/sqft/year and $35.72/sqft/year. You need to know which figure(s) is/are sustainable.

Keep in mind that those leases are considerably shorter than most commercial leases (which tend to span several years). What you don't want to do is buy the property expecting to get $35.72/sqft/year--only to get $17/sqft/year henceforth after the current leases expire.

After having confirmed that $32.72 is sustainable, then I'd probably make an all cash offer, an offer with 100% seller financing, and at least 1 other offer with some cash and seller financing.