BiggerPockets

I'm looking at a deal to invest in. It's a couple of metal buildings divided into 8 units (4 each) on .46 acres. The buildings total 7500 square feet. They are basically warehouse type of buildings with offices constructed into them. One set has insulation on the whole thing and full baths on the units. The others don't have insulation and only half baths.

These units are fairly old I believe built in the 80's. Annual taxes are $1514 and they are asking $360k.

I've spoken with a few of the tenants (7 of 8 or filled and I actually want the 8th for myself). The rent varies from $450 for some $550 for others and $600 for another.

It's in a decent location with good access and nearby other industrial areas.

The tenants seem happy there... what do you guys think of this deal?

I agree with Brian, not enough information to tell, Kevin. But given approx $4k a month in rents, and asking 360K (a rent multiple of 90 with all units leased), I doubt this is "a deal."

Maybe, if all units were NNN leases and you could pass taxes and other items onto the tenants in separate billing, or the leases you mentioned were the base amounts and include additional CAM (Common Area Maintenance) charges, or if the leases stated that outside areas associated with the units were the responsibility of the tenants, etc. Lots of little commercial gotchas that nickle and dime the tenants might make it look better, but you haven't mentioned any.

Given 7,500 sq ft of buildings on .46 acres (just under 20K sq ft of property), you've got ample common, shared or parking area with these buildings. Who's responsible for the parking lot, lights (and the electric bill), fencing, security, etc.

Many considerations and much more complicated than an 8 unit residential unit. It might also be a great deal at only $600/month!

Absolutely agree I don't have enough info... that is because of pure ignorance. I'm very new to this game. I was hoping my little bit of info could get me started and you guys could ask for the rest of the info vs me guessing and rambling too much (too late ;) )

Ok... I'd mainly like this as a source of income in the long run... for right now I don't mind if it just pays for itself. I also want to use a section maybe two at some point to run some of my own business out of.

Putting down:... hmm.. well, I'd like to not put much down as I don't have much capital to play with unless I pull out some of my stock market money (about 34k... good considering I only put in 15k a year ago). BUT I wouldn't want to do that if I'm not bringing in more than I would average on that money in the stock market. I currently make about twice as much as I spend, leaving me about 2k/month of extra cash (granted that doesn't include vacation and toys :) ). My PERSONAL credit is great 750+.

Condition: It is primarily a steel structured building and no one that I talked to (4 tenants) have any complaints about it. The parking lot is between the two buildings and is in fairly good shape, again can't see anyone complaining. There is VERY little upkeep on the property other than what might come up with the structure itself and they are very simple in design (office built into the warehouse, with full access to all of those walls easily).

There is a meter box for every unit... they are responsible for their own electricity. No security now but I could add some cameras VERY easily as that is one of the things I do.

I do not know the lengths of the leases currently, but I do know one guy has been in there since the 80's and another lady is looking to do some fixing up for her dance studio and was concerned if I would want her out (of course I don't).

I am not looking for a "steal" of a deal... just wondering on if this is practical or if this is ridiculously priced. If it was a steal it would be gone already. ;)

Gregory, I will definitely check out that link as most of that is greek to me. ;)

Thanks all, I look forward to more info/questions!

Hi Kevin,

I'm new here and saw your post. While there is insufficient info to determine if it is a good deal, I will touch on some basic calculations you need to do.

Based on what info you provided I am making some assumptions to create a scenario.

Here's what you collect in rents: (assumption)
8 units total
4 @ $450
3 @ $550
1 @ $600
Total is $4050 a month; $48,600 a year

You need to figure out your expenses.
They pay for electric - I assume that includes heating and cooling. There are baths. Do you pay for the water and sewage and trash collection fees?

I expect there are some common areas that have lighting and cleaning/maintenance.

Property Taxes and Insurance. Do tenants have insurance to cover the contents of their unit and liability if they cause damage to the premises or other tenants' property. You may want to find out.

Since all units are occupied, you have no marketing costs for now. You need to review the leases to see how long they are and what clauses are built into them. It's good that you have tenants who have been there a while. They are not likely to leave unless you raise the rents well above market rates. You want to determine if their businesses are stable so they will be there for a while. Long leases are good; you know you don't have high turnover rates like apartments. Leases should have provisions to adjust the rents with market conditions within reason. There are many ways to structure leases.

I assume you have no employees - property managers, cleaning/maintenance crew etc. After deducting all the expenses from the rents, this is your NOI (net operating income) and does not include debt service.

Now you have to figure out your debt service. That depends on what you can put down. Asking price is $360K. 20% is $72K. Can you make a 20% down payment? If not, is the seller willing to finance part of it?

You need to finance the balance of $288K. Find out what interest rate you can get for a commercial property loan. As an example, 8%, amortized over 25 yrs, the monthly payment is $2222.83 or $26,674 a year excluding any points you have to pay.

Add the annual maintenance and other expenses to the annual debt service to see if you still have positive cash flow. You will have to change the interest rate and purchase price to see how the numbers change.

You also need to calculate the rent/square feet to see if it is comparable to other similar buildings in the area.

The CAP rate is frequently used to determine if the price is acceptable. CAP = NOI/Purchase Price. You need to find out for the type of building in that location what the typical CAP rate is. For the lack of a number, 10% is a rough guide.

Keep in mind that for commercial loans, although amortized over 25 or 30 years, the loan is for 3 to 5 years only. You will have to refinance at maturity. You need to determine if interest rates will be higher in the future and whether the rents will cover the higher debt service.

That's just the basics. If the numbers work out in your favor, it's probably not a bad deal. There are other factors to consider and you have not provided sufficient information. I suspect when you apply for a loan you will be asked to provide more detail.

Glad my explanations helped.

The property currently has 100% occupancy, but it would be prudent to factor in some vacancy.

If you know how to set up a spreadsheet that would be very helpful. By changing the vacancy you can determine what the property can tolerate to break even.

With only 8 units, one vacant unit means 12.8% vacancy or 87.2% occupancy. Two vacant units and you're down to 75% occupancy.

There are no fixed rules of thumb for vacancies, especially when you have so few units. For larger properties that have 30 or more units, a rule of thumb may be applicable, say 5-10% vacancy. That number would vary with location and the current economic situation would certainly impact that number.

I don't know what the tenant mix is. You have to determine if they are stable businesses that provide fairly essential services that can weather a prolonged recession.

You have to plan for the worst and hope for the best. You know your local area better than I do - in fact I don't know where you are located.

If you ask yourself all the what-if questions and have a reasonable solution for them, then it may be a worthwhile investment. You need to think about setting up a business entity that owns the property for asset protection and liability should things get really bad. I would not put all your savings into a down payment. You must have some cash for emergencies.

It never hurts to ask the seller what his motivation to sell is - it can sometimes be very revealing.

You can do interest payment calculations in your head? :wink:

I normally set up the spreadsheet so that I can change any one parameter and all the numbers get updated so I can see how a change in interest rate or other parameter
would affect the deal.

I don't know the rules of the bank that you are familiar with. It is not uncommon to have the seller finance part of it in commercial deals. Say you put down 10%, the seller can lend you the other 10%. You can work out the terms with the seller so that it is agreeable to the both of you.

You can pay off the loan from the seller in 15 years or less if they want the money faster. You may want to ask the seller their intentions. If they don't need the money for some other purchase, making, say, 8% off you sure beats putting it in a bank. If they agree to this arrangement it shows that they are confident the property will perform to cover the payments. They owned it for a while and they should know.