I'm leaning no - Would you do this deal?

1 Reply

I came across a property on the MLS and went to see it the other day.

It is a mixed-use property with one (1) 3-bedroom apartment upstairs and two (2) storefronts downstairs. A woman and her two children live upstairs and pay $1,100/mo. Her husband used to be the super for the building but has subsequently left her. The owner of the building kept the rent the same in order to help her out with the understanding that she try to fix anything that may go wrong in her apartment. By the way, market rent in that area is about $1,300/mo. Although the listing agent claimed it was recently renovated the apartment was not in the best shape. The entry door molding was torn up from their dog and there are a number of holes in the walls. In all, it would probably take about $5,000 to repair the apartment and give it a fresh coat of paint. If we moved forward with the deal we would most likely ask that unit to be delivered vacant, but if we decided to keep her in there we would keep her entire security deposit to put towards fixing the unit up.

The two store fronts are approximately 1,500 sq. ft. total. Both units are currently not rented, haven't been rented for some time and also need to be spruced up. In total we are talking about $10,000 to spruce up and fix both storefront units.

So here is the interesting part, the apartment would pay for the mortgage, taxes and insurance and if that was the only thing leased up we would be "making" $100/mo. I put that it quotes because it would also mean that we would have to self-manage (which I don't necessarily want to do), and virtually have nothing set-aside should anything else go wrong with the building. What is interesting is that if we are able to lease up the storefronts we could potentially be cash flowing about $1,500/mo. That is nothing to sneeze about!

The location is pretty good as it is located on a very visible side street off the rural highway and there is plenty of traffic that passes the building every day. I was originally thinking that they couldn't lease the two storefronts because the commercial market is soft there, however I wonder how much of an affect an "unfinished" storefront would have on a potential leasee and think this is a major factor for people not leasing it. After all, there is missing ceiling tile, damage to the floors, old paint and damaged fixtures. Someone would have to see past all of the stuff that needs to be fixed in order to want to lease it.

So what are your thoughts BP people? Should I go for it and ask the building to be delivered vacant, lease it up at $1,300 (cash flow $300/mo. self-managed/$150 cash flow for professionally managed), and then fix and market the heck out of the storefronts? Or do I do a hard pass on the property. The potential $1,500/mo. is pretty alluring but the $100/mo. is not enough to get me out of bed ...

No!  $100 per month profit is nothing and the first thing good investors calculate is the risk-to-reward. Your commercial units can be vacant for several more years. When renting commercials units you are betting (risking) that the tenants can make a profit and pay the rent. We (you) already know that a high percent of new businesses fail. Then, you have a vacant unit to clean and you can wait several more years.

There are many better places to put your money with a lessor risk-to-reward. Look at multi-unit residiential properties.