I have found a store front property that is FSBO in an historic district of town in the Greater Akron Ohio areas, asking 550k. Seller has 100% equity and is mom and pop owner. 8/9 units occupied. The basic numbers seller has provided without letter of intent is 95k annual rents, 25k annual expenses. From my knowledge the area Cap rates are between 12-15%. If I did the math right I believe this property is selling at 12 cap. Given if these numbers are accurate would this be a worthwhile investment? What other details should I be looking for in assessing this property? Should I decide to move forward should I use utilize a commercial agent when it is FSBO?
It could be, it’s tough to tell. That owner is probably self managing so their operating expenses are lower than when you’d actually buy it and hire a property manager. That’s the biggest thing off I see.
@Marc Rice I hadn’t considered management expense! Was planning on self managing at first, then down the road getting a manager down the road. Are commercial management more expensive than residential management on average?
Mom and pop owners are hard to underwrite, especially if they are still tracking expenses and rents on a cardboard box top (it happens). You have to underwrite the deal as if you would not be managing it because they don't get a bonus on their price just because they manage it now. From what you put in, it sounds like a viable deal in a great location, but I would take note that your traditional main street commercial renters are fading as more business go virtual. What businesses are in there now? Is it more lawyer office stuff or retail?
@Alan Bostick those expenses seem low, you’ll want to double check them. Also, talk to an insurance broker and get a solid quote - I bought a plaza from a do it yourselfer and my initial insurance was more than double what he was paying because he had the building all paid off he way under insured it.
A great opportunity here is owner financing which is what I did with my plaza. The seller would have great tax benefits by taking a low down payment and spreading out their gains over the next five to ten years.
Another solid point! I’ll look into what kind of insurance I should be getting on the property. I had initially asked the seller if he would be interested in seller financing and he declined, but I was not aware of the tax benefits he could be entitled to. I’ll have to look into that have try again with him, perhaps because he is a DIY guy he is as unaware of the benefits as I. Thanks so much!
@Alan Bostick Yes, he is probably unaware. I'm guessing he has owned this for awhile if he owns it free and clear which means his basis for capital gains is pretty high. If he finances the deal he only pays capital gains on the portion of principal he receives in any given tax year. At the end of the day he will probably pay the same amount, but it is spread out over years instead of one big chunk. Depending on his tax bracket though taking over $800K in one year could bump him up, so spreading that out may reduce a little. There are people out there that can explain this way better than me.
With today's low interest rates though I would probably only do that with him if either a) you could put a significantly lower down payment than you would if you went to a bank or b) you could lock him in for at least 10 years at a low interest rate.
Good idea! I had also thought about finding traditional financing and seeing if he would finance the down payment, that would reduce at least some of his upfront tax liability. It is just that if the expenses are not accurate (which it is not due to management expense)l and potentially insurance at least) I may be hard pressed to get a lender to do %80 if it is not worth the firm 550k he is asking. Time to do some digging!
Because the Building is in the Historic District I would check to see if the building itself is on the Historic Registry. Many Insurance companies May decline the building if it is on the Registry. The rules & regulations that the Historic District may impose on rebuilding or repairing the structure can complicate an insurance claim.