Which property to buy?

[Robin Evans]

Hi dear BP friends we are new to commercial real estate investment and would like to ask for your input on these two potential investment properties. We have already bought a mixed use commercial property that has a store on the front and three residential units on the back in a small town. There is a parking lot on the back that can potentially fit 8 cars if tenants park as instructed. But we need more parking space because we are thinking renting out one big unit by room so will need more parking space. The rent of the whole property might be doubled if we rent out all 5 rooms. Currently it is being rehabed. There is also street parking option, but not that convenient.  

# 1 potential property is next to us (also a commercial lot currently rent as a retail store) and will be for sale soon. If we buy it, we can have more parking space for use for both properties, mainly at night time bc # 1 property uses the parking lot mainly in the daytime.  The rent is not that high (not even hitting 1%),  and is less likely to increase within a short time. It may not even cash flow if rent is not raised. 
# 2 potential property is a few blocks away, also mixed use, stores and residential units currently all rented out. Rent is much higher (can hit 1.4%) and will cash flow a lot more than # 1. 

We can only buy one with our current fund. Which one makes more sense? We appreciate any input and creative ideas! Thank you!

[Jason Norton]

I would go with #2. We have a returning client who has store front, storage in back and a rental upstairs and it seems to be a very good investment. Gets a good ROI.

[Account Closed]

I would do option #1. The value of two adjacent properties will be higher than the sum of the individual ones. In your case, the market value and cash flows from your mixed used property will likely be higher if you own the adjacent property. In addition, money you would invest in one of the properties will likely increase the value of the second one, as well. And vise versa. Faced improvements can be made to complement one another and would have a big impact.  

[Ronald Rohde]

I'd take the adjacent. Id wager your rents can go higher than your assumptions on #2.

[Steven Foster Wilson]

Quote from @Robin Evans:

Hi dear BP friends we are new to commercial real estate investment and would like to ask for your input on these two potential investment properties. We have already bought a mixed use commercial property that has a store on the front and three residential units on the back in a small town. There is a parking lot on the back that can potentially fit 8 cars if tenants park as instructed. But we need more parking space because we are thinking renting out one big unit by room so will need more parking space. The rent of the whole property might be doubled if we rent out all 5 rooms. Currently it is being rehabed. There is also street parking option, but not that convenient.  

# 1 potential property is next to us (also a commercial lot currently rent as a retail store) and will be for sale soon. If we buy it, we can have more parking space for use for both properties, mainly at night time bc # 1 property uses the parking lot mainly in the daytime.  The rent is not that high (not even hitting 1%),  and is less likely to increase within a short time. It may not even cash flow if rent is not raised. 
# 2 potential property is a few blocks away, also mixed use, stores and residential units currently all rented out. Rent is much higher (can hit 1.4%) and will cash flow a lot more than # 1. 

We can only buy one with our current fund. Which one makes more sense? We appreciate any input and creative ideas! Thank you!

 How long is the lease on #1? Could you potentially raise the rents like stated or get someone else in there that could rent for more? If there is more potential for that then I would go with #1 but if not then #2. At the end of the day it is a business and you have to go off of the numbers. 

[Evan Polaski]

@Robin Evans, you are looking at this all as 3 separate things, but it isn't.  You have have a bottleneck in your current property due to parking.  Potential #1 releases that bottleneck.  So even though, as a stand alone property it may not be better, what are the overall numbers combined by owning both.

Potential 2, is better standalone property, but you remain bottlenecked in current property, so, again what's your overall return.

Then, what is the path of development?  Are you positioning yourself in that path?  If so, having adjoining properties is always beneficial, since bigger is almost always more economical to develop.  

Lastly, back to risks of potential #1, what is the use?  How long have they been there?  What are their sales?  Are they the current owner?  Retail is a very susceptible business, especially if we are going into another recession.  Necessity based uses will always be insulated, but discretionary spending has been dropping already.  I would assess that risk as well, given you are concerned that the property may not be terribly viable as it sits, let alone vacant for 3-4 years, or at lower rents then current.

[Robin Evans]

Quote from @Jason Norton:

I would go with #2. We have a returning client who has store front, storage in back and a rental upstairs and it seems to be a very good investment. Gets a good ROI.

@Jason Norton thank you for your input! The one building we just bought has similar layout, store front, storage in back and an efficiency in the middle. We wanted to convert the storage into multiple smaller storages facility, but the city doesn't allow it because it is closer to downtown area. Now we are thinking dividing it into several spaces and rent to our own tenants. So it's not an official storage facility. Otherwise, it will just be unused. 

[Jason Norton]

Excellent idea. You can turn one space into a more cashflow area sometimes. 

[Robin Evans]

Quote from @Account Closed:

I would do option #1. The value of two adjacent properties will be higher than the sum of the individual ones. In your case, the market value and cash flows from your mixed used property will likely be higher if you own the adjacent property. In addition, money you would invest in one of the properties will likely increase the value of the second one, as well. And vise versa. Faced improvements can be made to complement one another and would have a big impact.  

@Blase P thank you! The adjacent place looks actually better than our front store now, has more room too. 

[Robin Evans]

Quote from @Ronald Rohde:

I'd take the adjacent. Id wager your rents can go higher than your assumptions on #2.

@Ronald Rohde thank you! Actually #1 is currently rented to a nonprofit organization store at $450 per month and seller is going to ask for $80k for the property. Kind of hard to raise the rent substantially to get decent cash flow with the current tenant. 

[Robin Evans]

Quote from @Steven Foster Wilson:

Quote from @Robin Evans:

Hi dear BP friends we are new to commercial real estate investment and would like to ask for your input on these two potential investment properties. We have already bought a mixed use commercial property that has a store on the front and three residential units on the back in a small town. There is a parking lot on the back that can potentially fit 8 cars if tenants park as instructed. But we need more parking space because we are thinking renting out one big unit by room so will need more parking space. The rent of the whole property might be doubled if we rent out all 5 rooms. Currently it is being rehabed. There is also street parking option, but not that convenient.  

# 1 potential property is next to us (also a commercial lot currently rent as a retail store) and will be for sale soon. If we buy it, we can have more parking space for use for both properties, mainly at night time bc # 1 property uses the parking lot mainly in the daytime.  The rent is not that high (not even hitting 1%),  and is less likely to increase within a short time. It may not even cash flow if rent is not raised. 
# 2 potential property is a few blocks away, also mixed use, stores and residential units currently all rented out. Rent is much higher (can hit 1.4%) and will cash flow a lot more than # 1. 

We can only buy one with our current fund. Which one makes more sense? We appreciate any input and creative ideas! Thank you!

 How long is the lease on #1? Could you potentially raise the rents like stated or get someone else in there that could rent for more? If there is more potential for that then I would go with #1 but if not then #2. At the end of the day it is a business and you have to go off of the numbers. 

@Steve Wilson thank you! Not sure on the lease term yet. Might be month to month. It will be a tough position for us to raise the rent or get rid of the charity store due to the purpose of the store, don't feel ethical to do that.  Meanwhile, running business needs to make money at the end of the day. #2 does have more potentials. One tenant is being evicted so might need a rehab after the eviction. Not sure on that yet. 

[Robin Evans]

Quote from @Evan Polaski:

@Robin Evans, you are looking at this all as 3 separate things, but it isn't.  You have have a bottleneck in your current property due to parking.  Potential #1 releases that bottleneck.  So even though, as a stand alone property it may not be better, what are the overall numbers combined by owning both.

Potential 2, is better standalone property, but you remain bottlenecked in current property, so, again what's your overall return.

Then, what is the path of development?  Are you positioning yourself in that path?  If so, having adjoining properties is always beneficial, since bigger is almost always more economical to develop.  

Lastly, back to risks of potential #1, what is the use?  How long have they been there?  What are their sales?  Are they the current owner?  Retail is a very susceptible business, especially if we are going into another recession.  Necessity based uses will always be insulated, but discretionary spending has been dropping already.  I would assess that risk as well, given you are concerned that the property may not be terribly viable as it sits, let alone vacant for 3-4 years, or at lower rents then current.

@Evan Polaski thank you! #1 is not there super long (a couple of years) and all the associates are volunteers. So they are not that profit driven.  If we rent our current vacant unit to a single family, our current parking lot would be sufficient. The cash flow would be less though but we would not be having the parking issue. 
The small town is currently expanding. More new homes are being built just outside town and the government is trying to boost the downtown business. We are seeing a positive uptake in the area. All three properties are downtown.
Then my question is if we buy #2 and the two stores can not be leased out due to recession or other reasons, is it allowed to use it as a residential unit? 

[Robin Evans]

Quote from @Jason Norton:

Excellent idea. You can turn one space into a more cashflow area sometimes. 

Thank you! Got the storage idea after attending BP rookie bootcamp in Dever last month! 

[Ronald Rohde]

Quote from @Robin Evans:

Quote from @Ronald Rohde:

I'd take the adjacent. Id wager your rents can go higher than your assumptions on #2.

@Ronald Rohde thank you! Actually #1 is currently rented to a nonprofit organization store at $450 per month and seller is going to ask for $80k for the property. Kind of hard to raise the rent substantially to get decent cash flow with the current tenant. 

 How long is the lease?

[Robin Evans]

Quote from @Ronald Rohde:

Quote from @Robin Evans:

Quote from @Ronald Rohde:

I'd take the adjacent. Id wager your rents can go higher than your assumptions on #2.

@Ronald Rohde thank you! Actually #1 is currently rented to a nonprofit organization store at $450 per month and seller is going to ask for $80k for the property. Kind of hard to raise the rent substantially to get decent cash flow with the current tenant. 

 How long is the lease?

It is currently month to month. 

[Ronald Rohde]

Quote from @Robin Evans:

Quote from @Ronald Rohde:

Quote from @Robin Evans:

Quote from @Ronald Rohde:

I'd take the adjacent. Id wager your rents can go higher than your assumptions on #2.

@Ronald Rohde thank you! Actually #1 is currently rented to a nonprofit organization store at $450 per month and seller is going to ask for $80k for the property. Kind of hard to raise the rent substantially to get decent cash flow with the current tenant. 

 How long is the lease?

It is currently month to month. 

 Why would that be hard to raise? Start the conversation when you're under contract, if they balk at market rates, shop for a new tenant all before your EM goes hard. There's no risk to you other than your time.

[Robin Evans]

Quote from @Ronald Rohde:

Quote from @Robin Evans:

Quote from @Ronald Rohde:

Quote from @Robin Evans:

Quote from @Ronald Rohde:

I'd take the adjacent. Id wager your rents can go higher than your assumptions on #2.

@Ronald Rohde thank you! Actually #1 is currently rented to a nonprofit organization store at $450 per month and seller is going to ask for $80k for the property. Kind of hard to raise the rent substantially to get decent cash flow with the current tenant. 

 How long is the lease?

It is currently month to month. 

 Why would that be hard to raise? Start the conversation when you're under contract, if they balk at market rates, shop for a new tenant all before your EM goes hard. There's no risk to you other than your time.

Appericate your input and follow up a lot! We could try to raise the rent. But it is a small town not attracting tons of people. There are already some vacant store fronts. So not sure if we will get new tenants in if we raise the rent. All in all, the numbers are just not that great. We have a duplex in another town that generates $ 1700 a month and the purchase price is almost the same as this one. If it is a residental property, we have better chance to raise rent and rent it out. Just talked to a guy on the street who lives there for many years and also has a store front but it is not rented. The town doesn't allow property owners to convert commercial units to residential units. If you can't rent it out, it just has to sit there. Is that common practice elsewhere too?