Major decision on commercial property

Major decision on commercial property

Investor · Member since 2020 · 34 posts · 6 votes

I have an urgent decision that I could use help on... My wife and I bought an 11,000 ft² Warehouse space and have white boxed it. It appraises for $800,000 and as of today we have about $550,000 into it with renovations and purchase cost. Unfortunately, we just found out that we're going to need a brand new roof for $105,000 plus an additional cost of $65,000 in other construction costs for a grand total of $175,000 more than our original budget.

Our current loan is almost maxed out and we don't have enough money to complete the project using just cash we have saved personally. We need an additional $175,000 to bring it to market ready ASAP. This brings me to the decision...

We own a rental house that is worth $300,000 and that is completely paid off. That house brings in $2,100 a month cash flow today. In order to complete the warehouse, the bank is suggesting that I take out a loan at 5.95% against the house in order to get the cash we need. That works out to about a 1400-1700 loan payment each month on the house.

My question is should I go ahead and take out the full 80% that I can possibly take out of the house equity? This would leave me approximately $65,000 cash to invest in another property after the warehouses leased. Alternatively, I could just take out the $175,000 that I need. If I only take out the 175k I'm left with the lower mortgage amount and more cash flow out of the house each month, but I can't buy another property.

I am thinking it doesn't make sense to leave the cash in the house and not deploy it especially since I'm going to incur closing and title cost either way. With the additional 175,000 on the warehouse we will be at a total of about $725,000 debt and it is worth at least $800,000 and it will be 100% updated and ready to lease. I'm looking to hold because it's in a developing area and the long-term equity play is significant.

So again, do I take out the $175,000 or do I max out the equity withdrawal at $240,000? Is there a better way to get the cash that I need? This is certainly the fastest and cheapest way I can think of vs trying to get another commercial appraisal on the warehouse. If I paid for another commercial appraisal on the warehouse the appraised value will likely have gone up but probably not enough to borrow another $175 against it anyway.

I really appreciate your thoughts! I need to make a decision Monday.

Justin

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Flipper/Rehabber · Bryan, TX · Member since 2014 · 258 posts · 170 votes
4y

if it were me, I would want to prelease the warehouse before I took the money out of the rental. If it takes 6-12 months to lease can you cover the debt payments? 


I would max out what you take out if you can put it to work for you. You can always give it right back by paying down the principal if you don’t use it. 

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  • Investor · Fairfax, VA · Member since 2015 · 1k+ posts · 801 votes
    4y

    Instead of getting a traditional loan can you get an equity line of credit on the rental?  Either way it's all about the numbers.  How much is the property valued once fully leased? 

  • Investor · Member since 2020 · 34 posts · 6 votes
    4y

    @John Mckee it should lease for around $8 /sq ft NNN so noi of $88000 annually. Not sure how to value it with that in mind.

  • Investor · Member since 2020 · 34 posts · 6 votes
    4y

    @John Mckee I could also get a non owner occupied HELOC. I guess this would be better because I wouldn't be paying interest on the amount that I have not withdrawn yet? Are there other advantages? My thought is that the rate won't be locked in for 5 years so it could be more dangerous.

  • Investor · Greenville, SC · Member since 2012 · 269 posts · 187 votes
    4y

    88k NOI would give you a value in the low millions (at least) I assume.

    Why not start marketing it now to find a tenant? Everything gets easier once you've got a lease in place. Unless the roof is going to get in the way of showing, you're probably best off if you get to finding a tenant ASAP. Get a local broker who can give you a realistic market rent and timing for tenant placement.

    Seems like you've got to come up with the money somehow, though. Commercial is a tough world. One issue can cost six figures, as you're seeing.

    Also, I'd highly recommend getting multiple quotes. You never know how much money you might save.

  • Investor · Greenville, SC · Member since 2012 · 269 posts · 187 votes
    4y

    I clearly didn't read the full question. I like the line of credit option, but assuming it's a standard refi, hard to say the right amount to borrow. I think that's your decision based on your own financial picture and goals.

  • Investor · Member since 2020 · 34 posts · 6 votes
    4y

    @Paul Smythe Thank you so much for the good response. I have three quotes and have chosen the most advantageous and a roofing company that I have experience with. It is listed with a commercial broker and there is interest, although there is more interest in buying it than there is in leasing it so far. It's an interesting size because it's too big for small warehousing but too small for big warehousing needs. However, in Kansas City where I'm located, there is almost no inventory in my category. I think that's why we're getting interest. I totally agree with you that a tenant in place would make things so much easier! I feel like I have to do the roof because the potential liability of destroying someone else's property with a leak could be six figures also and entangle me in legal wrangling... I've just got to get it done I think.

  • Investor · Greenville, SC · Member since 2012 · 269 posts · 187 votes
    4y

    @Justin Mathews great, sounds like you're on top of it. As far as how much, doesn't hurt to pull out as much cash as you can. That said, the market is tougher so it's not always easy to deploy the cash. I guess it's a question of how confident you are in finding something new to put the money into.

  • Investor · Evans, GA · Member since 2015 · 190 posts · 103 votes
    4y

    @Justin Mathews Just curious...how old is the roof and what type of roof installation were you quoted? Also, is the roof significantly degraded to the point you have multiple leaks? No doubt the costs of new roofs on an industrial asset can be quite expensive. My LLC owns two flex industrial assets in 10,000 - 12,500 sq ft range, and I also need to plan for future roof replacement on one of those in the next 3-5 years. We've had to track down occasional leaks thus far to get areas resealed to prevent further issues, but the age of the roof is getting up there.

    Good luck finding a good regional or national credit tenant to go into the space on a NNN lease. Once things are set up, they can really hum along nicely!

  • Investor · Atlanta, GA · Member since 2017 · 174 posts · 104 votes
    4y

    @Justin Mathews, if the rent differential is not that big with a renovated/nicer space, make sure you only inject as little capital as possible. Don't make it too nice. Not sure what market this property is located at but small flex warehouses are in very high demand with historic low vacancy. Because of this supply and demand dynamics, no TI packages are being provided for new leases. So, your new tenants will spend their own $ to make it nicer; this also makes them sticky.

    Another way to fund your project is to sell ownership interest to other people who are interested in being part of the project. 

  • Flipper/Rehabber · Bryan, TX · Member since 2014 · 258 posts · 170 votes
    4y

    if it were me, I would want to prelease the warehouse before I took the money out of the rental. If it takes 6-12 months to lease can you cover the debt payments? 


    I would max out what you take out if you can put it to work for you. You can always give it right back by paying down the principal if you don’t use it. 

  • Investor · Member since 2020 · 34 posts · 6 votes
    4y

    @Jade S. Thank you for your reply. I can't say how old the roof is because the building is probably 60 to 70 years old and it's been patched and layered so many times I can't tell. I spent a good amount of time and money patching everything that is there and while it is much better I'm concerned about chasing leaks and the liability it could cause if a tenants goods were damaged. Also, the under decking looks horrendous and I plan on replacing much of the metal under deck. I don't think it's excessive if you saw it. It's a bad eyesore and attracts from potential rent. The new roof itself is going to be $105,000 which isn't that bad capitalized over the life of the asset.

  • Investor · Member since 2020 · 34 posts · 6 votes
    4y

    @Abhishesh Acharya I really appreciate the suggestion. I think if I didn't have the asset to draw on to get it done and retain the equity I would look for a partner to help finish it out. This is a possibility but one that I'd like to avoid. I totally agree with you about the TI packages. It's a pretty unique property in Kansas City.

  • Investor · Member since 2020 · 34 posts · 6 votes
    4y

    @Katie Neason unfortunately some of the contractors need to get paid so I need to take the equity out now to cover the over budget invoices. The roof might as well be done at the same time. I think I am going to max out the loan and I appreciate the suggestion about paying it off. If I decide not to deploy the capital for some reason. I'm definitely going to wait until the warehouses leased to deploy any excess capital just to be conservative.

  • Ronald RohdePro Member
    Attorney · Dallas, TX · Member since 2016 · 5k+ posts · 2k+ votes
    4y

    I think you're in over your head.

    Why don't you have a tenant? Buying vacant buildings without cash flow is a huge risk. 

    I'd get at least an LOI from a tenant before fixing the roof. KC isn't getting crazy cap rates, especially on a building that small, so I'm struggling to see the upside. 88k at a 7 cap is only a $1.25m value, minus closing costs, etc. you're not making a ton of money, especially for ROE.

    Leverage your rental, but consider letting the tenant repair the roof as TI. I wouldn't put another penny in...

    I own 100k sq ft in DFW, btw. Vacant lease up is my biggest fear. The only new capex we do is either covered cash flow from existing tenants or signed LOI and credit tenant in tow.

  • Investor · Member since 2020 · 34 posts · 6 votes
    4y

    @Ronald Rohde Thank you for your response and the pushback. I definitely don't want to be in over my head. It has not leased yet because it has been under construction and until recently had leaks. I think I have chased down all the leaks but I'm still concerned about the old roof leaking once somebody is in there. Also, the under decking in some sections is very ugly and could detract from leasing. I like the idea of the roof as a tenant improvement but not sure how I could sell that. How have you done that? I always assumed structural issues like roofs are owner issues not tenant issues. One thing I could take away from your post though is to wait to do the roof until I have someone under contract. I could take out a HELOC on the rental instead of a loan so that I'm ready to go when the time comes if I don't get the tenant improvements approach to work.

  • Investor · Fairfax, VA · Member since 2015 · 1k+ posts · 801 votes
    4y

    88,000 annually/6% cap= $1,466,666.67 valuation once leased up.  That's some nice coin.  Get the heloc and pay it down with that sweet cash flow!

  • Investor · Member since 2020 · 34 posts · 6 votes
    4y

    @John Mckee thanks!

  • Rental Property Investor · Nyc, NY · Member since 2016 · 62 posts · 26 votes
    4y

    @Justin Mathews. I’m concerned about you having enough capital to comfortably see this through if the lease up takes longer than anticipated. So I’d suggest you hold off on the roof until you have a lease signed. I’ve nursed along warehouse roofs with regular patching and while roofers prefer to do the big job they’ll work with you if you explain your plans.

  • Investor · Member since 2020 · 34 posts · 6 votes
    4y
    Quote from @Richard B.:

    @Justin Mathews. I’m concerned about you having enough capital to comfortably see this through if the lease up takes longer than anticipated. So I’d suggest you hold off on the roof until you have a lease signed. I’ve nursed along warehouse roofs with regular patching and while roofers prefer to do the big job they’ll work with you if you explain your plans.


     I appreciate the response. I of course don't want to be in over my head but I've got a lot of lease interest. It is currently dry in its patched state and is showing well. But the metal decking that you can see from the inside is pretty rusted and torn up, so I think it detracts. It will depend on the kind of lease that we get. If it's industrial, logistics, packaging, etc, I don't know that they will care about the way the roof looks underneath. However, if we get something else like open office with an industrial look, they probably would care. Trouble would come for me if I don't have it leased by October 2022 and I have to start making PI payments without cash flow to support it. Having a lease in place is the safest bet but the roof is going to take a while to get done because of materials back order. I feel like I'm in a dilemma where I could get a tenant that wants to move in right away but they wouldn't be able to for 30 to 60 days because of waiting for the roof. Any suggestions?

  • Ronald RohdePro Member
    Attorney · Dallas, TX · Member since 2016 · 5k+ posts · 2k+ votes
    4y
    Quote from @John M.:

    88,000 annually/6% cap= $1,466,666.67 valuation once leased up.  That's some nice coin.  Get the heloc and pay it down with that sweet cash flow!


     That's wildly optimistic. No one will buy this building at a 6 cap (with his tenants), with debt approaching 6%... it would trade at an 8% at best...

  • Ronald RohdePro Member
    Attorney · Dallas, TX · Member since 2016 · 5k+ posts · 2k+ votes
    4y
    Quote from @Justin Mathews:

    @Ronald Rohde Thank you for your response and the pushback. I definitely don't want to be in over my head. It has not leased yet because it has been under construction and until recently had leaks. I think I have chased down all the leaks but I'm still concerned about the old roof leaking once somebody is in there. Also, the under decking in some sections is very ugly and could detract from leasing. I like the idea of the roof as a tenant improvement but not sure how I could sell that. How have you done that? I always assumed structural issues like roofs are owner issues not tenant issues. One thing I could take away from your post though is to wait to do the roof until I have someone under contract. I could take out a HELOC on the rental instead of a loan so that I'm ready to go when the time comes if I don't get the tenant improvements approach to work.


     I really need to understand the physical construction better. Is it wood? Why isn't it metal? Insulation?

    You tell interested tenants based on their feedback. Its not a tenant improvement that they pay for, I just mean you ready the funds when you have a ready tenant. Its definitely capex, not a tenant need 

  • Member since 2022 · 8 posts · 1 vote
    4y

    @Justin Mathews

    I would say the decision and options come down to what the terms are for the warehouse note. What’s the bal, fixed portion, rate. You mentioned payments coming Oct 22 and you’re $550m into the deal. Was this a bridge loan, do you have perm financing etc?

    Personally below is the way I would structure / for long term purpose, few adjustments could be made, but just some food for thought.

    Long and short - I would leverage the warehouse as much as I can, use the rental as a means to an end for the short term.

    - get HELOC on rental you mentioned $240m, that's at 80% for an investment SFR. I believe finding an agency lender to go 80% LTV for a HELOc may prove to be difficult, more power to ya if you got that company 👍 HOWEVER… feds have rate increases coming and HELOCS are adjustable, check in fixed rate options

    -work on getting tenant in warehouse asap, most lenders are cash flow based lenders and will want the lease. You can consider an asset based lender, will pay a premium on the rate. Again, depends on your current loan/options, don’t know the details.

    -once lease is in place, go 80% LTV on a fixed commercial note, you mentioned $800m appraised value, com loan at $640m, your NOI would support the request at most traditional figures. This would allow for $85m to be on the HELOC which as mentioned more than likely variable…

    would love to discuss solutions 👍


    matthew AT comconvos .com

  • Investor · Member since 2020 · 34 posts · 6 votes
    4y

    @Matthew Jones

    I really appreciate your comments. Here are the details. I acquired a warehouse for $200,000 that appraised the day I bought it for $450, 000. It was a really cool deal that took a year to put together but I got it done.

    Now I have a $558,000 bridge loan at 3.5% for 5-years with IO For 18 months that started October 2021 and because I put one of my properties up as collateral, I brought nothing to the table. That loan includes the purchase, fees and construction costs. The bank is in the process of releasing that second property as collateral as we speak because the ARV value is high enough on the warehouse to no longer need it. This was our arrangement in advance. The warehouse now appraises for $800,000. I'm told that with a new roof on it, it would sell for between $900,000 to $1.1 million based on the desirability of the location. My desire is to hold it long-term and refinance it with a long-term fixed solution once I get a tenant in place.

    Because of unexpected window supply issues and the roof needing to be replaced on the warehouse (I couldn't tell that it was as bad as it is until I got into construction and could see the decking from below) I need to borrow an additional $175,000 to pay off the last of the contractors and have enough money to make the first year of payments and insurance (70k) in case it doesn't get leased soon, and to put the new roof on the building (105k). I have gotten three bids on the roof and had an experienced GC inspected as well.

    To get the cash I need to finish the project I have found a bank who will do a 20-year fixed on one of my rental houses at 6.25% which is sounding much better to me than a HELOC or another 5-year arm commercial product given rates. The house currently cash flows $2100 /month and is paid off so I should have more than enough to cover the payments on the cash out refi on the house and still have some cash flow left for operating cost on that unit.

    Since I posted this originally it has rained hard four times and the roof on the warehouse has not leaked! I can probably do without a new roof for a few years, but I'm taking a risk of always chasing leaks or damaging a tenants property. This is my new dilemma... Do I do the roof now with the cash from the refi or do I wait. My gut says I need to do the roof now so that the building is in completely white boxed condition ready to go.

    However, I think one of the things that I've learned from this thread is that the best case scenario would be for me to be ready to do the roof with cash in hand, but wait to do the roof until I have a tenant loi or lease. That gives me maximum safety financially and the ability to move quickly. I know that it means the money will be sitting in the bank and not working for a short period of time, but it's worth it to me to have the financial security and options.

    If I don't need to do the roof because the patches hold or if I don't need cash to do the roof because I have enough cash flow on the warehouse to cover it, then I could redeploy the money that I pulled out of the rental house to other priorities or another property. Either way, I need about $70,000 of the $175000 now in order to pay off the contractors who are finishing their work.

    I think that's the full scenario...

  • Member since 2022 · 8 posts · 1 vote
    4y
    Quote from @Justin Mathews:

    @Matthew Jones

    I really appreciate your comments. Here are the details. I acquired a warehouse for $200,000 that appraised the day I bought it for $450, 000. It was a really cool deal that took a year to put together but I got it done.

    Now I have a $558,000 bridge loan at 3.5% for 5-years with IO For 18 months that started October 2021 and because I put one of my properties up as collateral, I brought nothing to the table. That loan includes the purchase, fees and construction costs. The bank is in the process of releasing that second property as collateral as we speak because the ARV value is high enough on the warehouse to no longer need it. This was our arrangement in advance. The warehouse now appraises for $800,000. I'm told that with a new roof on it, it would sell for between $900,000 to $1.1 million based on the desirability of the location. My desire is to hold it long-term and refinance it with a long-term fixed solution once I get a tenant in place.

    Because of unexpected window supply issues and the roof needing to be replaced on the warehouse (I couldn't tell that it was as bad as it is until I got into construction and could see the decking from below) I need to borrow an additional $175,000 to pay off the last of the contractors and have enough money to make the first year of payments and insurance (70k) in case it doesn't get leased soon, and to put the new roof on the building (105k). I have gotten three bids on the roof and had an experienced GC inspected as well.

    To get the cash I need to finish the project I have found a bank who will do a 20-year fixed on one of my rental houses at 6.25% which is sounding much better to me than a HELOC or another 5-year arm commercial product given rates. The house currently cash flows $2100 /month and is paid off so I should have more than enough to cover the payments on the cash out refi on the house and still have some cash flow left for operating cost on that unit.

    Since I posted this originally it has rained hard four times and the roof on the warehouse has not leaked! I can probably do without a new roof for a few years, but I'm taking a risk of always chasing leaks or damaging a tenants property. This is my new dilemma... Do I do the roof now with the cash from the refi or do I wait. My gut says I need to do the roof now so that the building is in completely white boxed condition ready to go.

    However, I think one of the things that I've learned from this thread is that the best case scenario would be for me to be ready to do the roof with cash in hand, but wait to do the roof until I have a tenant loi or lease. That gives me maximum safety financially and the ability to move quickly. I know that it means the money will be sitting in the bank and not working for a short period of time, but it's worth it to me to have the financial security and options.

    If I don't need to do the roof because the patches hold or if I don't need cash to do the roof because I have enough cash flow on the warehouse to cover it, then I could redeploy the money that I pulled out of the rental house to other priorities or another property. Either way, I need about $70,000 of the $175000 now in order to pay off the contractors who are finishing their work.

    I think that's the full scenario...


  • Investor · Fairfax, VA · Member since 2015 · 1k+ posts · 801 votes
    4y

    If you can wait to do the roof then wait!  The most important thing is to get it leased up and get the tenants comfortable paying rent and using their space before they change their minds.  

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