Rental Property Investor · MN · Member since 2015 · 76 posts · 27 votes
I am currently evaluating a deal but I only have experience in valuing and owning apartment buildings. Below are some more details and a few questions.
PROPERTY/LEASE -rural Minnesota town (around 5k people population) -built in 1974 -property is in good condition, right on the main street -10 units ranging in sqft -1 unit on a 3 year lease, 7 are on a month-to-month lease (not sure how long they've all been there), and 2 are vacant (yearly rent for these 2 open units combined would be around $22,000) -there is room for about a 5% increase in fair market rent for the units on a month-to-month lease -the expenses paid by the owner are taxes, insurance, utilities, snow removal, cleaning the common areas and minimal maintenance -yearly rent $133,560 -yearly NOI of $103,447 QUESTIONS -what are people seeing for office/retail CAP rates? -how much should the value be affected based on a majority of the leases being month-to-month? -what would YOU pay for this?
I know I just gave some high level details, but any help would be appreciated.
Real Estate Agent · Plano, TX · Member since 2015 · 734 posts · 511 votes
3y
@Taylor Witt the most critical thing I'd try to figure out is how long have these two spaces been vacant. A small rural town could mean it takes years to fill up a space and while 10% might sound great for the current numbers, lose 2 tenants and you're under water.
Make sure to stress-test your underwriting at lower vacancy to figure out where's your break-even point.
Full time investor · Cincinnati, OH · Member since 2013 · 405 posts · 312 votes
3y
Mom and pop office should trade around 9% cap in that area
A lot of mom and pop office space is 1 year or mtm. It is your job to get them on proper leases. This is a value add
I would personally only buy this at a 10 cap. Higher if there is significant capex involved. During DD, you can do tenant interviews and find out if tenants would like to sign leases.
I have a 10 unit office builidng raning from 400 sq ft to 3000 sq ft suites. Once stabilized, these are pretty easy to manage. Get one of your tenants to be your boots on the ground. I have a tenant that gets free rent and cleans the common areas, keeps up the landscaping etc. Good luck.
Rental Property Investor · MN · Member since 2015 · 76 posts · 27 votes
3y
It's good to hear from someone that has a very similar project. Good to know the information you provided matches what is typical for these mom and pop type places. I'll investigate a bit more regarding potential cap ex items.
Real Estate Agent · Plano, TX · Member since 2015 · 734 posts · 511 votes
3y
@Taylor Witt the most critical thing I'd try to figure out is how long have these two spaces been vacant. A small rural town could mean it takes years to fill up a space and while 10% might sound great for the current numbers, lose 2 tenants and you're under water.
Make sure to stress-test your underwriting at lower vacancy to figure out where's your break-even point.