Would Love Feedback Analyzing a Mixed use Commercia Deal

Commercial Real Estate Investing
3yFollow

Would Love Feedback Analyzing a Mixed use Commercia Deal

Jennifer Baldassari
Member since 2019 · 25 posts · 8 votes

Hello Bigger Pockets,

Would you please provide feedback analyzing our first "big" deal? We have 1 duplex and 3 SFH's however this is our first commercial and it's mixed use.

This is a downtown "main st"-type property in a vibrant small midwestern town consisting of two 2-story buildings built in the late 1800's.  

On the street level are 3 commercial tenants (restaurant, attorney, and pharmacy) - nice, newer, redone.  On the second level(s) are 10 apartments -  all constructed in 2007.  Essentially, all tenant locations are updated and newer, it is the buildings themselves that are old but have been maintained.  Due to the age of the building and the mixed tenancy; insurance came in at $10,307.00.  The primary risk we heard from several brokers is the restaurant under living quarters.  According to the broker, when or if the space no longer has a restaurant below apartments (which would be in our control), the risk lessens a bit and premiums could very well come down.  All tenant rents are below market by at least a couple hundred each.  So, there are concerns however also obvious upsides.  We are kind of stuck knowing which way to go.  Probably our main concern are the old buildings and cost of insurance plus any issues with an increase over time of insurance and property tax.  On the flip, having 13 tenants (and a variety of them) and occupancy rate at 80% with below market rent is a good place to be to lessen risk.

Here are our BP calculator results:

Purchase Price:  $360,000.00

Down Payment:  $45,000.00 (actually secured by another investment of ours)

Mortgage:  $2,590 at 6% over 20 years

Rents: $7525

5 year annualized return:  38.79%

CoC: 47%

NOI: $52,197.00

Pro Forma Cap:  14.50%

7% reserves for CapEx, 7% reserves for maintenance/repairs, 3% vacancy

Cash flow:  $2,157.00/mo

Cash flow at the 50% rule:  $1,570.00


I'm very excited to post this deal to the forums because I've read such awesome feedback on other posts.  We just received our insurance quote about an hour ago so I wanted to get on here and get some feedback from my people!  :)  Let me know if there is data missing to help come to a good assessment.  

Thank you!!!

Jennifer



2Reply
60 views

Most Popular Reply

Henry ClarkPro Member
Developer · Member since 2020 · 4k+ posts · 4k+ votes
3y

Just some checkpoints.

1.  Asbestos

2.  Roof 

3.  Level floor

4.  Brick tuck point

5.  National registry

6.  Foundation

4Reply
See this reply in the discussion

27 Replies

Jump to latestLatest
  • Jennifer Baldassari
    OP
    Member since 2019 · 25 posts · 8 votes
    3y

    I guess one of my big questions is... how much cash flow makes sense for 10+ tenants? That's a much easier question to answer (for me, at least) on smaller units or SFH but this feels like a big project to take on for $2K in my pocket... or perhaps this is right on the money and a great opportunity!

    What do you guys look for in cash flow on bigger places?  TKS!

    0Reply
  • Henry ClarkPro Member
    Developer · Member since 2020 · 4k+ posts · 4k+ votes
    3y

    Just some checkpoints.

    1.  Asbestos

    2.  Roof 

    3.  Level floor

    4.  Brick tuck point

    5.  National registry

    6.  Foundation

    4Reply
  • Bjorn AhlbladPro Member
    Investor · Shelton, WA · Member since 2017 · 6k+ posts · 6k+ votes
    3y

    @Jennifer Baldassari the main reason a LL sells a property is because it is performing moderately or even poorly. So you buy it at one caprate or level of performance and then you get to work and put your stamp on it during the first year or two and get it performing at an entirely new level. 

    You have to honor existing leases, but as they expire you can raise rents, renovate units as they turn over and bring them up to market rent. In the meantime spruce up the common areas, landscaping, paint etc to raise the standard to your level.

    We bought a 12 unit in 2017. The financials were good when we bought it but nowhere near to where we are today. Gross rents have grown from 72k per year to 130k/year. Yes, expenses have gone up too, but the building is a better performer by a long shot, and there is still room for growth.

    The long and the short of it is that generally you don't get to buy good deals you have to make them. Your property looks like a good deal in the making. All the best!

    3Reply
  • Jennifer Baldassari
    OP
    Member since 2019 · 25 posts · 8 votes
    3y

    @Henry Clark thank you for the list!  We have covered some of it (mostly through our inspector) however I didn't think of the National Registry.  Is the concern there that modification to the building or restrictions or ordinances might be in place if it is registered?

    @Bjorn Ahlblad great advice and you are correct.  The building is in 'good' shape for what it is but definitely has lots of room to improve.  

    0Reply
  • Henry ClarkPro Member
    Developer · Member since 2020 · 4k+ posts · 4k+ votes
    3y

    National registry question.  Just cost of fixing, restrictions and approval concerns. 
    In our small Midwest town those are the things I would look at on older buildings.  For example if you see 6 x 5 inch square tiles those are asbestos.  Ok as long as you’re not removing them. Big removing them need asbestos mitigation. Same for hot water or old heating system insulation. 

    1Reply
  • Henry ClarkPro Member
    Developer · Member since 2020 · 4k+ posts · 4k+ votes
    3y

    6x6. 

    0Reply
  • Jennifer Baldassari
    OP
    Member since 2019 · 25 posts · 8 votes
    3y

    Thank you @Henry Clark!!  Good information.  I appreciate it.  Have you owned older buildings? If so, would you again?

    0Reply
  • Henry ClarkPro Member
    Developer · Member since 2020 · 4k+ posts · 4k+ votes
    3y

    Nope and no.   Like their looks just where we are at the bricks have lost their glaze, need tuck pointing, are soft from exposure.  

    Really just about the checkpoints I noted above  


    Your financials look good.  Plus each bank payment your building equity which wasn’t reflected in your numbers.   I like paying the bank   More equity  

    But there is an old fire station I would buy in a heartbeat. 

    2Reply
  • Jennifer Baldassari
    OP
    Member since 2019 · 25 posts · 8 votes
    3y

    What's your idea for an old fire station?  :)

    0Reply
  • John M.
    Investor · Fairfax, VA · Member since 2015 · 1k+ posts · 801 votes
    3y

    I have an old building so I can relate and maintenance is an issue.  If I'm following your numbers correctly, you're making $2,157 per or $25,884 a year which is very good on a $45,000 investment.  Sign me up!!

    Because the cost is only $360,000 I would take a flyer on this one all day long.  Just make sure the area has potential for growth, has employment, and as you mentioned has a vibe. 

    When the timing is right increase the residential rents. In addition make sure that the commercial tenants are paying the taxes, insurance, and maintenance on their prorated share of the building (NNN). Maintenance can be an association/property management fee that you charge that will help pay for common area expenses like a roof, sidewalk, facade, parking lot, etc.

    Mixed use is the future of all downtowns and the big cities are scrambling to figure this out.  It's funny how things have come full circle since the 1800's.  This looks like a great opportunity just mind your cap ex, and check for any historical restrictions as well.

    1Reply
  • Jennifer Baldassari
    OP
    Member since 2019 · 25 posts · 8 votes
    3y

    @John M. -  thank you so much for the feedback and words of encouragment!

    $2,157/mo or $25,884/annual is our cash flow after all expenses, 7% back for CapEx, 7% for maintenance, and 3% for vacancy.

    It's a great area for growth -  the town is on a highway between two larger more expensive cities.  We aren't talking NYC... these are smaller midwestern university "cities" ..haha... population 100K-300K on either side of this small town.

    I'm so glad you brought up the triple net leases.  For one, I have no idea how to go about utilizing them but I will learn.  Familiar, just haven't executed.  And, they are not currently in place --- so that very well may make the deal more lucrative with tenants sharing costs.  Is that how it works?

    I didn't realize big cities are trying to get back to mixed use!  That's good to know.  The current owner rarely has residential vacancy (and there are 10 apartments out of 13 doors).  This downtown could easily convert back to horse, wagon and gunslingers in a heartbeat....and speaking of reverting back to the 1800's ... my husband and I are full-time taking action on pivoting to 100% self-sufficiency (large gardens, animals, harvesting rainwater, etc..) to take care of ourselves, family, and neighbors.  Well, one of the commercial spaces is vacant behind the restaurant so we were thinking of turning it into a farmers market (right on "main st") during the summer and selling our garden leftovers! :)  

    0Reply
  • John M.
    Investor · Fairfax, VA · Member since 2015 · 1k+ posts · 801 votes
    3y

    only the commercial tenants typically share NNN expenses. They should also share In the HVAC and hot water heater replacements as well. As these leases turn over it's something to think about to keep future Capex at bay.

    I love the farmers market idea!  

    1Reply
  • Dan H.Pro Member
    Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
    3y

    I have significantly more concerns than the other posts.

    What is current NOI? What is cap rate in the market for apartments? What is the cap rate for commercial business RE? What is market vacancy rate? Price should be based on current NOI and cap rate.

    Your cap ex/maintenance is $1053 for 13 units (10 residential, 3 commercial) or $81/unit.  This would be too low if the building was brand new.  On an old budding this is way too low.  My pro forma typically reflect 3x this on my smaller units.  I see no PM allocation.  Even if you are self managing, include PM fees.  PM is work and not passive.  if self managing, you deserve to be compensated for managing 13 units.  I have concern about the vacancy.  My experience with small unit count landlords (LL) (I count myself in this category), the tenant turnover is often not super quick.  Small tenant LL do not have a team that serves only their needs to do unit flips.  The tenant typically needs to give notice before being able to move in. 3% vacancy seems real aggressive.  

    Building is old which I already discussed in maintenance/cap ex but it also can mean asbestos, lead paint, lead solder, possibly knob and tube electrical, possibly fuses instead of circuit breakers, likely old cast iron sewer pipes.  Any/all of these could present problems and be very costly. 

    The insurance at that rent point is crazy   Many years ago we paid $6k/year for insuring a duplex on the beach.  It seemed crazy high except we collected in back to back years due to hurricane damage. Our rent point was significantly higher than your rent.

    $2157/month cash flow seems too optimistic by far. I suspect my pro forma would show this as negative cash flow. 

    It is my view that the rent point is too low for 13 units in an old building and the maintenance/cap ex and insurance will make this investment difficult.  

    Good luck

    1Reply
  • Henry ClarkPro Member
    Developer · Member since 2020 · 4k+ posts · 4k+ votes
    3y

    The old firehouse is all brick.  Just a great architectural building. For our town would be a great Airbnb, although we don’t do housing rental, just commercial non MFH.  

    1Reply
  • Josh Shaughnessy
    Member since 2021 · 82 posts · 86 votes
    3y
    Quote from @Jennifer Baldassari:

    I guess one of my big questions is... how much cash flow makes sense for 10+ tenants? That's a much easier question to answer (for me, at least) on smaller units or SFH but this feels like a big project to take on for $2K in my pocket... or perhaps this is right on the money and a great opportunity!

    What do you guys look for in cash flow on bigger places?  TKS!


    We have very different ideas of what makes sense haha. I know people that would kill for $1600/mo cash flow on a $360k investment, let alone your cash-on-cash return. In my market, it's rare to even see a 10 cap, let alone 14. 


    Obviously do your due diligence, but assuming your operating/maintenance cost estimates are accurate, the returns look fine to me

    1Reply
  • Josh Shaughnessy
    Member since 2021 · 82 posts · 86 votes
    3y
    Quote from @Henry Clark:

    The old firehouse is all brick.  Just a great architectural building. For our town would be a great Airbnb, although we don’t do housing rental, just commercial non MFH.  


     I've seen a lot of older architectural buildings being converted into event venues lately. Might be another path to consider...

    1Reply
  • Jennifer Baldassari
    OP
    Member since 2019 · 25 posts · 8 votes
    3y

    @Dan H. thank you for the feedback!

    Using the BP calculator we budgeted 7% for both capex and 7% maintenance.  Your budget for cap ex/maintenance expense is 3x that?

    0Reply
  • Jennifer Baldassari
    OP
    Member since 2019 · 25 posts · 8 votes
    3y

    Thank you, @Josh Shaughnessy.  

    A venue is a great idea!  

    0Reply
  • Dan H.Pro Member
    Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
    3y
    Quote from @Jennifer Baldassari:

    @Dan H. thank you for the feedback!

    Using the BP calculator we budgeted 7% for both capex and 7% maintenance.  Your budget for cap ex/maintenance expense is 3x that?


    I never have understood maintenance/cap ex as a function of rent. A 3/2 class b SFH that rents for $1k will have similar cap ex/maintenance as a 3/2 class b SFH that rents for $4k (not including age, deferred maintenance, etc that could differentiate the two). In fact if both these SFR are in same city, I would expect the lower rent unit to likely have higher maintenance/cap ex because it is likely in a lower class area and tenants in these areas are typically rougher on the units. Why should maintenance/cap ex be a function of the rent?

    My cap ex/maintenance allocation varies from $200/month for an attached studio in a quad to $400/month for a 4/2 stand alone SFH that has fenced yard with significant hardscape.

    My cap ex/maintenance is 3x your estimate in terms of dollars (not percentage). 

    Good luck

    2Reply
  • Josh Shaughnessy
    Member since 2021 · 82 posts · 86 votes
    3y
    Quote from @Jennifer Baldassari:

    @Dan H. thank you for the feedback!

    Using the BP calculator we budgeted 7% for both capex and 7% maintenance.  Your budget for cap ex/maintenance expense is 3x that?


     Here's how I budget capex... 

    3Reply
  • Jennifer Baldassari
    OP
    Member since 2019 · 25 posts · 8 votes
    3y

    @Dan H. I see what you're saying.  That makes good sense.  Thank you for the education on this and I'll reconsider my numbers.

    0Reply
  • Jennifer Baldassari
    OP
    Member since 2019 · 25 posts · 8 votes
    3y

    Thank you, @Josh Shaughnessy!  As a visual learner, this is very helpful!!!  

    0Reply
  • Jonathan R McLaughlin
    Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes
    3y

    I would say the numbers seem in the ballpark for what you would want to see in this type of value add and yeah the masonry can bite you big time as @Henry Clark says, and state of the windows, especially as a lot of the older buildings are non-standard sizes and require more labor and more expense. 40K for repointing about 15K SF or so? Check the masonry around the sills super carefully. 

    I would also look carefully at the 2007 apartments. Lots of the older buildings still have knob and tube especially on the upstairs units from the roof and in the fixtures. You may want to insulate and that has to go.

    We had a big issue on the smoke certs on a similar  building with a bully of a fire inspector who interpreted the code as needing new hardwire smokes in all the bedrooms and that was expensive. No one, including other fire chiefs, thought he was right about the law but that didn't matter. So make sure of what you need to do when it changes hands.

    shop for the insurance. A viable restaurant is a great tenant and I wouldn't let the tail wag the dog on that one. Good luck!

    2Reply
  • Dan H.Pro Member
    Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
    3y
    Quote from @Josh Shaughnessy:
    Quote from @Jennifer Baldassari:

    @Dan H. thank you for the feedback!

    Using the BP calculator we budgeted 7% for both capex and 7% maintenance.  Your budget for cap ex/maintenance expense is 3x that?


     Here's how I budget capex... 


     For the first handful of investment properties I purchased I had a similar spreadsheet but instead of life span I had expected years to replacement. An asphalt shingle roof that was 10 years old showed 10 years life left.  It was a very good exercise for leaning cap ex/maintenance costs and mathematically showed that many investors are using too low numbers.  

    After I did a handful of these spreadsheets, I used the knowledge to extrapolate to other purchases and stopped doing them on each property (but I do question if I have properly fully counted for inflation for the ~5 years since I last did a spreadsheet). Attached units cheaper than detached, kitchens have highest cost, bathrooms have higher cost than other footage, yards have costs, etc. 4 units renting for $4k is going to have substantially higher cap ex/maintenance cost than SFR that rents for $4k.

    I love your spread sheet.  I hope along with my posts it demonstrates 1) percent of rent is only usable if the properties are similar and the percentage has already been calculated 2) the effect of unit count on the calculation. 

    3Reply
  • Josh Shaughnessy
    Member since 2021 · 82 posts · 86 votes
    3y

    @Dan H. You're correct my spreadsheet assumes everything is new. The most accurate way would be to run another version with the expected life remaining for an initial period and then move to full lifespans thereafter. 

    Your experience sounds like it matches mine in that many investors (myself included) tend to underestimate capex and maintenance costs when they're starting out. All part of learning, I guess

    3Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free