To sell or not to sell.... Commercial small warehouse

Tampa, Florida
Commercial Real Estate Investing
3yFollow

To sell or not to sell.... Commercial small warehouse

Joe Young
New Port Richey, FL · Member since 2019 · 48 posts · 16 votes

I have done a about a dozen residential flips this last year, some I intended to hold but due to market (Tampa suburbs) prices rose fast and I had a chance to get out of some class C / D properties with some good profit.  I used my profits to buy my first commercial building and promised myself I wouldn't sell, as I want to build wealth and not just be flipper.  However, one of my potential tenants made an offer on the property to purchase!  Here are the details.

Purchased 6000 sqft warehouse / automotive shop for $515,000.  Invested $15,000 into paint, facade and some repairs. 

Purchased 120 days ago on a 20-year note, 25% down ($138,000) and no balloon 6.7% fixed interest.  My total monthly expense is $4250 per month. 

The potential tenant offered to buy for $800,000 with no brokers on either side and splitting closing costs.  It's an SBA loan so the 4-5 months it will take to close put it really close to being 1031 eligible although I don't mind just paying the tax now.

Another potential tenant is ready to sign a lease for $6500 a month gross NNN, so about $5500 rent and $1000 is for taxes and insurance. They asked for a 5 year lease with 5 year option so plan to stay.


My thoughts:  the building is in a decent little town (Port Richey).  A little older building in a lower income neighborhood but a decent spot.  Not necessarily in the path of progress as most of the immediate area has been built out already.  The building will need a roof in the next 10 years and insurance in high due to age. 

Leasing it offers a great cash on cash return of 20%, but when I calculate my return on equity and cash is only about 6.8%
Part of me wants to sell and invest into a newer multi-tenant building and the other part wants to take my home run deal and set it and forget it.  Any advice!??  Last option is at the 6 month mark refinance my down payment out and have no money in the deal.. The lender also offered to allow me to cross collateralize after 6 months so I can access the funds to use as a downpayment on the next one, just makes me nervous maxing out debt on a single tenant building. 

 

0Reply
41 views

Most Popular Reply

Harvey LevinPro Member
Property Manager · Indianapolis, IN · Member since 2012 · 205 posts · 157 votes
3y

I always look to be sure there is a better investment to purchase. I always recommend that Investors who no longer have w2 income make sure to hold income-producing assets that produce enough income to cover their personal "nut".  Peace of mind and not having to  make risky deals just to pay the bills are a big plus. 

2Reply
See this reply in the discussion

16 Replies

Jump to latestLatest
  • Brock Mogensen
    Real Estate Syndicator · Milwaukee, WI · Member since 2018 · 1k+ posts · 907 votes
    3y

    Good spot to be in, but always a hard decision to make.  As long as you feel you have "squeezed" most of the value out of it, I would sell.  Nothing wrong with taking a nice profit and moving it into the next one.  That being said, you need to feel confident on finding the next deal.  Good luck!

    1Reply
  • Lucia Rushton
    Realtor · Dallas - Fort Worth Metroplex, TX · Member since 2016 · 1k+ posts · 925 votes
    3y

    @Joe Young sounds like you have a great asset. If you kept it what would you do to grow your portfolio?

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

    Your return on equity isn't awful at 6.8%.  Over the course of time through pay down of principal and appreciation that number will shrink and then maybe at that point you could either pull cash out or 1031.  DO NOT pay the tax and cash out, although I will admit finding a replacement property can be difficult.  I would wait. 

    1Reply
  • Caleb Brown
    Real Estate Agent · Kansas City · Member since 2018 · 4k+ posts · 3k+ votes
    3y

    I don't think you can go wrong either way. I do think it'll continue to go up on price due to warehouses being popular with ecommerce and businesses needing them. If you do sell I would definitely wait till you can 1031, avoid that tax hit. Doing a refi wouldn't be a bad idea either to use your DP on something else

    0Reply
  • Anaim Murcia
    Specialist · Port Richey · Member since 2019 · 54 posts · 12 votes
    3y

    It looks like a great asset. But if you're looking to continually grow your returns. You are 100% on taking the path to looking for Multi-Family. 

    best of wishes 

    1Reply
  • Harvey LevinPro Member
    Property Manager · Indianapolis, IN · Member since 2012 · 205 posts · 157 votes
    3y

    I always look to be sure there is a better investment to purchase. I always recommend that Investors who no longer have w2 income make sure to hold income-producing assets that produce enough income to cover their personal "nut".  Peace of mind and not having to  make risky deals just to pay the bills are a big plus. 

    2Reply
  • Henry ClarkPro Member
    Developer · Member since 2020 · 4k+ posts · 4k+ votes
    3y

    Couple options

    1.  Do an SBA refi yourself down to 10%.   I like this because it is fixed. But you can only cross collateralize with another SBA deal. In your business model I wouldn’t.

    2.  In your shoes.  I would keep to start adding Passive income.  Flips can get old and also be hard to find.  Use this to level out your income stream.  That’s a good stable neighborhood

    3.  The $800k offer sounds great and is, but I don’t think it’s that great a deal if you went to find or build a similar location.  If you did that I would come back at them with $600k up front and $400k over 5 years.  I would make that offer anyway versus just saying no.  

    4.  Lease option, you didn’t ask but I will throw in.  Any changes they do stay.   Car lifts, hvac etc. you don’t want to have to plug holes if they leave.  Also put in a 6 month notice to move out of the lease at the end.  With predefined rate increases.

    5.  How much parking and land go with this?  If a lot, segregate and lease that out to this person or others.  See if there is cheap land or run down buildings and add to your property to value add. 

    Use this property to level out your income stream.  Also as a base for cross collateralization.   Great deal. 

    0Reply
  • Joe Young
    OP
    New Port Richey, FL · Member since 2019 · 48 posts · 16 votes
    3y
    Quote from @Henry Clark:

    Couple options

    1.  Do an SBA refi yourself down to 10%.   I like this because it is fixed. But you can only cross collateralize with another SBA deal. In your business model I wouldn’t.

    2.  In your shoes.  I would keep to start adding Passive income.  Flips can get old and also be hard to find.  Use this to level out your income stream.  That’s a good stable neighborhood

    3.  The $800k offer sounds great and is, but I don’t think it’s that great a deal if you went to find or build a similar location.  If you did that I would come back at them with $600k up front and $400k over 5 years.  I would make that offer anyway versus just saying no.  

    4.  Lease option, you didn’t ask but I will throw in.  Any changes they do stay.   Car lifts, hvac etc. you don’t want to have to plug holes if they leave.  Also put in a 6 month notice to move out of the lease at the end.  With predefined rate increases.

    5.  How much parking and land go with this?  If a lot, segregate and lease that out to this person or others.  See if there is cheap land or run down buildings and add to your property to value add. 

    Use this property to level out your income stream.  Also as a base for cross collateralization.   Great deal. 


     Replacement would be tough but I’d have 400 cash reinvest.  For an sba I thought I had to occupy?

    One plan was sell, use the 400 as 10% down on multi-tennant new construction.  My small business can use one unit and have 8-10 other small bay to rent out.

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

    Correct you must occupy 51%.

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

    Do you have a day job?  If totally flipping I would want a level income stream and save on income taxes

    0Reply
  • Ronald RohdePro Member
    Attorney · Dallas, TX · Member since 2016 · 5k+ posts · 2k+ votes
    3y

    I'd sell. plenty of deals out there that you can get 8% on.

    0Reply
  • Teri Feeney Styers
    Real Estate Agent · Grand Junction, CO · Member since 2015 · 1k+ posts · 736 votes
    3y

    Write two documents with the tenant who wants to purchase. The first is a lease with a monthly rent of $5500 or more (which is what the other people offered you). This lets them get into the building and start creating a financial track record. The second document is a purchase contract. Make the closing date work for both obtaining an SBA loan AND meeting 1031 guidelines. This will give you monthly income now, time to watch the local market and loosly identify a replacement property if that is your goal. Possible downsides? The tenant doesn't get their SBA loan and they just stay your tenant - you have a lease in place. The other possible downside is that the purchase transaction takes place and you are unable to find an appropriate replacement in time. In which case you pay the tax you were willing to pay today. 

    0Reply
  • Joe Young
    OP
    New Port Richey, FL · Member since 2019 · 48 posts · 16 votes
    3y
    Quote from @Teri Feeney Styers:

    Write two documents with the tenant who wants to purchase. The first is a lease with a monthly rent of $5500 or more (which is what the other people offered you). This lets them get into the building and start creating a financial track record. The second document is a purchase contract. Make the closing date work for both obtaining an SBA loan AND meeting 1031 guidelines. This will give you monthly income now, time to watch the local market and loosly identify a replacement property if that is your goal. Possible downsides? The tenant doesn't get their SBA loan and they just stay your tenant - you have a lease in place. The other possible downside is that the purchase transaction takes place and you are unable to find an appropriate replacement in time. In which case you pay the tax you were willing to pay today. 

    I actually wrote up a lease option yesterday.. and a purchase contract.  Have them 90 days to get approved and 6 months to close at $800k… my request was they move in on the 1st and give me first and security.  I guess we either close or I have a tenant good either way 
    1Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    3y

    @Joe Young, the lease option is a good one.  I wouldn't worry too much about the 1031.  The tenant approached you.  that makes it an unsolicited offer.  And that's worth gold to establish your intent to hold.  But I would worry about the SBA process and loan.  SBA is prime + like 2??  So an SBA loan will cost them 10% right now.  It's going to cause a lot of buyers to stumble.  Again, this is where the lease option could benefit and protect you.

    The 1031 Investor5137 Reviews
    WebsiteView Page
    0Reply
  • Ronald RohdePro Member
    Attorney · Dallas, TX · Member since 2016 · 5k+ posts · 2k+ votes
    3y
    Quote from @Joe Young:
    Quote from @Teri Feeney Styers:

    Write two documents with the tenant who wants to purchase. The first is a lease with a monthly rent of $5500 or more (which is what the other people offered you). This lets them get into the building and start creating a financial track record. The second document is a purchase contract. Make the closing date work for both obtaining an SBA loan AND meeting 1031 guidelines. This will give you monthly income now, time to watch the local market and loosly identify a replacement property if that is your goal. Possible downsides? The tenant doesn't get their SBA loan and they just stay your tenant - you have a lease in place. The other possible downside is that the purchase transaction takes place and you are unable to find an appropriate replacement in time. In which case you pay the tax you were willing to pay today. 

    I actually wrote up a lease option yesterday.. and a purchase contract.  Have them 90 days to get approved and 6 months to close at $800k… my request was they move in on the 1st and give me first and security.  I guess we either close or I have a tenant good either way 

     They signed? What legal form did you use? 

    0Reply
  • Joe Young
    OP
    New Port Richey, FL · Member since 2019 · 48 posts · 16 votes
    3y
    Quote from @Ronald Rohde:
    Quote from @Joe Young:
    Quote from @Teri Feeney Styers:

    Write two documents with the tenant who wants to purchase. The first is a lease with a monthly rent of $5500 or more (which is what the other people offered you). This lets them get into the building and start creating a financial track record. The second document is a purchase contract. Make the closing date work for both obtaining an SBA loan AND meeting 1031 guidelines. This will give you monthly income now, time to watch the local market and loosly identify a replacement property if that is your goal. Possible downsides? The tenant doesn't get their SBA loan and they just stay your tenant - you have a lease in place. The other possible downside is that the purchase transaction takes place and you are unable to find an appropriate replacement in time. In which case you pay the tax you were willing to pay today. 

    I actually wrote up a lease option yesterday.. and a purchase contract.  Have them 90 days to get approved and 6 months to close at $800k… my request was they move in on the 1st and give me first and security.  I guess we either close or I have a tenant good either way 

     They signed? What legal form did you use? 

    Not yet, waiting on their lender to get back from out of town Monday to provide pre-approval and discuss their ability to close.  I used basic lease / lease option docs to go over details with them, but ultimately will have my title company / attorney write it up for signing 
    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free