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Neel Patel
  • Rental Property Investor
  • Hazel Green, AL
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Need Help Access an Off Market Commercial Deal

Neel Patel
  • Rental Property Investor
  • Hazel Green, AL
Posted Feb 27 2024, 16:27

I have gotten an off-market Commercial Deal to me for $550K. The property consists of 3 front units touching the highway with good traffic. One residential unit is attached in the back, around 700 sqft. The total size of the building is around 4800 sqft. 

The seller is open to doing seller finance at 5% INTEREST only or P & I. The INTEREST-only payment would be $1460/m with a $200K downpayment. The loan will be due end of the 5th year. I am planning on holding this long term for appreciation. 

The seller has replaced the roof last year. All the expenses inside the building are the tenant's responsibility except for the apartment. I have the option to increase the rent on Unit 1, Unit 2, and Unit 4. They are month-to-month leases. I plan on putting CAM on the tenants.  The current rents are well below market rents. 

The location of this property is north of Huntsville. This is not located in the immediate appreciation area but it has the potential to appreciate in the longer run. 

Following is the income for all the units

RentsNew Rents Expenses
Unit 1: 1800 sqft $ 975.00 $ 1600Insurance $ 6,000.00

Unit 2: 1100 sqft

$ 900.00 $ 1100Taxes $ 2,728.00
Unit 3:  1100 sqft $ 925.00 $ 1050Sewer Charges $ 4,800.00
Unit 4(Apartment): 700 sqft
$ 700.00 $ 850Vacancy $ 4,000.00
Total $ 3,600.00 $ 4,600.00 Repairs $ 2,000.00
Yearly Revenue $ 43,200.00 $ 55,200.00 Total $ 19,528.00
Mortgage Interest Only/m$1,460.00$1,460.00
Mortgage Interest Only/y$17,520.00$17,520.00
Current Income Projected Income
Net Operating In $ 23,672.00 $ 35,672.00
Cap Rate4.30%6.49%
Cash Flow With Int Only $ 6,152.00 $ 18,152.00
Cash invested $200,000.00$200,000.00
COC3.08%9.08%

What are your thoughts on this deal? Anything I am missing? 

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Henry Clark
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#2 Commercial Real Estate Investing Contributor
  • Developer
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Henry Clark
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#2 Commercial Real Estate Investing Contributor
  • Developer
Replied Feb 27 2024, 16:50

1.  Your net operating income should have changed more due to the CAMS of $19,528.

2. You're increasing the rent, but also adding CAM of $19,528; plus, NNN other costs. How sensitive are those Renter types?

3.  Do some failure or sensitivity analysis.

a.  Assume xx months of lost occupancy.  Right now, your assuming 100% occupancy.

b. Run your COC with Principal and Interest, since you're looking at this from a long-term standpoint.

c.  Switch your interest rate to 8% and run both your current 5 years and after your 5 year balloon period.  Validate your financial metrics again.  Don't do the deal just for an Interest only loan.

4.  What are the quality of your clients?  

5.  When they leave, what is your conversion costs or build out costs for upgrading.  Need to factor in an assumption.  

6.  Run the numbers doing a Commercial Loan with 25% down and interest rate of 7.5% and compare against your Interest only loan of 5%.  a.  What is the difference in cashflow P/I versus I?, b.  What is your opportunity cost of the Downpayment difference, do you have other deals you could be doing?  The interest only looks great, but I would still run the numbers and see the difference.

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Michael S.
  • Huntsville, AL
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Michael S.
  • Huntsville, AL
Replied Feb 27 2024, 19:04

@Neel Patel - I doubt you can get $1600 for the larger unit; for $1600, the tenant could rent a fully rehabbed single family home in a nice area of Huntsville or even Madison proper; the other rent amounts are probably feasible, although again, $1100+ can net a decent SFH rental. I'd run your number with lower rent amounts for those two units.

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52
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Neel Patel
  • Rental Property Investor
  • Hazel Green, AL
11
Votes |
52
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Neel Patel
  • Rental Property Investor
  • Hazel Green, AL
Replied Feb 27 2024, 20:58
Quote from @Henry Clark:

1.  Your net operating income should have changed more due to the CAMS of $19,528.

2. You're increasing the rent, but also adding CAM of $19,528; plus, NNN other costs. How sensitive are those Renter types?

3.  Do some failure or sensitivity analysis.

a.  Assume xx months of lost occupancy.  Right now, your assuming 100% occupancy.

b. Run your COC with Principal and Interest, since you're looking at this from a long-term standpoint.

c.  Switch your interest rate to 8% and run both your current 5 years and after your 5 year balloon period.  Validate your financial metrics again.  Don't do the deal just for an Interest only loan.

4.  What are the quality of your clients?  

5.  When they leave, what is your conversion costs or build out costs for upgrading.  Need to factor in an assumption.  

6.  Run the numbers doing a Commercial Loan with 25% down and interest rate of 7.5% and compare against your Interest only loan of 5%.  a.  What is the difference in cashflow P/I versus I?, b.  What is your opportunity cost of the Downpayment difference, do you have other deals you could be doing?  The interest only looks great, but I would still run the numbers and see the difference.

1. Yes, you are right about the NOI should change. 
2. There is one national tenant. The other two are just local tenants. One grocery store and office for a local restaurant. 
3.
a. I have $4000 of vacancy
b & c. That is a good point. 

Thank you for giving all the great points! 

User Stats

52
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Neel Patel
  • Rental Property Investor
  • Hazel Green, AL
11
Votes |
52
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Neel Patel
  • Rental Property Investor
  • Hazel Green, AL
Replied Feb 27 2024, 21:00
Quote from @Michael S.:

@Neel Patel - I doubt you can get $1600 for the larger unit; for $1600, the tenant could rent a fully rehabbed single family home in a nice area of Huntsville or even Madison proper; the other rent amounts are probably feasible, although again, $1100+ can net a decent SFH rental. I'd run your number with lower rent amounts for those two units.


 Thank you for your input. The larger commercial unit has 1800 sqft. It has a Mexican grocery store. I checked local commercial properties to match the rents.