Is This SELLER FINANCE Option Too Good to Pass On?

Question

Hello,

I'm facing a great dilemma regarding an investment strategy and I'd like to see other investors' opinions/input on this. I'm current real estate investor (not full time) that have about 10 residential- signal family properties. All are doing well. 40% net/annual (about $50k) and 10% COC.

A friend of mine trying to leave the area and sell a commercial property that he owns. It's a unique facility that serves functional activity such as YMCA. It has many tenants such as full size gym, yoga studio, NEW full outdoor area for pickleball, ju-jitsu, and other recreational programs that renting (16 total units - currently 9 are occupied). Other benefits: Located in a growing area, and have a full bar Liquor License and a bar that is currently not occupied (A lot of potential there to sell alcohol).

But the cherry on top is this: seller is a friend and very motivated to sell, so the terms are 2nd to none: 30yr AMP table @ 4%, and 10 year exit (balloon). If the rent are being kept for our agreement, I'll increase my net income by 173%.

But now for my concerns:

1) What do I do after the 1st 10 years? Do I have to pay a lump sum or just find another lender with new terms?

2) It took me a while to build my residential portfolio, and we all know that residential is far safer investment than commercial (especially now); However this is not an office building and related to leisure and "fun". No Risk No Reward - I know... but a part of this investment will mean that I'll have to liquidate about 60% of my portfolio to come up with the DP.

3) Insurance right now is at a little over $30k/year, and I expect this to keep on growing. So insurance cost is obviously higher.

Thanks for reading through and looking forward to hear ANY feedback.

Mark H. Porter · Answer

Aside with what others have said, you’re only diversifying by two (residential and fitness). One pandemic and that entire center, being fitness focused, is wiped out.

To win on this you need to reduce the risk. Any chance the bar is on an end that could be made into a drive-through? Will the bar location actually be a full-service restaurant?

How long have the vacant front been vacant?

Was this place built as a warehouse-type structure that has been compartmentalized or does it look like a strip-mall? This will determine what type of uses are feasible.

Bjorn Ahlblad · Answer

@Dolev Shemesh Congratulations on your achievements! Personally I would be reluctant to liquidate the majority of my current portfolio to embark on a risky new gig.

The terms sound great, perhaps a little too great? As always do your own homework; success and failure is totally on you-never believe anyone without verifying. Be suspect when doing deals with friends. All the best!

Dolev Shemesh · Answer

Thanks so much Jeff.

All are very informative. The early payment penalty is certainly something for me look in.

Are you familiar with the Tampa Bay area?

Mohammed Rahman · Answer

Congrats @Dolev Shemesh! For the NYC market perspective, the owner financing terms sound awesome!

1 - Yes the expectation is for you to find traditional commercial financing by then, or ask your friend to refinance if they enjoy the monthly income coming in.

2. Are you sure you can't ask your friend to roll in the downpayment to the owner financing? Alternatively you could possibly look into an SBA loan if you plan to owner occupy one of the properties (depending on your current role and whether its W2 or etc.)

John Canchola · Answer

Congrats on your residential portfolio.

In my opinion, tapping that much into your portfolio is risky for me because you are speculating on an empty building not producing income with a long-term tenant. You are setting up yourself to risk. Finding the right tenant for commercial space is nothing like finding a tenant for a house. You will now be paying on a new loan you took out against your residential portfolio and hoping you land a tenant that will be permitted by the city redevelopment department to approve the tenant that wants to move into that building. KEEP IN MIND city redevelopment departments have a lot of red tape to go through and this can take months before your prospective tenant is at the mercy of the City to be approved and then follows up with your tenant checking off all the requirements boxes the city department needs your tenant to get completed before moving in /opening up its doors for business. In the meantime, you have two or three residential tenants move out, three water heaters go out or HVAC...all of a sudden your in a cashflow crunch. Don't bite big if you you THINK can't swallow. I'm coming from exact personal experience.

Jeff Hamann · Answer

@Dolev Shemesh, it could be a good opportunity, could be a bad one. 🤷‍♂️

To answer Question #1, you'll pay a lump sum after 10 years unless you refinance out of it. Hard to say what rates will be doing then or before (without making wildly inaccurate predictions that will come back to haunt me), so I'd just say to ensure you know what kind of (or if a) prepayment penalty is baked into the loan. If you can refi out after a few years at little to no cost should rates fall enough to find a better loan, it's good to keep in mind.

#2: Residential is (broadly) safer, and retail's sure had its ups and downs over the years. Right now retail is largely looking pretty solid in a lot of markets, but make sure you do some serious homework about the property's area and the wider market. If only slightly more than half of the units are occupied (or leased?), that's concerning. Make sure the property aligns with what retailers are actually looking for, or you'll sit with empty spaces for a while, and those vacancy costs will eat into your margins faster than just about anything. And do some research on previous tenants, too. If there was a dry cleaner operating there in the past, for example, you could be on the hook for environmental stuff, to give one quick example.

#3: Definitely expect insurance to keep climbing, especially for Tampa. It's going to be a factor almost anywhere you'd invest, but just make sure to add a bit of cushion into your costs to account for increasing premiums.

Dolev Shemesh · Answer

Just messaged you

Jace Perry · Answer

Hello, I have a lot of general experience in this area. This is more of a conversation to be had over a phone call if you are interested. Cheers!

Is This SELLER FINANCE Option Too Good to Pass On?

Is This SELLER FINANCE Option Too Good to Pass On?

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