Commercial newbie here-Is this a good deal?

Question

I am a newbie on commercial properties except for owning the building my business is run out of.  To me this sounds like a good deal, but since I'm inexperienced in commercial thought I would get some advice.

I have an opportunity to purchase a 3,700 square foot brick single-story building.  Purchase price is $400,000.  The building is fully leased and houses three tenants.  The property has one billboard on the property.  The building is in excellent shape and was built in 2002.  The owner is selling due to his age; he is over 80.  Tenant #1-$1,176.00 per month (Staffing agency-lease has expired and is currently paying month to month). Tenant #2-$1,200.00-month (Financial Services Co-lease through end of 2028) Tenant #3- $1,936.00 per month (Dr office-lease through end of 2027). The billboard generates $4,500.00 per year and increases by $50.00 every year for the next 5 years.

Total Rent: $56,244.00

Total Expenses:  $22,800.00  ( planning on self-managing the property)

Cap Rate: 8.36%  (i think this is correct)

Financing:  I currently own a commercial building that my business operates out of and is now paid off.  I am getting ready to close on a cash out loan to cover the entire purchase of the new building.  The loan will be amortized on 20 years and fixed for the 5 years at 6.45% and will reset at current rates in 5 years.

Goal:  Take my current business lease payments and the new building profit to quickly pay the loan off.  Should pay it off in 5 years if all tenants stay in place.  Rinse and repeat.

Potential Issues:  Tenant #1 on a month to month and not sure if they are wanting to stay. If tenant is leaving and the space sits vacant until a new tenant is located.  This would slow up my full payoff date.

Does this plan sound feasible?

Greg Scott · Answer

You had two questions. Your last question was, does this plan sound feasible?  This is easier to answer.

Yes, people do this all the time.  I'm less clear why you try to quickly pay the loan down, to then refi into a new loan.  I'd much rather pay the loan down slowly and keep cash in the bank. That way you can take hit if, for example, your tenant moves out, you have vacancy for a while, and your new tenant is going to require you to make tenant improvements.

Your first question was, is this a good deal?

Based on what you listed, you have calculated the cap rate correctly at 8.36%. I would say that is on the low side for an office building in this market.  In other words, the price may be on the high side.

I'm also not certain you calculated the expenses correctly.  You haven't provided enough information to really gauge if it is a good deal.  You have "Total Expenses" as $22,800, but I would need to know what you included in there and what you excluded. For example, you said you were planning on self-managing.  For a purchase analysis, I would have included the cost of management in the expenses because that is a normal expense associated with a commercial building.  You should not pay more to the seller just because you intend to operate the building more efficiently.

Drago Stanimirovic · Answer

Hey Micah,

The deal looks solid on the surface, 8.36% cap on a stabilized asset with a decent tenant mix and upside from the billboard is a good start. Your financing terms are also reasonable.

The biggest risk, as you noted, is Tenant #1 being month-to-month. If they leave, it could delay your payoff strategy. To hedge, try securing them on a lease extension or start marketing the space now to minimize downtime.

Solid first commercial move.

Best,
Drago

Micah Jackson · Answer

Thanks everyone. This is the type of feedback I was hoping for.

Arman Ahmed · Answer

@Micah Jackson

Hey Micah, looks like you’ve got a solid handle on the numbers and your plan seems feasible if tenant #1 stays or you can quickly backfill the space. Month-to-month tenants are always a little uncertain, so I’d plan for a small buffer in case of vacancy. Your cap rate and financing look reasonable, and self-managing is doable with just three tenants. Overall, it seems like a good strategy to leverage your existing business building while building more income-producing real estate, just make sure you’re prepared for that first tenant turnover.

James Jones · Answer

Micah, the deal definitely has potential, but your plan hinges on a few key risks that you want to iron out before you move forward.

1. The plan can work, but only if your tenant stability holds.
Paying off a commercial loan in 5 years using your business lease + rent from this new building is aggressive but doable if all tenants stay put and pay consistently. The math works right now. The risk is what happens the moment it doesn’t.

2. Tenant #1 being month-to-month is the biggest threat to the whole strategy.
If they leave, here’s what changes immediately:
• Your DSCR drops
• You lose ~25% of your projected rent
• Lease-up time + potential TI costs hit you at the worst possible moment
• Your 5-year payoff timeline stretches fast

Before closing, I’d get clarity on:
• Whether they want to stay
• What they’d need to sign a new 3–5 year lease
• Market rent and demand for that particular unit in case you do lose them

A month-to-month commercial tenant should be treated like a vacancy with training wheels.

3. Your expenses are likely low.
$22,800 for a 3-tenant building + billboard + 20-year roof + mechanicals is almost certainly missing:
• Annual reserves
• Re-tenanting costs
• CAM reconciliation
• Future maintenance on a 22-year-old building
• Legal/accounting
If your real expenses end up at $30K instead of $22K, it changes the cap rate and the risk profile.

4. The financing structure adds pressure.
You’ve got:
• A 20-year amortization
• A 5-year rate reset
• A payoff strategy that depends on everything going right
If a tenant leaves during the first 24–36 months, you’ll feel it quickly.

BOTTOM LINE:
Yes, the plan is feasible, but only if you secure Tenant #1 and confirm the building’s true expense load.
If you can get Tenant #1 locked into a multi-year lease, this becomes a much stronger (and safer) deal. If not, underwrite at least 3–6 months of vacancy and make sure the numbers still work.

You’re close, just tighten up that one variable, and you’ll know whether this is a great buy or a stressful one.

Ronald Rohde · Answer

What is market rent for the area? That's the single most important question.

As others have noted, what is included in current T12 expenses? What will be projected expenses/capex next 5 years? Whats your exit? No one likes these small deals with multi tenant for $1m. Not attractive to buyers

Micah Jackson · Answer

Greg,

Thanks for the insight.  Where do you prefer the cap rate typically to be? closer to 10?

The expenses covered taxes, insurance, utility (water/sewer only), and I included 500.00 a month for lawn care and general maintenance.

I have $65,000 in a high yield savings account that could be used for tenant improvements generated from rents saved in current building and a flip from a couple years ago.

Commercial newbie here-Is this a good deal?

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