I found a commercial property with a seller who is ready to sell. The seller took the property off the market.
I'm cautious about it, but don't want to let an opportunity go by without taking a good look at it. I feel like it's an opportunity to learn how to analyze this type of deal.
Here's the details of the deal to help frame the questions:
-3 unit commercial property
-Two units occupied, one vacant. The vacant unit was previously a BBQ shop/restaurant.
-The market is a rural town in the population range of 30 to 50 thousand.
-Location is in the older, but still utilized part of town.
-Owner pays sewer
-Tenants pay other utilities (each metered)
-Asking price (negotiable): 130K
-Current Rent unit A - $250/mo
-Current Rent unit B - $500/mo
-(Historical) Rent unit C - $800/mo
Theoretical/"historical" rent total: 1550/mo
My concern is with the $800 dollar gorilla in the room, or out of the room as it were and what value to assign to vacancy rates.
1.) How do you analyze a commercial property based on a vacant tenant position?
2.) How do you dig into the market to know what that particular unit will demand in rent?
3.) What are some good follow up questions to help establish the value of the property?
4.) What else should I be looking at?
Thank you for your time.
How long has the BBQ unit been empty for? Does it have a good chance of being rented?
You will be hard pressed to find a lender willing to lend out on a value of 130k with only $750 coming in.
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The short answer is, I don't know for sure. I think it's been at least a few months since the BBQ place shut down.
Your second question is spot on, and is the root of the reason for my post. I don't know how to know if a commercial property is likely to be rented again. If we're talking residential, no problem. I have my processes that I usually run through to identify the going rent on the market, and it usually is pretty ballpark, and fast.
On this commercial deal, I can't use the same processes to identify what the next potential tenant is going to be willing to pay, or what kind of timeframe it might take to get it rented again.
I would agree with your assessment.
Do you have any tips or ideas on how to solve some of the issues?
Don't over analyze jump in and get moving as you are young and have time on your site
5 or 10 years from now you will be looking back at this time and say why did i not make that move get off your a .. and make a move
Thanks for the reply. I agree, time heals most mistakes or oversights. However, I'm already moving in markets, but I see this as a potential opportunity, but the opportunity cost of moving on it without a solid way of analyzing it isn't worth the loss of returns in another investment.
We just had a seminar that was very similar to this discussion. Here are some of the answers that we came up with:
1.) Get rental numbers in the area and then discount for the existing vacancy by increasing the first year vacancy rate.
2.) Call property management companies in the area and commercial brokers who specialize in this type of commercial property.
3.) How long has unit c been empty? What is the demand for this unit? What is the condition of the property?What do the other two leases look like?
4.) How strong is the economy? Is there one or two main employers that can potentially shut the town down? What is the zoining?
Hope this helps!
The other thing to factor in is how much money needs to be put into the space for a new tenant, even if it's another food service, and is the future tenant expecting you to subsidize some of that tenant improvement cost?
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