What do you think of this deal?

Question

This will be my first commercial property deal. I currently have the property under contract and feel good about the returns, but I'd love to hear what you guys think and how you would break down the deal.

Two identical buildings on one piece of land. One is split into four units, the other is being rented as one single unit. The split building is being rented for 59% more than the single unit building. I've run my numbers based off the single unit tenant staying, but splitting the property into multiple units would be much more profitable.

All units have been full for 8+ years due to the rent being far under market value. The owner is an absentee landlord by his own admission. Renters are currently handling all their own repairs due to the low rent. These buildings are block structure, each with their own bathroom, no furnished heat or AC but some tenants have added it themselves. Very little maintenance issues due to the simplicity of the structure. All of the tenants are on a month to month contract.

Cap rate is 10.19% with the low rent rates. I believe I could increase the rent 22% and still be under market value and likely continue to keep these tenants. Raising the rents will move the cap rate to 13%.

Financing will be done through the seller at 25% down, 7% APR, 30 year amortization with a 5 year balloon.

Cash on Cash is 29%

I'm a passive residential investor. I don't have much experience with commercial other than renting for my own needs. This seems like a homerun in my world. Have I missed anything? Any glaring concerns?

Thank you so much!

Jeb Brilliant · Answer

I'm looking to get in to commercial multi family properties and these apartments sound amazing.

Jeremiah H. · Answer

Thank you. There is more due diligence to be done, to this point its a block structure and the roof is 10 years old and its rock solid. The market in my area is good for this type of property. The buildings can be used for such a wide variety of uses that I see absolutely no issues with keeping them rented if I keep the rent rates where I'm thinking.

One of the things I'm conflicted about is how much to raise the rent on the single unit tenant to the point where it closes the 59% gap on the 4 four unit building. If he leaves as a result I'll split that building into 2-4 units but be able to increase the rent roll. The cost of splitting the unit into multiple units is minimal. They were built for flexible uses.

I didn't ad this into the original post, but my dad and grandfather built these building 30 years ago. My dad is still alive and is very familiar with the structure and how they were designed.

Christopher Telles · Answer

If the due diligence on the improvements is positive e.g. structural, roof, environmental then it sounds like you've got a killer deal on your hands.

You didn't mention the market, metro, secondary, tiertery so you'll want ensure there is enough depth in the market to fill any vacancies as units go vacant. Secondary and tiertery market CAPs are typically higher than a metro or urban/suburban market.

Given what you've described I'd buy that deal. Run some IRR numbers and you're likely to find the IRR over a ten year hold to be +/- 30%. Hard to go wrong with that type of return.

What do you think of this deal?

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