Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
For all you number crunchers and RE investment pros, analize this: (Hey, isn't that a movie with Robert D!)
Commercial unit (Retail Strip/Office) Street facing
4500 square feet. 2 units
Market rents: $16 per square annually (NNN)
Expenses: Taxes = $8000 (paid by tenants on the NNN)
Insurance = $3900 (paid by tenants on the NNN)
Trash = $900
Water = $1500
Electric paid by tenants
Common area expenses = $3600
Occupancy = 100% current (ok to plug in 90% for future)
Ask price = $425,000
Financing = Owner carry 90% note @ 6% (10% cash down)
Approx $10k in repairs/improvements necessary
Good deal, great deal, not so good deal, or bad deal? :D
From a numbers perspective it seems like a winner:
16 Sq Ft Price
4500 Sq Ftge
$72,000.00 Revenue
$(7,200.00) Vacancy Allowance (10%)
$64,800.00 Gross Revenue
$(900.00) Trash
$(1,500.00) Water
$(3,600.00) CAM
$(10,000.00) Misc
$48,800.00 NOI
$435,000.00 Cost
$(43,500.00) Down Payment
$391,500.00 Loan Amount
$23,490.00 Interest Only (6%)
$25,310.00 Cash Flow
11.22% Cap Rate
58.18% Cash on Cash
I added $10,000 year in miscellaneous expenses and hit it for a 10% vacancy allowance. For simplicity sake, I assumed that the payment is interest only at 6%. With two tenants a 10% vacancy is very easy to achieve, so you need to investigate the leases.
- Where is it? In California a 10+ cap is great, but many other places it is common.
- What is it?
- Do the tenants have leases? You should get copies. Do they have a history of paying on time? Are they really NNN leases?
- If a tenant moves out will a lot of tenant improvements be required to get someone else in?
- Why is the owner selling? Is there something you do not know about?
- Do you have financial statements? The expenses seem a bit low?
My biggest concern would be the stability of the tenants. Are they long term tenants? Are their businesses likely to survive the current economic crisis? Is there demand for these units if one of the tenants leave? Would these tenants sign a new, longer term lease?
My biggest concern with commercial is that they can stay vacant a long time in some areas. Although Ohio is obviously a lot different than California, we're now starting to see commercial buildings becoming vacant as marginal companies go out of business.
Anyway, the numbers look good if the due dilligence checks out.
"The expenses seem a bit low?"
Not sure what possibly could be missing. It is a NNN unit, so the costs are limited and definately not the 50% OE rule.
The property is in TX, the building is in great condition, and the seller is my agent's mother, so I know all the details and all the ins and outs. Nothing hidden here.
$10,000 for misc. expenses seems very overly conservative to me, not that this is a bad thing. Two items I did leave out is agent fees for tenant placement contracts and administration/accounting which will later will be minimal, so I guess these two items should be more than covered in the $10,000 misc. right?