First Commercial Deal - Small Office Building, worth pursing?

Question

I currently own 10 properties on the residential side and have an opportunity to acquire a small 3-unit office building that is fully leased. This would be a contract for deed with a family member that owns the building free and clear. Not sure yet on what the terms would be, but the purchase price would be around $300k and gross rents are $3,300/mo. Taxes are somewhat high at $11k annually but it's still a decent return if I can put 10-15% down.

Since I'm new to the commercial side, is there anything I should look out for here? Figure this might be a great way to diversify the portfolio, but want to do my due diligence since I'm new to the commercial side.

Thanks in advance!

Since I'm new to the commercial side, is there anything I should look out for here?  Figure this might be a great way to diversify the portfolio, but want to do my due diligence since I'm new to the commercial side.

Thanks in advance!

Andy Schornack · Answer

No mention of location and type of tenant.  Outside of lease terms and staggering the maturities ( mitigates risk of multiple vacancies), location and credit of tenant is very important in commercial.  More so than residential. You may want to negotiate contract length to exceed lease maturities to allow some more flexibility if tenants leave. Best of luck!

Dan Frank · Answer

Thanks for the replies.  One tenant is 30+ years and will be at least another 5 years.  The other is 10+ years and will be staying as well.  The third is a newer tenant that has renovated their space so they'll be sticking around as well.  I like the fact that there's less turnover than residential and more vacancy protection being a "multi-unit" property.  Seller financing is a plus too.  Only downside is the high taxes and the property needs a new roof which I will try to negotiate into the sale price.  Thanks again.

Matt Boettinger · Answer

How long have the tenants been in their spaces?  How much time is left on the leases?

Check the rent/sq ft compared to other like properties near the property.

Ronald Filian · Answer

the lease structures ( Gross or NNN); term remaining and options. Offices do not rent out or turnover as quickly and often as residential. The carrying costs of a vacancy could be lengthy, more people work remote or office parks / near mid urban. Twin Cities still a strong market. Got family in Coon Rapids. Everybody has to live somewhere. I say stay with what you know and keep it growing. Good Luck.