Advise evaluating a commercial deal

2 Replies

Hello, just wanted to get some help evaluating a potential commercial project.

24,000 square foot building with 20,000 warehouse space and 4,000 of office space.   Building is concrete tilt up and is in very nice shape.

lease is $12,000 per month NNN, tenant also pays RE taxes.

just entered into 5 yr lease.

7.5% cap rate 

PP is $1,920,000.00

seller will finance with 10% down at 5.5% interest. 

loan amount is $1,728,000.00

30 yr amort. @5.5% is $9,831.39/mo

thank you for any help or input

Hey Rob,

This deal doesn't look too exciting.  One of the great things about real estate is the opportunity to acquire a property that is operating below its full potential and to make money by increasing the value of the property.  Adding value to a property can usually most easily be achieved by filling up vacancies or raising rents on existing tenants (If a property is valued based on a cap rate, than higher income leads to higher value.)  On the other hand, one of the unfortunate things about real estate is that there's always potential for the value of a property to decline, which can also happen in several ways (For example, the tenants vacate or market rents decline).

For example, if the property you're describing was vacant and/or was in a difficult ownership situation (bank-owned or owned by an inexperienced investor), there's a good chance you would be able to acquire for a much lower price.  You may need to submit a whole bunch of offers, be patient until a good opportunity comes along, or be creative in searching for deals, but you can probably acquire the exact property (just vacant) for around $1.2 million.  At that price, you would have to spend a few months of time marketing the property for lease, would probably have to spend another $50,000-$100,000 on leasing commissions and tenant improvements, but you would be able to own the same exact property with the exact same income for $1.25-$1.3 million.  By taking on a bit more work on the front end, you can make about $700,000 in profit which will provide you with a cushion in case the market takes a downturn, the tenant vacates, or something else goes wrong. Or you can even, just sell the property for $1,920,000 and move on to the another deal.  Or hold on to the property and earn >10% cap rate rather than a 7.5% cap rate you would be earning on a higher purchase price.

The best advice I can give you is to focus on price above all else.  Would this deal still be attractive at $1,920,000 if the seller wasn't offering attractive financing?  Probably not.  If you only have $200,000 to invest, it might make most sense to acquire an underperforming property at an auction for $200,000 or an underperforming smaller property with much more potential with a 40% down payment for $500,000.  The way people become extremely wealthy in real estate is by taking advantage of the value-add potential when acquiring the deals.  If that value-add potential is taken out of the equation, real estate is much more risky and not very exciting.

Good luck!  Feel free to reach out with any additional questions.

Great advice Josh!

Thank you

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