Bought my first medical office building
I bought my first medical office bldg in Houston. It was listed for $750000, but I was able to acquire it for $600000. It's 5100 sq ft. There is one tenant who occupies ~1500 sq ft. I get a rent of ~$19/sq ft (NNN lease). I intend to use ~1800 sq ft for my own office, and lease out the remaining. Do I need to notify my acquired tenant regarding the ownership change? Do I need to do a new lease? Do I use a attorney? Any input would be greatly appreciated.
Thanks
Raj
I was also interested in hiring a property management company. I am told that they charge ~5% in the Houston area. Does that sound right?
@Bharath Raj let me be blunt, from what you have posted I should say that I think you got the shorter end of the stick, but then again I do not have the full picture! To answer your question, yes, you should introduce yourself to your tenant. New lease is not necessary you are required to honor the lease signed by the previous owner.
@Priyanshu Adathakkar Can you please elaborate? I would like to learn.
@Bharath Raj You bought a 5100 SF building with only 1500 SF occupied. What kind of CAP rate were you looking at? Your guaranteed income at the time of purchase was $28,500. The minimum acceptable CAP rate is 7.5% that would be $45,000. You basically bought a property @ 4.75% CAP rate, which in my experience is a heck of a deal for the seller.
@Priyanshu Adathakkar I bought this building for a owner occupier purpose. I will be occupying ~1800sq ft for my own physician practice. I will still have the remaining space left over, which I plan to rent. I do hope to rent it out. That space is already built out by the prior medical practice which just left. I am not sure how the cap rate is calculated in my situation.
Lucky you, you found a tenant - your own practice! Separate your medical practice from your investment business. It is one thing to buy a property that is solely occupied by yourself (owner occupied) and buying a property where you are a landlord and you are also one of the tenants (investor), hope you see the difference. You are leasing more of the property then occupying, from a funding perspective the lender would also consider this an investment property.
@Priyanshu Adathakkar I appreciate your insights
So Raj when you say acquire it for 600,000 have you CLOSED on the property and now own it?
OR
Are you under contract and working to closing lining up lenders?
You sound very green as a buyer but it's good you are asking questions. The questions you are asking should be handled while in the process of buying the property. If you have already closed on the property you might have a mess to clean up as are doing things backwards with paperwork and notices etc.
Get legal counsel to help you ( know what you don't know). A local attorney who specializes in commercial might help.
How do you know about title exceptions, ALTA level one survey, site inspection, phase one environmental,appraisal, service contracts, loan covenants,leases, property management agreement, estoppels & snda's, association dues, ccr's,etc.??
@Bharath Raj What kind of practice do you have if you don't mind me asking? We have a lot of vacant small medical office in my town and I've been wondering what a good use for it would be.
Kudos to @Priyanshu Adathakkar and @Joel Owens for not pulling punches. @Bharath Raj, My wife is a surgeon and I handle all of her real estate for her locations. She focuses on being a doc. I think you need to focus on being a doc also. If you want to dabble in real estate, get into a syndicated deal or a REIT. You can't buy a $750k building then and work backwards. I would hire a property management company but more importantly a CPA firm that specialized in real estate. Now that you are in bed with this property, figure out how your taxes can benefit from improvements, etc. Like Joel stated, its good that you are asking but hire professional help.
@Joel Owens I did close on the property this last Monday (I bought it) with a title company. I hired a real estate attorney to do all the legwork. I got the inspection & appraisal done. Both looked fine. I have a common area parking and access agreement with the other owner of this medical complex. It basically states that clients can park anywhere on the property, but I am given 6 reserved spots. I share my 1/3rd cost of maintaining the parking lot. I am looking at property management companies right now. I don't intend to self-manage. I have inherited one tenant, who will stay for 5 more year. I have engaged a architect to build out the portion of the building I intend to occupy. I have engaged a realtor to list the portion that I intend to lease out. I put this investment into a LLC, as suggested by @Scott Smith in his podcast regarding asset protection. He was great! I would highly recommend him.
@Jeff Kehl I am a psychiatrist. My office looks more like a attorney' office than a internist'.
@Ash Patel I am hiring a property management company. I am still interviewing them at this time. I do have a CPA. I have experience in residential real estate (single family only), but none in commercial. Since I was looking to occupy part of the building for my own office practice, I didn't look at a REIT.
Thank you all for your constructive criticism. I do intend to continue investing, albeit imperfectly. I am just happy that I am taking action.
This is a great post! I am an orthodontist in Greater Washington DC area and currently leasing an office space but looking to buy a strip mall space with some tenants.. hopefully have a Starbucks next to me!
@Bharath Raj - First and foremost, congratulations on your purchase. Owning the building that you will place your practice in can be financially promising and certainly exciting!
To answer your questions:
Do I need to notify my acquired tenant regarding the ownership change?
It would be good to notify your tenant regarding your purchase of the property. I'm sure they are already aware that the property is up for sale and likely sold. After all, they were probably present when the appraiser, insurance company, and possibly lender came to inspect. If nothing else, making a formal introduction that you are the new owner will be great in getting your relationship with your tenant off on the right footing.
Do I need to do a new lease?
No, you do not. The lease they have in place still holds and is likely transferred in kind to you. This is of course presuming the tenant has a long term lease and is not going month-to-month. If it is the latter, then of course you and the tenant can work out a new lease if both parties so wish.
Do I use a attorney?
Generally, you are not required to use an attorney. But if you would sleep better at night, then by all means, do so. After all, it is always a good idea to seek professional advise if you are uncertain about any factors of investment property ownership, tenant laws, tax matters, etc.
@Bharath Raj - Its good that you want to continue to focus on CRE. I learned the hard way and made a ton of mistakes. I would recommend posting questions on BP as soon as you find the next deal. In your spare time, pick some of the people on this post and read through their previous posts. Its more efficient than reading entire threads.
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@Bharath Raj, If you are successful at leasing out the remaining space at anywhere near market rate you will have a real winner.
@Don Konipol, I was hoping for the same, but for some reason, the prior owner kept ~1800 sq ft as shell space for ~12 years. He had leased out the remaining to one OBGyn doc for >10 years. I am hoping to find a tenant. I will keep y'all posted if I have any luck.
@Bharath Raj, Interested to know how it all worked out 5 years later! Hope to hear from you. Looking forward for insights and lessons learned.