Deal Anaylsis for this commercial property

10 Replies

The property is a 3 unit - store front, 1st floor 1 bed bath, and 2nd floor 2 bed 1 bath -- $1500 monthly income.  The owner owns free and clear and willing to carry mortgage. 

I offered full asking price of 125k with 10% down @ 0% rate for 8 years 

Security Deposit - $500 

Financing $112,000

Principle - $1186

taxes -$300

insurance - $81

Monthly payment - $1567

Rent rolls can not to changed or increased for another 6 months.  After 6 months, I will more than likely receive an additional $400 to $600 in rent increases, but not guaranteed.  Rents are really low and still waiting for Contract approval.   Appraisal will be a little costly, but required from me to know value prior to closing.   Closing costs, down payment, appraisal will cost around  $18,000 to $20,000.  Is this a good deal for me if approved?

Why why wouldn't the seller be happy with a payment that gives them the same income as they're making today including vacancy taxes Insurance maintenance capex Etc?

@Orkeem Davis In addition to the question of why the seller would go for it, why would you do it? You'd be cash flow negative every month at least until you could raise rents and possibly the whole 8 years. Sure you'd own it free and clear at that point but only if you could survive that long. And what happens when the furnace goes out the same month that one of the tenants moves out?

Why not instead go to a commercial bank and get a loan for 80% and have the seller hold a second for 10% 8 years 0 interest? You would cash-flow even allowing for maintenance reserves and vacancy. I only show a coc return of about 4.5% doing it that way but your total return factoring in the loan pay-down would be about 26%.

You could play with the numbers a bit and increase the owners note to boost your return while still keeping it cash-flowing. Maybe bank loan for 60% and the owner holds 30%.

Doing this also gives the owner a chunk of cash. In my experience most sellers prefer a chunk of cash if they can get it. 

Update - we agreed on 4% rate for 8 years and are suppose to close this Friday.  The present owner will hold the note and mortgage.  Two (2) of the tenants' lease agreements expire in 4 months so their rent will be increased.  Right now, the mixed use property is bringing in $1500 in rent rolls and hopefully after the 4 months, the rent rolls will be increased to $1900.  The mortgage payment (principal and interest) is around $1350.  The seller and seller's attorney are trying to have me pay for the seller's lawyer fees since he drafted the agreement.  I said "no" and we are trying to get on the same page.  Thanks for any feedback. 

@Orkeem Davis I am confused by this deal. I hope that you amortized this over 30 years and not 8? I would make sure that your exit strategy is clear as far as a loan. Meaning make sure that you can go to a commercial lender and not a residential lender. As the others have stated never buy a property in the "hopes" of raising rents. My experience has taught me to buy on what the property makes today, not tomorrow or in 4 months, because I can guarantee that will be the longest 4 months you have even seen.  I am not a broker, lawyer or professional, just somebody with a ton of experience. Also, it sounds like you don't have an attorney on your side -I would never sign a document that somebody else's attorney drafted without having my attorney look at.

What are the taxes going to adjust to once you purchase the property? Just my two cents. 

@Pat Gage - thanks for the feedback. I would be more concerned too if this was my 1st real estate deal. I have a few RE Deals under my belt and my portfolio is fine. Actually, my attorney is starting to step up to the plate -- he is requiring the seller to produce CO (Certificates of Occupancy) for the mixed use property prior to Closing. All rent rolls for Oct 2017 and security deposits will be used to offset by required down payment. This the 2nd deal I worked on with this attorney. The 1st deal closed and I have a positive cash flow of $900 after PITI. I'm no invoice, but each deal is an adventure and sometimes bumpy roads will occur. I must admit this is a sticky deal, but no risk no reward. Thanks again.

Orkeem, I like your deal.  Many BP gurus are aghast at even tiny, temporary negative cash flows.  If property in question is an investors only income, that makes sense. but if you have other cash flowing investments that cover, along with steady employment income, increasing your net wealth, including locked in equity, counts for a lot, too. 

@Pat Gage I have a few commercial banks with direct contact persons in my area interested in providing financing for this mixed use property when I have sufficient equity. The taxes are low in this town, and the taxes for this property is around $3900.  If the taxes increase, a higher appraised value is not too far behind.  I am not too concerned about that.   Since this mixed-use property will be paid off in full in 8 years, possibly sooner, we will analyze what is going on in the RE market and make our next financial decision with regards to using the equity to purchase additional properties.  I already have a few unsecured cash lines.   Hopefully, this property or another one of my properties will put me in a position to have a 100k - 150k cash line available at my disposal at all times.  As you know, every time you purchase an investment property, you are required to put 20% - 25% down.  This requirement will become easier for me and I will be able to transfer larger amounts from this line of credit -- access 24/7 -- to reach more RE goals.  Banks and other financial companies move faster when you can show you have the down payment in hand.    Thanks again!

@Jim Walker Thanks for the feedback.  Yes, I am a professional along with my wife - we both have steady employment in addition to being RE business partners.  Our personal finances are in good shape, but can always improve.  This mixed-use property will be my second Closed Deal this year and I have another 3rd Deal (multi-family apartment building) in underwriting as we speak.   We own additional properties from prior years, and 2017 has been a very busy year for us.  Bottom line, we are diligently investing and plan to reach projected gross yearly rental income of around 150k in the immediate future.      I hope your RE portfolio is also working in your favor as well.

It does not appear to be a good deal. First, you have not provided or explained your operating costs. That will determine your NOI prior to debt service. Considering your debt service is greater than your income, it is not a good deal as you will be negative cash flow even before expenses.

Update - The COs are scheduled and hopefully everything is approved and we close in the near future. Worst case, the COs need a great amount of work done prior to receiving approval and the present owner wants us to chip in on the cost of repairs. We will sprint away as fast as we can --- no go. I appreciate the honest feedback from all. I never said this was a Great Deal or even a Good Deal, but it works for us. It's an off-the- market-deal where there are obvious pros and cons. Even if I explained all of the present facets of the Deal - point for point - operating income, NOI, exit strategy, etc., there would always be naysayers. I get that. At the same time, we are all real estate investors with different levels of expertise and I am comfortable with my standing and return on investments.