Complete Commercial Property Gut/Renovation

10 Replies

Hi All,

I am currently looking at an 11,000 square foot commercial property in a small upstate NY town between Rochester and Syracuse. If you look up the definition of a distressed property you'll see this property. The buildings first floor was once a general store that closed ~10 years ago and okay shape. The second floor was once apartments but not since the 50's and 60's. We've been told the roof was replaced 6-7 years ago but during walk through there were some noticeable leaks. The 2nd floor will be a complete gut (electrical, plumbing, HVAC, windows, etc). I believe the first floor could be sectioned into rentals with the store front remaining a smaller commercial rental. The basement has a walkout entrance and could support some smaller self storage units. 

I believe the property could easily support 5 2BR (900 sq ft / $850 utilities included),  5 1BR (600 sq ft / $600 utilities included), and 10 (10x20) self storage units if the town allows it. A nearby smaller property nearby has 8 units. We will certainly find this out before moving forward. At this point I would assume nothing from the store front commercial portion. I believe rents could be slightly higher when including utilities and I assumed 15% vacancy when I believe it will be less than 10% based on conversations I've had with other locals. Taxes would clearly grow when the property reaches its end state. I also believe there is margin left in the yearly expenses and would be comfortable if the 12% cap rate drifted lower. Out of the gates we'd self manage, but would leave the possibility of outsourcing it later.

Would love feedback on the numbers. Obviously would need more due diligence to see if $250k is even realistic for renovation, but I think it has a ton of potential. They currently want $70-80k for the property, but I can't see them getting that in its current condition and its been generating $0 for a long time now. 

Does anyone have a roofer in the Rochester, NY area they'd recommend for this type of property so we can get an assessment on the existing leaks as well as someone to get an assessment on the foundation/brick structure? 

Thanks,

Alan

CAP Rate 12
 
Revenue 99000
Vacancy -14850
Effective Gross Income 84150
 
Operating Expenses 3000
Management 9900
Repairs/Maint 3000
Utilities 15000
Taxes 3001
Insurance 11000
Legal 2000
Misc 0
Replacement Reserves 3000
Total Expenses -49901
 
NOI 34249
NOI CAP 285408.3
Renovations 250000
 
Business Valuation 35408.33

Is there anything n that twon to draw people to it. I.e. local college?  Any major retailers near by? 

On the number you don't want to go higher that 60% of the After repair and stablized value including purchase and fix up if you want to get a bridge loan. 

Town is less than 10k about 30 minutes from Rochester. It's primarily an agricultural community or those that don't want to live in the suburbs. Many choose to make the commute to Rochester for work. My wife grew up here and we moved back here when I took a new job. This purchase would also be us taking a risk to invest in a community we love. 

Speaking with the realtor we're personally connected with and others networked locally, there's a demand for rentals. The realtor often doesn't have a place to direct folks when they receive requests for rental housing. There are some local rentals with landlords that simply do not take care of the properties or their tenants. We would clearly be different in both aspects. 

This sounds very similar to my first property.  My building was about 120 years old needed a lot of work.  I think your numbers are very good.  Hopefully you don't spend the whole 250k on renovations but there are always surprises with old buildings.  Get to know the zoning people and inspectors if possible.  Let them know you are trying to better the community and they will be on your side.  My exit was to sell the building on land contract to the retail tenant.  Total win/win.

@Kyle Ransom Mind diving into the 60% you referenced? We will need to pursue private and/or a construction loan none of which we have experience with. Are you saying we would only be able to get a construction loan for $171k (60% of ARV assuming a CAP rate of 12%)? Those numbers don't include any financing costs which will obviously change things too.

Other than the proximity to Rochester there isn't a large draw employment wise other than agriculture. We do have some businesses popping up in the last year or so highlighting the town, ie. craft cidery, winery, couple restaurants, etc. 

This would be a relatively easy sell to the town. We know many locally in the town and would be taking over a building declining in value that hasn't really been anything other than storage for the owners since the store closed. I think a lot will depend on letting us get to the 10 unit level and self storage. 

Once we get an idea if the town would allow it, we could take some GC's through to get a renovation estimate. With estimates we could start to pursue financing options, correct? What else should we be looking at? 

Originally posted by @Ash Patel :

This sounds very similar to my first property.  My building was about 120 years old needed a lot of work.  I think your numbers are very good.  Hopefully you don't spend the whole 250k on renovations but there are always surprises with old buildings.  Get to know the zoning people and inspectors if possible.  Let them know you are trying to better the community and they will be on your side.  My exit was to sell the building on land contract to the retail tenant.  Total win/win.

Alan,

One thing that immediately stands out is your estimated taxes. The $3000 estimation seems very low given NY's high tax rate. For example, a 2 unit house worth $70k in the city of Syracuse will be $3k a year in taxes. I am guessing the ARV for your property will be much higher.

I can't speak from experience, but I have talked to others who were assessed after the final certificate of occupancy was granted. That was for new build residential; if the process holds true for renovations your taxes could be in the tens of thousands per year.

Hopefully, someone who has more experience can chime in and provide a more definitive answer.

@Alan Smith - Financing for these types of properties can be quite challenging.  You can forget most big and regional banks.  You may have to get creative but definitely pursue every local lender in the area.  Once you purchase it, see if you can get people at the City level to help you apply for grants.

How much of your own cash will you be putting in for down payment/rehab?  

@Alan Smith I would echo some of the comments above about making sure you have the renters there before you take on a project like this. A small rural town 30 minutes from Rochester does not strike me as a great place to build new rental units. I may be way off-base, I'm just saying verify what the realtor is telling you from some other sources. Find a local property manager who doesn't have a vested interest, maybe even place a craigslist add and see how many responses you get.

@Mark Costa This is definitely true. They would no doubt go up as we renovated and tenanted apartments. We could probably benchmark other properties to see their taxes and what we may be looking at down the road. 

@Ash Patel One of the ideas we had was paying for the property and owning it free and clear prior to renovation. We don't have a lot of existing capital due to purchasing our first rental earlier this year. That resulted in us dipping into "emergency funds" for maintenance and getting that property tenanted. Our existing REI plan subject to change was to look at the bonus I get yearly to be a down payment on a new rental property every year (~$15-20k). There's not a line of people waiting to put offers on this property and I figure we could continue to do more due diligence to get things in order financially as well.

Due to its current state I'm hoping we could purchase it for significantly less than the purchase price. Once the property and dwelling is owned, could we then approach a commercial loan for financing the renovation?

@Jeff Kehl I think I will try the Craigslist ad. A coworker of mine with ~20 units suggested the same idea. Is there as much risk with a complete renovation when you know you'll be doing all new plumbing, electrical, mechanicals, etc from the start? The numbers are certainly larger but what "surprises" are there for increased budget hits compared with a cosmetic renovation for a SFR? When you're doing a smaller reno and opening walls you can discover you need to replace old wiring or old plumbing and the possibility of the project expanding in scope is much greater is it not? With this renovation you're planning to go down to the studs and putting everything new in? If we know that from the start aren't there actually less surprises?

Thanks for the input!

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