Buy and Hold Commercial

7 Replies

I used the BP buy and hold calculator to analyst a commercial property and the numbers didn't make sense. Not sense to purchase and lease out. Can you use this tool for commercial properties or am I missing something. They are asking $169,000 for a standalone 911 sq ft building. The leasing price is $14.00 sq ft. I adjusted the offering price to $80,000 and the cash flow is $105.14, ROI is 7.42% and the cap rate is 7.69%. I have never purchased commercial before only residential and this would be a terrible deal. Please advise.

Is this a "triple net" property where the tenant pays all taxes, insurance and maintenance?  $14 per sq.ft. and 911 sq.ft. translates to $1062 a month.  Commercial loans typically have a higher down payment and a shorter amortization than conventional residential loans.  Assuming 30% down, 5% interest and a 20 year amortization, your monthly payment would be $739.  If the tenant is paying for all expenses, you would have cash flow of $323.  If you're covering some or all of the expenses, then those would cut into the cash flow.  Commercial loans also often have balloon payments, so you'll often end up needing to refinance or sell when the loan balloons.

I don't know how many commercial properties you looked at? Is this the first one?

When I started residential and commercial investing, I looked at many properties in different areas. It's 50 to a hundred before I buy one. ROI is only one of the considerations. For commercial properties, there's even more considerations.

For residential, renters generally rent if they are within commuting distance, good schools. For commercial, especially retail, often, the location is vital. For a small property such as yours, it's suitable for an owner/user, so for a given group of users, it's worth more than the ROI, and in some cases, the ROI is irrelevant.

Take hairdressing as an example. Its customers are within a certain driving distance. People usually don't drive two hours to have their hair done. If the area is in need of a hair salon, there's no available sites nearby, then they'll either buy or rent the location. So a owner/user would pay more if the location is ideal for his business, so if it became successful, he wouldn't worry about exorbitant rent increases. This is often the case for the size property you're looking at.

To assess a good retail investment vs a mediocre one, you'll have to drive around the area to see how many other vacant stores there are, and if there's construction for more. There are areas where practically all stores are rented, and there are areas with a number of empty stores, especially downtown where in many areas, people drive longer distances to strip mall to do their errands.

My dad was in a retail type business, bought the property that his business was located in, and rented out another store on the site. He did it to protect his business. We're in NYC, a very competitive area, so if you have a thriving business, your lease is up, and the landlord knows your business is doing well, he can raise your rent substantially, and put you out of business, and then rent it to a competitor where all your former clients used to patronize.

After he became a commercial landlord, my dad kept close tabs of what's going on. Some favorite stores he went to, say small local chains called "Stevens", and "Times Square Stores" upon lease renewal, competing large chains like "PC Richards" would come in, offer three times the rent, or buy the building, take over the business . A fish store he patronized, was at that location 40 years, moved across the street when I was a little kid, and I couldn't understand why. Turned out the fish store owner had the foresight to buy the building 20 years back, so when his landlord chased him out, he had a place across the street to move to, and kept his customers. So for "PC Richards", the fish store owner, ROI is the last thing. It's "location, location, location". The fish store owner could find an empty store, miles away, and start his business from scratch if he didn't have a place to move to. At this point, the ROI for his store is totally irrelevant.

When you do commercial real estate, you only look at ROI on the property, you're only at a half or a third of the total picture.

Originally posted by @Frank Chin :

I don't know how many commercial properties you looked at? Is this the first one?

When I started residential and commercial investing, I looked at many properties in different areas. It's 50 to a hundred before I buy one. ROI is only one of the considerations. For commercial properties, there's even more considerations.

For residential, renters generally rent if they are within commuting distance, good schools. For commercial, especially retail, often, the location is vital. For a small property such as yours, it's suitable for an owner/user, so for a given group of users, it's worth more than the ROI, and in some cases, the ROI is irrelevant.

Take hairdressing as an example. Its customers are within a certain driving distance. People usually don't drive two hours to have their hair done. If the area is in need of a hair salon, there's no available sites nearby, then they'll either buy or rent the location. So a owner/user would pay more if the location is ideal for his business, so if it became successful, he wouldn't worry about exorbitant rent increases. This is often the case for the size property you're looking at.

To assess a good retail investment vs a mediocre one, you'll have to drive around the area to see how many other vacant stores there are, and if there's construction for more. There are areas where practically all stores are rented, and there are areas with a number of empty stores, especially downtown where in many areas, people drive longer distances to strip mall to do their errands.

My dad was in a retail type business, bought the property that his business was located in, and rented out another store on the site. He did it to protect his business. We're in NYC, a very competitive area, so if you have a thriving business, your lease is up, and the landlord knows your business is doing well, he can raise your rent substantially, and put you out of business, and then rent it to a competitor where all your former clients used to patronize.

After he became a commercial landlord, my dad kept close tabs of what's going on. Some favorite stores he went to, say small local chains called "Stevens", and "Times Square Stores" upon lease renewal, competing large chains like "PC Richards" would come in, offer three times the rent, or buy the building, take over the business . A fish store he patronized, was at that location 40 years, moved across the street when I was a little kid, and I couldn't understand why. Turned out the fish store owner had the foresight to buy the building 20 years back, so when his landlord chased him out, he had a place across the street to move to, and kept his customers. So for "PC Richards", the fish store owner, ROI is the last thing. It's "location, location, location". The fish store owner could find an empty store, miles away, and start his business from scratch if he didn't have a place to move to. At this point, the ROI for his store is totally irrelevant.

When you do commercial real estate, you only look at ROI on the property, you're only at a half or a third of the total picture.

 Frank, thanks for the input. It was very helpful.

Originally posted by @Jon Holdman :

Is this a "triple net" property where the tenant pays all taxes, insurance and maintenance?  $14 per sq.ft. and 911 sq.ft. translates to $1062 a month.  Commercial loans typically have a higher down payment and a shorter amortization than conventional residential loans.  Assuming 30% down, 5% interest and a 20 year amortization, your monthly payment would be $739.  If the tenant is paying for all expenses, you would have cash flow of $323.  If you're covering some or all of the expenses, then those would cut into the cash flow.  Commercial loans also often have balloon payments, so you'll often end up needing to refinance or sell when the loan balloons.

 Yeah Jon, I'm with you. Like I said it makes no sense. My number is lower than yours because I included vacancy, capex, management fees, repairs and insurance. Thanks for you input

The leasing price 14 a foot?? Is it leased or are they offering it for sale and for lease at the same time??

If there is no income then you are paying per sq ft for the shell of the building. Have to know exactly what you are buying before you can do a proper analysis on it.

Example there are NNN leases,NN, and gross.

Originally posted by @Joel Owens :

The leasing price 14 a foot?? Is it leased or are they offering it for sale and for lease at the same time??

If there is no income then you are paying per sq ft for the shell of the building. Have to know exactly what you are buying before you can do a proper analysis on it.

Example there are NNN leases,NN, and gross.

I would do a NNN if I was to lease it out. My number may be a bit off but regardless the numbers don't look good unless I increase the leasing price.

@Georgee Gilbert   As mentioned by a few: A little more information would help make a much better assessment on this deal. In addition, what's the average lease price per sqft in the area for comparable spaces? Are you using a commercial broker to buy this property? or are you doing it yourself? A broker would be able to provide you comps. You can also use a few websites to find some comps. Who pays the taxes? Utilities? ... etc. Most leases have yearly escalations. You might start losing a little bit of money, but if you are leasing it for 5-6 years, you can structure the lease in a way that you make money a few years later.... There are plenty of variables ... and many are negotiable and depend on your level of comfort, your own objectives, ... etc. Good luck.

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