I have found parcel for sale which has a nice brick duplex and a bonus three unit small commercial building. I'm pretty confident in evaluating the duplex and the purchase price I want to offer but I'm less confident on what considerations I should take into account for the small commercial building.
The property is in a small town so looking at CAP rates and all that is probably not going to lead me very far. The owner is also older so trying to get good accounting from him to figure out the NOI of the building over time is also probably not too helpful.
I have an idea of the rents and all thee units are presently occupied. I can work my way back with a 50% expense rule but I'm not sure this applies here as it does in residential. I do not yet have copies of the leases to know if the are NNN leases.
Also, if there is a vacancy, it will probably take quite a while to fill as this town is stable but not hyperdynamic economically.
What considerations would you suggest I take into account or things I should look into before going further with offering on this deal?
The-first THING THAT COMES TO MINE FOR Me... Are the buildings code compliant?
Yep, good point. The buildings seem to be in good shape but that is something to check definitely.
I’m thinking more from a building-a-business-case perspective than from a due diligence perspective.
@Josh Stack I don't know if this perspective will help but I'd imagine your first step is knowing why you want the property. What's the driver? Are you in love with the duplex and will take the commercial building with it? Are in love with the commercial building but will take the duplex with it? Are the on the same assessor's parcel? Do you have any idea how long the commercial tenants have been there?
I have super-duper limited knowledge around this but if you have a tenant like a dentist that has spend huge amounts of money building out their space you have a lot more stability than something like a barber shop. I can't tell you how many times I've seen small-scale retailish space with something like a hair salon, knick-knack retail store, and maybe like a random single-person CPA. I drive by a year later and it's another (different) 3 shops in the building. I think I see a pair of scissors and a directv logo so I have no idea what's going there. If nothing else, you might be able to increase value by investing in signage!
I think it your shoes I'd be happier if the commercial building had a different APN and you at least had the option to sell if it didn't go according to plan.
Hi @Andrew Johnson ,
Good stuff. Yes, I would feel much better if they were split into two parcels as well. I have talked to the city and they say it can be done though it would require a deviation as the setbacks don't quite meet code. The gal I'm talking to in the planning dept says she believes the variance would be approved since it is two exiting and established buildings on a single parcel that is just requested to be split.
The building looks like it lacks direction. What is it? Who comes there? Could people swing by one place and be interested in another? Ie Nail and hair? What if you just converted the spaces into apartments and made the whole thing 5 or 6 units total?
Tough to say for sure without knowing the area but as far as considerations before buying be sure the leases aren't going to come up 2 days after buying, call brokers in your area to see what market rents are and if your paying for something that has income OVER market value but leases that are shaky, personally I wouldn't buy it. If it were me I would request the variance, split the land, re-lease all 3 spaces on 5 year terms and sell the building off then use the money to for another 3-plex or bigger this time. It sounds like you want to buy multifamily property, throwing in C- commercial space is just gonna throw off your processes. Those are my 2 cents. Best of luck!