Mixed Use Investment Purchase

4 Replies

I currently own a 9 unit multi-family and a mixed use fourplex both of which has commercial financing, so I'm familiar with the typical financing arrangements and valuation. I'm in negotiations to purchase a 6 unit mixed use building with 3 residential units and three commercial spaces. The apartments and the commercial areas are newly updated. The seller divided three commercial units of a much larger original space thinking that smaller spaces would be easier to rent and there are a few additional items needed to finish off the commercial area. Some of these items will be completed by the seller and I'll need to complete some after I close. Two of the commercial spaces are ready to rent however. The immediate area is densely populated with many other mixed use buildings and there are low number of vacancies though out the immediate area. I believe the commercial spaces would rent fairly quickly. Likely tenants would be places like Telephone Stores, Delis, Insurance agents and various mom and pop type operations. Surrounding neighborhood is a C class area with some gentrification occurring in spots. Residential rents are below market by about 20% and all tenants have been there for 5 years or longer. If I'm able to bring the residential rents to market and get the commercial portion rented, NOI would be $ 40,000 on a sale price of $ 280k or a cap of about 14% (caps in this area range from 7%-9%). However, I'd have to get to that point as the commercial is completely vacant. Cash burn is about 6000 to 8000 annually until at least one commercial unit is rented. I can get 80% financing from my bank and the seller is willing to hold 20%. Here are my questions:

1) What do you think of this deal?

2) I read a string here where someone had to get a commercial inspector for a 10 unit mixed use property which cost significantly more than a residential home inspector.  For my fourplex mixed use building, the bank accepted a regular residential home inspector.  Their position may be different here.  Regardless of their position, would it be worth the cost for me to engage a commercial inspector?

3) For a property this small,  it is typical to have a gross lease or a  net lease?  Obviously, if I could lay off some of the operating expenses, my numbers would look better. 

The real question I see is can you rent the commercial units? You gamble will be in affording the place until you get them rented. I cannot advice as I don't know the area. I think I would be walking door to door asking the other commercials properties what they pay in rent then compare that to the vacant ones.  Since there are other options.... it means either no one is looking to add a business in that area or those units are over priced. You need to find out which. 

As for the inspect just ask your bank which one that want and call to get an estimate from a commercial. On my business loans that bank doesn't care about an inspection. I actually do all my own. 

I love the deal... your close to 0 out of pocket. I would be all over it, once I knew I could rent to commercial units. 

Are the comm units sub metered? Or is that one of the planned updates? I would always go for tripleN if you can get tenants to agree. the type of tenant you listed should be comfortable with net lease in my experience...

1) Sounds like it potential to be a great opportunity but missing a little info.  @Gordon French hit the nail on the head.  Residential you'll get those rents up over time, but the much bigger risk appears to be commercial lease up.  Keep in mind you may have additional build out for each new tenant, leasing commissions, some free rent during tenant's build out period, etc.  Maybe those are in your math, not sure.  Some unknowns there but probably just things to keep in mind/budget for.

2)  Some sort of inspection would be helpful unless you have lots of experience here.  Roof, hvac and electrical are generally the big ones.  If you don't hire an real inspector, you could just use a general contractor or pay electrician, roofer and hvac guy for a 30 minute appointment to get their two cents.  Probably gets you to same place but without a report.  if bank requires a report they can probably write you something up.

3) I think net is more common for commercial spaces, but tough to accurately allocate insurance and real estate taxes among 9 units.   If you just divide among sq ft you probably still get stuck with the residential but at least it helps spread risk.  As someone else said, biggest thing would be to get separately metered utilities if at all possible.    You could do private sub-meters for electric, but gas meters are really pricey.  

Thanks for comments everyone. Very helpful. All utilities are separated and all units are separately metered. I spoke with a couple of leasing agents today to get their insight on market conditions as well as to understand their compensation. They need to see the place, but the feeling is that I'll be dealing with gross leases in this area. I have another mixed used building that's a fourplex and that's the case there as well. That fourplex is located in commercial/residential area similar to this building and no one is doing NNN. The types of businesses in that area is similar to what exists in the area for the new building. My analysis doesn't factor in any fit out costs. The spaces are demised already and two have HVAC in place. One space is electric and I'll need to have air conditioning installed in that particular space; that's one of the reasons I insisted on no money down so I can reserve capital for anything that pops up that I didn't anticipate. My thought is to make the tenants responsible for fit out costs.

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