5 Unit Commercial building Valuation

4 Replies

I'm considering a property in Utah that has 5 separate offices (all are currently rented) in a 11,000+sf  building in a nicer area where rents are about 3-6% lower than the average in the area.  All 5 leases will expire within 3-9 months.

I own several residential rental properties.

I've never analyzed commercial business buildings.

This building's asking price is $1.4m.  

QUESTIONS:

1. Any calculators similar to the one on BiggerPockets for residential properties out there you recommend?

2. What key factors should I consider to determine if this is a good deal or not?

3. What ROI, IRR, CapRate, Monthly Cashflow, etc., should I target if I were to buy this deal or another commercial business building?

I'm a newbie in commercial buildings.  I've had some success with residential and I want to strongly consider commercial now. 

Hello Scott!  That is a good question and nothing that I say is meant to be taken as a personal insult.  I have not ever looked at the possibility to purchase commercial property but I'll do my best to give you an answer based on what I've learned about that type of development.  I have been involved in the past about sales managing and maintaining commercial properties as well as construction projects into retail, banking, movie theaters, and a hotel.

For about a year I have been watching and listening to a gentleman that has about 25 years in the experiencing of successful real estate buying and selling apartment complexes and currently owns almost 5,000 apartment units.  One of the reasons he has bought so many apartment complexes and have always been profitable for him and he says that apartment complexes have always been profitable for him and is now saying to stay away or be cuatious from most other commercial operation.

He is currently very concerned about other commercial developments depending on its demand for that type and how long a vacancies lasts and if that location is dependent on a special industry or the demand for it or that type.  That being said, I would be concerned about the occupancy and if the leases have a variable ending date and its age, and if you think you could add any value to it by raising the rents or make any interior or exterior improvements. 

Are there any specials on it that are still around and if it was made to get it fully occupied?  I would see if any of those specialties are still going on that or if you might be obliged for them?  You might need permission to do that but I would also recommend that you talk to each tenant and see if they have made any choice to stay there or not.  I do not know anything about your or its location but you might look into an apartment complex as a possible investment if any existing complex is available for purchase. 

Is the cap rate raising or lowering? The ideal cap rate is around 8. I would also recommend a positive cash flow on day 1 of your ownership and do all expenses except the debt should be around 40% of the gross income. Do any expenses look unusual? Does the IRR or the ROI better than any of your other returns? You might check out any other development that is nearby dependent on any of your future tenants or vise versa.

Good luck to you!

Thank you for the insight and tips Michael.  I'm still more comfortable with residential including apartments, duplexes, multi-plexes, etc.  Commercial only interests me as there are certain areas in Utah where the business environment is continuing to see solid growth

A commercial broker in your area would really help guide you on your first deal.

Roughly it looks like this property has a big risk of losing all tenants. Are you prepared to re-negotiate all those leases?