How to analyze a deal on a mixed used commercial property

5 Replies

I've found a 24 unit mixed use apartment building for sale. 8 units are retail space, 8 units are 1 BR apartments and the remaining 8 are 2 BR apartments.  I am brand new to residential RE investing having only bought 2 six BR single family homes set up for student housing.  

I'd like to eventually graduate to apartment buildings and would like to use this opportunity to practice analyzing deals and see if this is a good one.  What questions and data should I gather from the commercial agent to start analyzing the deal?  I simply don't know where to start.  

The listing suggests there are opportunities to add value....from the listing: "features large 1 bedroom units (900 SF), which can easily be converted into 2 bedroom units. The 2 bedroom units currently average $1,425/month, while across the street rents are north of $2,000/month. The commercial (retail/office) space is 100% occupied by stable local and regional tenants at below-market rents."

What is the total cost of the deal?

what are the comps locally?

what kind of financing can you get?

What is the ordinances on this property?

What are the demographics in this area?

what are the rehab costs?

Age of roof, electrical, plumbing, heating, sewer?

Cost of insurance, taxes, trash removal, lawn work, what other incidentals are there? 

how long to you plan to hold?

What are the minimum payments going to be?

I guess you also need to see the rent receipts for at least 5 years that show the vacancy amounts

Start by asking for the up-to-date rent rolls and the income statement (or use 30%) on the property. Calculate the net operating income.  Divide the net operating income by the capitalization rate you require to invest your funds. That's give you the value.

NOI = Capitalization Rate X Value, or, as the formula is more commonly known, "IRV." I = RV

I have an excellent spreadsheet that you can use that will calculate all these numbers for you. We use it every day in the Denver market to arrive at a beginning estimate of value. Send me a note if you would like to receive it from me (free of charge). Or you can go directly to the author, Joe Massey at Castle and Cooke Mortgage

@Matt McCue

Great thread!

Unfortunately, underwriting mixed use properties correctly takes a lot of modeling experience. 

You'll want to create a pro-forma (cash flow projection) for both the multifamily section and commercial section separately, then combine them in a summary pro-forma. 

Commercial underwriting requires that each lease is underwritten individually (so you'll want to ask for the leases). You'll want to assign probabilities to lease renewal and  assume a market vacancy, even if the units are currently 100% occupied.

Best of luck! DM me or reply here if you have any specific questions with the analysis. 

@Michele B. and @Rodolfo Canon really gave great responses here.  The bottom line is will it cash flow and you need all of the information they're asking before you'll really know the answer.  @tyler kastelberg was also on point by making a point to assign probabilities to lease renewal and to absolutely assume a market vacancy.  Depending on the property and location, crime statistics etc... I've seen vacancy loss assigned by underwriters as high as 25%.