Looking to buy first commercial building

[Wills Manning]

I am looking at buying my shop (It is a building and a barn on a .4 acre property with a fence surrounding). I am one of the 3 renters (I have a landscaping business). Total rents are 2050, taxes are roughly 3300, and the Landlord wants 190k for it. Other than that we (as renters) are responsible for all utilities, snow removal and lawn care. So the landlord is resposible for upkeep on the buildings (maintenance and cap ex) and the taxes. The shop is also located in a tif district. I am having trouble running a report on this property as I do not know what assumption I should put in (for vacancy and maintenance) and I only have experience with multi family buildings. I have a few questions: How do you value a commercial property based off sqft? What do I need to know if I am planning on buying this property?

[Bob Langworthy]

@Wills Manning, here are some thoughts:

1) Commercial property is valued based on NOI (net operating income). It's similar to EBITDA if you're familiar with that. The NOI for this building would be:

Gross income: $24,600

RE Taxes: $3300

Insurance: $1500 (just a guess, but the owner pays it)

Repairs: $2460 (10% of gross)

Vacancy: $2460 (10% of gross)

NOI: $14,880

At a price of $190,000, the building would have a cap rate of 7.8%. Stated another way, if you bought it with cash you would earn a 7.8% return on your investment if you hit all of those figures above. If you finance the purchase, you would have $14,880 to cover the debt service and provide some cash flow for you.

2) As you see above, I'm using 10% for maintenance and vacancy. You may have a better sense of what actual maintenance may look like. You may also have an idea of what vacancy has looked like over the past few years.

3) If you move forward with the purchase, talk to your accountant about how much you should pay in rent. You should be able to realize some tax savings by paying at the high end of market rates.

4) I didn't include an allowance for CapEx. Again, this is something that you are going to have a good idea of based on your knowledge of the building. I know that I have to replace air conditioning units in two of my offices in the next few years, so I have put that aside for when the time comes.

Hope this  helps,