Buying small office building with essentially no cash flow.

9 Replies

I am looking to buy my first commercial building. The plan is to use a very small portion of the building for my new office and rent the rest which could be broken up into 3-6 units or more. Here are details...

4862 Sq Ft. Century old home - bones and mechanical are very good - just dated cosmetics from a 1984 remodel. The attorney who bought the building in the 80s gutted it and used part of it for his law firm and rented the rest. It is essentially vacant because he retired and other renters left as it went up for sale. It has been on the market for 2.5 years but he started it at 375K in 2017 and dropped it to 290K in March 09 and 275K in May 09.

This building is in my home city and the area is called "Downtown Willoughby" which has become what I would consider a top 5 trendy bar/restaurant area in Cleveland suburbs. So the area is desirable and on its way up.

I am about to send him my letter of intent but I need to reach out to my commercial contacts. Should I expect issues since I would be buying the building to do a cosmetic rehab and it has no tenants?

Would me using it for my personal business change anything on the lending side. SBA loan?

Why do you say the building has no cash flow? Do you mean it doesn't now because it's empty but will in the future once it's full? Or did you mean you'll have negative cash flow due to expenses exceeding potential rents?

Originally posted by @John Teachout :

Why do you say the building has no cash flow? Do you mean it doesn't now because it's empty but will in the future once it's full? Or did you mean you'll have negative cash flow due to expenses exceeding potential rents?

 I mean the building has no cash flow because the main tenant is the owner selling the property and the rest of the offices are vacant.

@Adam Craig it's going to depend on your financials. Some will use potential income to help qualify if you have leases in place but your income, credit, net worth and cash on hand are what they will be looking at primarily especially since it's vacant.

Every bank is different so you need to shop several. Some do SBA some do not.

Make sure to prepare a business plan for the property to submit along with your financial package which should include last 3 years of tax returns, current P&L and balance sheet for your business and current PFS. This will help speed along the process and you will look like a sophisticated investor.

@Greg Dickerson

Thanks Greg! I have a portfolio 27 single family homes, 70k cash hand, solid net worth, and a second business with 6 figure income.

On paper I look really good I just didn't know if a no cash flow I will prepare the documents you suggested with my offer.

One follow up question - I do the brrrr on single family and plan to do similar with commercial and apartments. After I get the property rehab and I get it occupied how long do banks typically require you to wait before you can refinance a commercial building like this?

Originally posted by @Adam Craig :

@Greg Dickerson

Thanks Greg! I have a portfolio 27 single family homes, 70k cash hand, solid net worth, and a second business with 6 figure income.

On paper I look really good I just didn't know if a no cash flow I will prepare the documents you suggested with my offer.

One follow up question - I do the brrrr on single family and plan to do similar with commercial and apartments. After I get the property rehab and I get it occupied how long do banks typically require you to wait before you can refinance a commercial building like this?

Sounds like you should have no trouble qualifying.

Some banks will refinance as soon as you are complete and stabilized. It all depends on the lender as they are all very different and have different appetites. You want to talk to smaller local and regional commercial banks as they have more flexibility and make decisions on a local level.

One thing worth repeating and I can not emphasize enough is the more complete and professional your business plan for the property and your financials the better you look and the easier it will be to get things done. This will serve you your entire career.

The package should be electronic so you can email it as a follow up as well as drop a hard copy when you meet with the banks. They will ask for it again. Sometimes multiple times.

@Adam Craig  

@Joshua Holt

Just as an FYI you would probably be looking at a short term loan product on this type of deal until the property is stabilized . 

As far as the SBA is concerned those loan amounts are heavily based on collateral as well. 

If you have the income history with the business or other assets that can be used as collateral then it maybe possible 

But a short term loan that gives you a % of the rehab would be your best bet if not... 

Originally posted by @Tarik Turner :

@Adam Craig 

@Joshua Holt

Just as an FYI you would probably be looking at a short term loan product on this type of deal until the property is stabilized . 

As far as the SBA is concerned those loan amounts are heavily based on collateral as well. 

If you have the income history with the business or other assets that can be used as collateral then it maybe possible 

But a short term loan that gives you a % of the rehab would be your best bet if not... 

 I thought about that but I have a traditional hard money lender for my single family homes at 14% plus one point. I have two smaller time lenders that do 10% and one point for loans around 100k

I can't imagine the interest rate on hard money would be a good idea for this amount. So you think Bank financing with a potential rehab finance would not be the way to go?

Depending on the condition of the property. 

If it is still in solid condition and can be used as is, (And the appraisal pans out) then you should be able to get an offer from a traditional lender on it 

BTW those rates mentioned are on the high side