Hey there! I'm completely new at all of this so be brutally honest. An opportunity has come to me to purchase a small commercial building in an "up and coming" downtown area. It's a private deal/loan, no money upfront, 550 a month for 5 years, no balloon payment. It used to be a doctor's office but the inside needs to be completely gutted and redone. It's valued at well under a 100k right now. I have no experience in commercial property but I think it could have some potential. I know someone who has the experience and means to fix up the place at significantly reduced rates if they get a stake in the building/business, which isn't a problem. I don't have a lot of upfront capital but between us both could rehab the place, I have the financial means and they have the experience and means to fix it up, it would just take longer than usual. I feel that at that price so much could be done with the building whether its leasing it out or selling later for hopefully a profit. This would be my first time venturing into the real estate realm so there would be lawyers involved but before talking with a lawyer I wanted thoughts and opinions. This could be a horrible idea or a stepping stone.
Immediately with any commercial property, you need to understand the economics of the property. How much can I charge my tenants and how much will it cost me to run?
How big is the space? What is your potential rent income with a property this size (Avg. per sq. ft. Price in the market x # of sq. Ft.)?
Once you know these figures, you’ll need to understand your operating costs. These are things like utilities (if not triple net leases), maintenance, marketing, etc.
You'll then subtract the first number from the second number to get what is called your Net Operating Income (NOI). This number divided by the average commercial cap rate in the market, will derive the potential value of the property.
Imperative to have some of these numbers in front of you to start to understand if you truly have an investment opportunity here. Reach out if you have any questions!
Thanks for your post and welcome to BP!
The best recommendation that I can give you is to find a local mentor in your market who is willing and happy to hand-hold you through your first commercial deal.
Commercial leases are typically more complicated than residential, and the "after renovation" value of the property can be subject to a lot of factors.
Walk before you run -- find a few people who have knowledge in your local commercial market and buy them a coffee.
I usually offer specific advice or my own analysis on a deal. This time, I'm going to do something totally different.
Go for it.
Your potential losses are small and what you'll learn is huge. Here's a short list of things you could learn:
1) What are commercial rents like in the area?
2) What's it like to do a rehab?
3) Do you like having a partner?
4) What does due diligence look like for commercial property?
5) What type of business wants to rent my type of space?
6) Maybe you'll hate commercial and move on to residential.
7) How do you create a pro forma financial statement?
8) How do you estimate costs for a property?
9) Is passive income actually passive?
10) Is real estate investing all its cracked up to be?
Hope this helps,
My recommendation would be very careful regarding estimating expenses for this space. These types of projects can get expensive quick, especially if you have to make improvements to get the space up to code.