Second look at numbers for one of my first deals

5 Replies

Hi everyone! Analyzing one of my first deals and would love a second set of eyes. I'm a bit and hold, value add investor. What are your thoughts?

It's a building on the main street in a suburb with a ton of foot and car traffic. The retail/multi-use building currently has two tenants (one has been there for a decade) and one additional vacant space. Current tenants just resigned new five-year leases with $300 monthly increase each year. Cap rate for the area and type of building is between 6-8.

Monthly gross income (total): $5,500

Purchase price: $724,900

Taxes: $9,441

Insurance: $5,199


Vacancy: 5% $275

Maintenance: 10% $550

NOI: $59,976

25% down, amortized over 20 years at 6.5% (being conservative, although think I'll come in under this)

Cash flow: $2,103.39

What am I missing or miscalculating?

You might want to check those figures, because with what you provided, this deal loses money. Here are the monthly figures:

Income: $5500

Taxes: $786.75

Insur: $433.25

Vacancy: $275

Maint.: $550

Mortgage: $4053.49 ($543,675, 20 years, 6.5%

Loss: $598.49

Also, the NOI is $41,460. (Income: $66,000 - Taxes: $9441 - Insurance: $5199 - Vacancy: $3300 - Maint.: $6600). If this deal was priced at a cap rate of 6% - 8%, it would be listed at $518,250 - $691,000.

Hope this helps,

The real question here is can you renegotiate these leases to be NNN (triple net) leases if they aren't currently. With a triple net lease, you're going to be able to push the taxes and utilities to the tenant to cover. That's a game changer and keeps your NOI and cash flow in tact in the face of ever increasing property tax bills in the wonderful state of TX.

What's the age of the building? That may dictate how far off of current code the building is and you'll be setting yourself and future tenants for a large upgrade bill to bring the building up to code. The city uses new tenants and permitting as a way to force compliance to code changes.

This could be a good deal, but only if you're able to push the taxes and utilities to tenants.

@Krisleigh Hoermann

I wont go too far into the numbers, but I will note that unless you are bringing a tenant to the property at purchase, you'll need to assume one to two years of vacancy on the commercial space. You might consider running this model as a flip to see if it makes sense economically. 

It's best to not assume a future lease in your purchase value ... hard to do on small properties but very important to avoid getting trapped.