Updated almost 5 years ago on .
Should I buy this office building?
I am in the early stages of evaluating the purchase of a small multi-tenant office (6,250sf) building with an asking price of $500k ($77/sf) which I'm going to offer $437k for ($70/sf). There is one 3,550sf suite that is currently occupied by a tenant on a 1-year lease with several one year renewals. That tenant has a gross lease at $15/sf (about $10 net or $35,500 after operating expenses) which is is consistent with the market.
The remaining 2,700sf is a large open space that would more than likely need to be built out at a cost of about $100k. Additional expenses include updating the exterior ($15k), potentially renovating the existing tenant's space if they vacate at the end of their lease ($35k), leasing commissions for both spaces ($25k). So total potential outlay would be $612k or $98/sf.
Once fully leased it should spit out $62,500 NOI and assuming an 8% cap rate at sale would result in a valuation of $781,250. After selling expenses I would be looking at a gain of about $115k. I expect it would take at least a year to stabilize the property before I could sell it or do a cash-out refi.
Is the juice worth the squeeze? If so what would be the appropriate financing strategy here?