How to analyze a deal for an office space

Question

Hi,

I came across a 2200 sq ft office space listed for $400k.

It would be our first RE investment. Wondering how to analyze this deal. Here’s what I’m thinking

- Calculate commercial loan terms

- Add operating expenses

- Add any fixes

For income, calculate annual income based on local lease rates (broker mentioned they are $15-16/sq ft /year).

Figure out cash flow, cash on cash, etc.

Is this the right way or am I missing something?

Please advise.

Best,

Dharmesh

Rush Ricketson · Answer

Thank you, Bennet!  That's very helpful - I'll do that.

Bennet Sebastian · Answer

The simplest way is to call current competitive spaces for lease and find out what they are asking. You should have a fairly accurate estimate of what you could expect to lease it for. If it were me I would discount it by 10% to be safe.

Rush Ricketson · Answer

I'm in a similar situation actaully.  Is the best way to understand the local lease rate simply through an experienced broker in the area?  This is the part that I'm finding to be the hardest to estimate so far when the property doesn't have an existing tenant.

Dharmesh B. · Answer

@Bennet Sebastian DM sent. Appreciate it!

Bennet Sebastian · Answer

PM me your contact information and I’ll give you my spreadsheet and help you run the numbers.

Dharmesh B. · Answer

@Bennet Sebastian thanks for confirming. I don’t have a target IRR. It hurts my head to understand it, but will keep trying.

Bennet Sebastian · Answer

All of the above. Do you have a target internal rate of return or IRR? That’s what most commercial investors will use as a benchmark to decide if an investment will work for them. For me the target is 20% using conservative assumptions.