First potential commercial deal - feedback welcome!

[Aly W.]

Hello all! My husband and I are making the move (we hope) from residential buy and hold landlording to commercial investments. Our first opportunity is an office condo in the Ft. Lauderdale area. I think we're ready to submit a Letter of Intent but would greatly appreciate feedback.

Details:

Asking price - $834,000

Approx. 5,753sf space in a 59,000sf, three story office condo, Class A space. The 5,753sf space consists of 6 offices. The owner is the largest tenant with 2,120 sq ft, another tenant has 1,606 sq ft, balance (3) are all less than 400 sq ft, vacant office of 350 sf. with the balance being common elements, corridors, stairways, elevators, bathrooms, kitchen, etc.

Gross rental income per the listing agent is $108,660, expenses are $41,225 annual condo fee (CAM) which includes electric, water/sewer, janitorial and property management, the estimated new property taxes are $15,500, and insurance approx. $2000.

All tenants' leases are 1 year and/or have less than 1 year remaining.

The property was purchased by the seller in 2011 for $350,000. My agent feels an apples to apples comparison based on recent comps (in the building), adding the average CAF, would equate to this unit costing $714k.

I know there are expenses missing and without seeing the leases, not sure when they're expiring or when the tenants need to give notice. The listing agent says the small office suites are going to be constantly in flux. My agent feels I would need to get the current owner and maybe the 2nd largest tenant to renew a longer term lease during due diligence. If not, then this really may be more suitable for an owner/occupier, where leasing the extra space is going to help cover costs.

My lender can offer a program of 10% down for a bridge loan of 1 - 3 years, but we haven't determined the full terms yet. So the numbers above do not include debt service.

I know this is long winded, but it's our first commercial opportunity and after reading Commercial Investing For Dummies, we're a bit overwhelmed. Thank you for your help!

[Joel Owens]

Yeah I do not like office condos for commercial investment. I am sure some do great with office it's just not my thing. Might want to talk to Jon Klaus on here as I believe he owns some office property already.

You can't really control what the other owners are doing or who they are renting to.

If you are going to buy an office building then go for owning the whole thing.

What kind of cap rate are you getting you for?

For office it would have to be much higher compared to more hands off investments. The key in commercial is to know the pluses and minuses of each asset class and to get the proper yield based on work involved and risk.