Apartment buildings with commercial store fronts

13 Replies

I am interested in purchasing an apartment building as a first investment property, it's the only building that has decent numbers at first glance.   It is an 11 unit building with two store fronts.   Only 4 of the 11 units are occupied at just under 600 each unit per month.   I'm planning on going to see the buildng and ask questions on Monday.  How should I determine the overall value?  Current list price is 159000, taxes are 4300 a year.  Are there any questions other than why are you selling? and what keeps the rest of the building from being rented? That I should ask?   Thanks for your help!  

Newbie Jason Smith

If the store fronts are/were restaurants, check to see if they still have the hoods and air flow evac systems and fire suppressant systems. Check to make sure the stores have separate gas /water / electricity (would be hard to lease out of they dont). Check to make sure theres enough  car parking to support both store fronts, plus the tenants of the apartments (city can limit the types of businesses depending on parking, for instance if theres not a lot of parking they can not permit restaurants).

Also find out if the building is in a DDA controlled area. Those can be a real pain to deal with.

what is DDA controlled?

Downtown Development Authority. They set rules of what types of business can go in, what you can do with the looks of the outside of your buildings and what have you. They are usally a group of business owners from the area. Can be really cliquy and if you aren't part of the "cool people" can cause you all kinds of problems. They tend to do what they think is best for their own businesses and not whats good for the area.

1 example. They can rule that grass in front of property between sidewalk and street is to be maintained by city, not property owner. Which sounds great, but can be a real nightmare when the city does a half arse job of doing it, cutting irregularly, getting rid of any flowers or plants you might have put in, not allowing bike racks in front of business. All kinds of nonsense that you don't want to have to put up with but if your within the area the DDA is in charge of, you have no say. You can go to the DDA meetings, voice your concerns, but its like talking to a brick wall. Of course, you can go to court and sue to have the right to do what you want to do, but thats time consuming, expensive, and a pita that you'd rather not have to deal with.

My father, brother, and me bought some commercial property back in the 80s. It was an old garage/gas station and a pool hall next door. We converted the gas station into a 3 unit building and totally redid the pool hall. We put a ton into the property, and for over 15 years our properties were really the only properties that were well maintained, not just for profit, but to make the city look better.

City started picking up and moving from a low end working class neighborhood, to more of a urban yuppie type of scene if you know what I mean. DDA was formed, which we didnt join for a few years, so they had no say what we did (Once you join, theres no leaving). Eventually we gave in, and joined. Big mistake. They don't maintain it worth talking about. They stole the bike wrack we had out there (yep, you read that right, the city stole it), they removed all the bushes and flowers, and they constantly try and move the decorative garbage containers we have out so that people dont have to throw crap on the side walk and street.

The DDA just turned down a million dollar business that wanted to move into the area because he wanted to have automatic doors like you see at some CVS drug stores. Not the big sliding kind, but the type that open the same way normal doors do.

@Jason Smith  

Significant defect the occupancy find out why.

Google the property name and address see what comes up. Check the fire and police logs.

Go to IREM.org search for ARM certified property managers. Call 5 ask them what sides of the city they like/dislike and why. Ask what they see them selling for and what expenses are by category. Ask if they know anything coming up for sale. Then ask them about the property you are looking at they might know the scoop.

Paul

I think you need to find out what the Net Operating Income is and divide that by your cap rate. You get your cap rate by NOI/SALE Price = cap rate. So if you have a cap rate of 0.05 and the NOI is $10,000 then your purchase price or value will be 200,000. But you have to take other things into consideration such as condition vacancy rate and what your goals are with that property.

You should pick up a book called "The Complete Guide To Buying And Selling Apartment Buildings" by Steve Berges.

Originally posted by @Girard Curry:

I think you need to find out what the Net Operating Income is and divide that by your cap rate. You get your cap rate by NOI/SALE Price = cap rate. So if you have a cap rate of 0.05 and the NOI is $10,000 then your purchase price or value will be 200,000. But you have to take other things into consideration such as condition vacancy rate and what your goals are with that property.

You should pick up a book called "The Complete Guide To Buying And Selling Apartment Buildings" by Steve Berges.

You would use a market cap rate and your NOI. A market rate comes from recent sales of similar properties. In your example you are figuring in circles.

I'd start treating the multifamily valuation and retail valuation separately, though they're obviously a part of one whole.

On multifamily, certainly figure out the vacancy situation, and see what comparable apartments rent for, which is crucial to your underwriting.

On retail, see if you can get at least an indication of interest letters from a national retailer. If not, still shoot for a triple net lease, and see what sort of pre-commitments you can secure. A NNN of $26/sf vs $18/sf is a big swing in evaluation. Id put the property under an LOI and try to negotiate a 45-60 day study period to do due diligence and locate a retail tenant.

Having a retail component certainly makes this a more challenging transaction since you have to do a good job with both asset classes in order to succeed. Good luck!

Jason, An 11 unit mixed-use property is an ambitious first step to be sure! I wouldn't be too concerned about the residential portion. As you clean each unit up and get it priced right they will get occupied soon enough as you determine your target market.

But I'm curious about the nature and size of the retail spaces. My experience is that anything under about 1200sf is pretty easy to occupy. I have 500, 700 and 900sf in a small market and they stay occupied no problem. As was stated earlier, restaurants are another thing altogether. Mine has been empty 3 out of 8 years -tough business in tough times.

Lending is more limited for mixed-use. You will want to know the history of your building as far back as you can go. Ask questions, check county records and historical society.

A lender (or potential purchaser down the road) will likely require environmental info if there is not a recent history recorded (phase I, II).

Ask questions about the roof, systems (heat a/c, hot water) and depending on age asbestos issues.

Good luck and have fun!

Jason, An 11 unit mixed-use property is an ambitious first step to be sure! I wouldn't be too concerned about the residential portion. As you clean each unit up and get it priced right they will get occupied soon enough as you determine your target market.

But I'm curious about the nature and size of the retail spaces. My experience is that anything under about 1200sf is pretty easy to occupy. I have 500, 700 and 900sf in a small market and they stay occupied no problem. As was stated earlier, restaurants are another thing altogether. Mine has been empty 3 out of 8 years -tough business in tough times.

Lending is more limited for mixed-use. You will want to know the history of your building as far back as you can go. Ask questions, check county records and historical society.

A lender (or potential purchaser down the road) will likely require environmental info if there is not a recent history recorded (phase I, II).

Ask questions about the roof, systems (heat a/c, hot water) and depending on age asbestos issues.

Good luck and have fun!

PS just looking at some preliminary numbers and this could be a great deal if the bldg structure is solid! I look forward to hearing how this one goes for you.

$159,000 is awfully low for an 11 unit building. These are some questions I would ask if I were in your shoes.

1) What year was it built? I would be concerned that significant deferred maintenance is rearing its head right around the corner. Is it made of concrete or wood frame? Also, a very important factor. Concrete requires much less maintenance all the way around. 

2) Why are only a fraction of the residential units rented? Does the area possess inherent problems with keeping a residential building fully occupied? Or did the Landlord slum out the place for years until it was nearly uninhabitable?

3) What are the store fronts zoned for? DDAs have much less power/authority in other cities. The DDA in my city is not nearly as hostile as the one he describes.

4) Are there any current code violations?

5) I would want to know what seller paid for it (Look Online)

6) Have the police been to the property within the last two years? Check Police Records

I would want to see all the apartments. A general rule of thumb I use is that it costs me $1,000 per square to completely gut, rebuild, and update an entire apartment. That means everything...drywall, flooring, kitchen, bathroom. You can add a little more if you are doing two bathrooms. I would look at all the units and determine a rough estimate of how much it would cost to get the building operating at peak efficiency.

As your looking around take notice of the floors. Do they slant at all? Are they uneven? It could be nothing or could be a myriad of problems. The floors might be deeper in one corner than in other. Take notice of any discoloration on the drywall. If you see any circular shapes on the ceilings there is/was a leak.

Your idea is right on. 11 units for $159,000 is a good deal. Do not pay attention to the Cap Rate as its currently operating. Use your imagination. Where could you see this building operating? What do you have to do to get this building operating to peak efficiency? 

I don't know the area so take the following numbers with a grain of salt...

9 one bedroom units rented at $575 (let's be conservative)

2 store fronts leased at $600

Total Gross Revenue - $76,500 - 15% (sticking with the conservative theme) Vac Loss

Total Revenue - $65,025.00

Total Expenses (50%) - $32,512.50

Total NOI - $32,512.50

Potential Vale of Property if sold at 9% Cap Rate - $361,250

Like I said, I haven't seen the property but that's how I play it out in my head. Looks like a winner just need to make sure your not getting stuck with a lemon of a building.

Ok, so here's some info I have come across, the building in February of this year had a wiring malfunction that shut the doctors office down for a few days to be re-wired.  A bare wire had arced to the metal in the plaster walls  and had started to smoke 3 joists.  Although no major damage was done, it makes me curious if the 10400 sf building will need completely re-wired before I can put anyone into it for my own concerns.  This is a huge task for a new guy like myself to jump in so deep so early.   If the numbers work out near to what @Daniel Miller   had stated, it would completely replace my current J.O.B. income in just a few years.

The building is made of brick and is 98 years old, there is plenty of on street parking and parking lots nearby as well as the spaces included.  I think our area relies more on a boro council than a DDA, which can be just as bad if not worse.

I will be looking for some funding if the property checks out tomorrow on a visual inspection.  My local credit union only lends to owner occupied and the local banks lend up to 4 unit buildings, any recommendations on where I could find lending and what the rates may be?  I will check to see if the owner will finance.

I will post again tomorrow with the info I find.  Thank you!

ok guys, I viewed the building today and was not impressed.   Could not and didn't go into the basement due to a mangled junction box near the top of the steps.   It's funny how 9 un-taped wire nuts can tell you a lot about the quality of the work done in a large building.   The realtor warned me that they wouldn't budge on the price and we all other investors had been through the building already and deemed it un-worthy of the amount of time and money it would take to turn a profit.   Each unit can only be considered one bedroom, which are not popular for middle class in the area.  The lack of decent kitchens and bathrooms in every apartment and whole building heat, turned me off for this building.   Thank you all so much for the advice and I took notes!   You all are excellent!

Neat tread.  Knowing when to walk away is as important as knowing when to jump in.  

I have been having a hard time finding anything at a decent price in my area at this time.  I can't believe what some people are willing to pay for rental income property in this area.  Apparently they can afford a negative cash flow, or they aren't on BiggerPockets and don't realize there's going to be a negative cash flow.

Join the Largest Real Estate Investing Community

Basic membership is free, forever.

By signing up, you indicate that you agree to the BiggerPockets Terms & Conditions.