Third deal - need some advice/thoughts

7 Replies

Hi guys, 

Its been a while, sorry. 

I am working on my third deal. I am currently about to purchase a triplex with a garage. 

Current rents are Garage: 110, 3 bedroom unit: 475, and 1 bedroom unit: 375 per month and there is the whole downstairs that the owners were using for a church, but will be leaving at the end of the month. These are low especially since they include utilities due to all being on same meters. Current owners never wanted to raise rents and had the current rents covering mortgage and expenses. 

searching for comparable apartments put rates at 650 for the 3 bedroom and 500 for the single.

I will be paying $16,250 cash and assuming a mortgage for 23k left for 5 years @ 5.5%. Comparables in the area are hard because it has a storefront currently, but I think they are close to 50k+ to be conservative. 

insurance: 2000 (due to a church in bottom unit - should be closer to 800 if all residential)

taxes: 3300

water: 350

gas: 1800

electric: 1000

assuming mortgage: 386

Should I keep the bottom unit a commercial type or rehab it into an apartment. It will need a bathtub or shower and a couple walls. It looks like it used to be an apartment, but now has a glass front. This would probably have to change also. It was gutted before the previous owners and they just put up all new fixtures, kitchen cabinets and studs and walls that were donated to the church. I have two other buildings that are both 4 unit residential, so I do not have much experience with storefronts or commercial. 

Should I also separate the utilities? Is the cost worth it? I am planning on slowly raising the rents to come up to comparables or just under, but dont like the idea of also paying for utilities. 

Thoughts on this deal? 

I like mixed use and would seriously consider keeping the lower storefront as-is and getting a commercial tenant there. The right business can help boost rents in an area, and commerical tenants tend to be low maintenance, long term renters.

Separating the utilities is a good long term plan, but why not wait until you've built up some cash from the property so that you're re-investing the funds back into the building?

@Shiloe B.  Thanks for the advice. I wasn't sure if the commercial would deter tenants from the units above it. The current tenants have been there for years so that may help also. Do you or anyone know anything else that goes with renting a commercial unit, such as higher insurance? 

Commercial tenants make great neighbors because they typically are quiet after 6:00pm.

You will have to get commercial insurance, but it would go through your regular broker and be comparable in price to multi-family.

@Shiloe B.  Never thought of the quiet by 6pm point. Good call. 

I currently have 2 - 4 unit buildings where insurance is ~$1000, but the current owner says they pay >$2000. I will def check with my current broker to see if I can get a better deal then. 

I am hoping to get 600-800 for the commercial. Anyone from Buffalo know what a roughly 1200 sq ft storefront rents for on Walden? Has kitchen and bathroom. It was hard to find comparables online for that type of place. 

110+375+475+600 = 1560

50% rule gives me 394 cash flow, if including the garage (very low maintenance), that's just under 100 per door which seems low for us, but I am hoping that I can raise the rents incrementally. 

Thinking

110+450+600+600(conservative for comm) = 494 cash flow

Anyone have thoughts on the deal as a whole?

Oh my goodness, this is the EXACT property I bought about 5 years  ago and sold 3 years ago!  LOL!  I put electric heat in the store front (previously used by a church) and the 1br, and used the furnace in the 3br.

Let's see if I can  remember:

Garage, $125/mo, 1br, $475/mo, but I might have paid the electric, 3br, $600/mo, store $500/mo.  Gross income around $1,700/mo so I think that is right.  I bought the place for $26K cash during the housing meltdown.  Sold it for $42K, I think.  It cashed flowed like crazy but was too much management for me.

Separating the utilities is expensive, but I think it is worth it.  You won't have to worry about tenants running the heat with the windows open and it will have better resale value.

@Larry T.  that's hilarious if its the same property...sounds like @Shaun Carl  could also milk this cow... was it the distance that made the management less than ideal?

Sean, you may want to check with the City/Town if you are considering updating the commercial space to residential...if you are keeping commercial really depends on where on Walden it is, demand is all over the place as you move down the corridor.  If you cant find a commercial tenant you may be able to benefit from renting the space to your business, but you would have to speak with an accountant which I am not.