Newbie with Potential Deal apartments/commercial

3 Replies

Hi, I'm new at this and need some help to make sure I'm gather the right information as a I think about his deal. First, a little about the property. It is located in east Austin on a major thoroughfare. It contains a closed-down but functional restaurant and 2-3 houses that that have been subdivided into 6 apartments. The property can be accessed from the main road and from a secondary street. The property is owned by a coworker who inherited it along with 6 other siblings. Their relationships are contentious. My coworker has been managing the residential buildings (and reportedly is cash flow positive since she and her siblings own the property outright) and at various times has rented out the restaurant (I have no information on this). She is looking to get 2 million. Since this is a mixed use property how should I go about figuring the value? What questions should I be asking? I've read a few books, frequently listen to the BP podcasts, was primarily interested in buy and hold residential/multi-family, and hadn't planned to take any action until 2016 to be sure I'd given myself enough time to learn. Any help would be appreciated! Steven

Welcome to the BP community.

Tip: if you break up your posts into smaller paragraphs, they will be easier to read and probably garner more and better responses. Also, upload your face pix and complete your profile will help.

In order to know what you can pay for ANY property, you need to know what it's worth. A mixed use commercial property value is either based on what it currently generates as cash flow, future cash flow, or land value. 

Buying from six (6) different sellers makes for a challenge for even the most experience investor or agent. Getting all people on the same page with same agenda, at the same time is tough. It's likely to require buying "pizza by the slice."

Unless there is something unusual about the property it should be worth the potential cash flow divided by an appropriate discount rate for the area.  If you are a buy and hold investor the discount rate is determined by the return you want on the investment.

I would probably start out finding out the rental rates.  Usually I use an 8% discount rate and a 50% expense ratio.  For instance, $700 per month for each unit is $50,400.  Using a 50% expense ratio you get $25,200.  At a discount rate of 8% you get a value of $315,000.

I would look to see if there is deferred maintenance.  This would be subtracted from the above number.  Later on you can look at actual expenses and get a better value.

The restaurant is a problem because the owners have not been able to find a permanent renter at the price being charged.  That could indicate that the rent is too high or that the property is not in a good location for a restaurant.  Is there another use for the property?  I don't want to use an 8% discount rate for "maybe" income.  I would probably use 16%.

I hope that all 6 owners agree that the property should be sold.  Even then, they might not agree on the price.  Good Luck.

Bill