Should I pull the trigger? So many questions!

Question

I've been reading a TON and asking lots of questions from people who've been in home repair circles. One gentleman heard my story about beginning in property investing and passed my name to a potential deal-of-a-lifetime, but I still feel so GREEN that I'm doubting myself.

So here's the nuts and bolts:

A commercial property with 3 small store fronts on the main level, and apartments above.

Left Storefront: $350

Middle Storefront: currently used as owner storage

Right Storefront: Currently occupied as a Post Office Contract unit that pays a percentage of sales. Averages between $1500 and $2000 profit

2 bed apartment upstairs: $525

Studio apartment upstairs: $300

Water, Sewage, and trash are paid by the owner.

Total asking price (off market) is $100,000

Now, without the Post Office, this isn't a very attractive deal. It falls under the 2% Rule, BUT adding in the Post Office sales makes this a SWEET deal. Roughly 3% but I'd have to manage (or hire out mgmt of) the Postal business. And I'd still have a small storefront open to rent out or use as I see fit.

Thoughts?

Dominic Lucarelli · Answer

Thanks for responding back! Quite honestly I'd forgotten if posted this here. I asked the owner for his sales figures, expenses, etc for last year. What I learned was shocking: he barely makes any money! The building is poorly managed, the owner pays the lion's share of all the utilities, his rents are under market, and his business is suffering. He spends more time trying to sell junky typewriters and greeting cards than acquiring business accounts literally one mile from his cash registers... The only thing keeping him afloat are the tenants upstairs. Some months the business LOSES money, so the income from the tenants pays the mortgage.

So, I didn't make a deal... I *could* put the needed effort and time into it and properly grow his business accounts and run the building right, but the return on my time and energy would be far too little too be worth it. It'd be easier to convert the entire building into a 5-plex than to assume ownership of that mess of a business. He literally handed me a box of register receipts for 2015 and said: "here are my sales from last year"...

So, I passed. And learned much about business than if I had done nothing, so I'm glad I came in off the sidelines.

Brent Coombs · Answer

@Dominic Lucarelli, this one looks to be a good example as to why the "2% Rule" is just a  rough indicator as to whether it's worth a closer look in that preferred market, and why "not meeting the 2% Rule" should NEVER be used as the reason why a possible deal is rejected out-of-hand.

With you as owner, wouldn't the Postal business be able to continue as usual?

How motivated is the Seller (and perhaps more importantly: why selling)?

From what you have told us so far, I like it. Welcome to BP. All the best...

Kim Tonetti · Answer

Hi Dominic,

Seems a shame to let this opportunity for a 5 plex to fade, and this poor guy needs some help to get out of there.  Have you thought of getting the estimates together for the conversion, and going in on it with another investor? Once you update, and stabilize with the 5 plex in place, you can refi and pay back the investor capital for rehab funds, then split the profits.

Dominic Lucarelli · Answer

Quite honestly, I don't have the cash. The retail spaces could be converted to studio apartments but I don't think he's got cash to do any of the work either. The utilities would need to be separately metered

Loren Whitney · Answer

How did this turn out for you @Dominic Lucarelli ?

Dominic Lucarelli · Answer

I've been reading more and listening to podcast after podcast. I think I've come up with two creative options:

Option 1:

NNN Lease the property

Option 2:

Buy the building for $60k, and value the business at $40k and partner with the current business owner.

Thoughts? I haven't presented any info to him yet. Just testing out my theory here

Dominic Lucarelli · Answer

It's a Postal Contacted Unit, which means you're authorized to sell USPS products (stamps, stamped letters, parcel postage, etc.) and take a portion of the sales. I've done more research and since I'm a Postal employee I'm forbidden to own the contract. But I'm thinking I can partner with the current owner, allow him to own the contract (and receive 49% of profits) and run the remainder of the business myself. I cut my top end earnings but I can't earn them without him. Such a shame...

Darrell Shepherd · Answer

This is a no brainer if the renters are paying.

Those smaller rents are a little tricky because a major repair knocks out so much of the yearly income, but with that much income on a $100k loan- what like $600/mo?  It works all day long.

I'd get the rent rolls and do the due diligence, but be lining up the loan while I was doing it.  You're gonna have more trouble getting a commercial guy to do a loan that small than qualifying for it with those numbers.

I don't understand the postal biz.  If it 'profits' $1500-$2000 but you'll have to hire someone to operate it, there isn't any profit there if they have to work full time.  $10/hr is $1600/mo.  Need to do a real analysis of that business and putting your time in for free doesn't count.  Is it a USPS outlet that has some PO Boxes and sells stamps and such?

Brent Coombs · Answer

Yes.

Should I pull the trigger? So many questions!

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