Selling my large office/residential zoned house

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Selling my large office/residential zoned house

Chuck B.
Investor · Louisville, KY · Member since 2011 · 296 posts · 248 votes

I've been investing mainly in tough areas to working class neighborhoods, and doing well with it though it requires a lot of eyes on the tenants and properties.

In order to do more deals, my wife and I have agreed to sell our home (currently being used as a duplex), take the equity for working capital and live in a much more modest home while we get some new rentals established.

We originally moved into this place due to the zoning. We were going to do a live/work situation with either my offices or her hair salon on the 1st floor and we'd live in the top two floors. I ended up buying office space with my partner nearby and she moved in with friends at a salon a few streets away, so we changed plans and rented the 3rd floor and took the first two as our residence.

The house is a 125 yr old mansion on the very edge of one of Louisville's more desirable (and pricey) urban neighborhoods. It's zoned uniquely, as only the properties on the busier edge streets are allowed, as OR (office/residential), which allows for a lot of different uses. We're currently using it as a duplex with a separate 3rd floor apartment and my wife and I live on the first two floors. Open a pocket door and some stairwell doors and the house becomes one big place again.

You can see it here: http://www.kcrea.com/jsp/listings/listing_overview.jsp?listingID=8514264

The house has a lot of commercial upgrades, and we've redone most everything else in the ten years since we've been here except for the fully functional, but not very pretty commercial kitchen on the 1st floor and some minor work that needs to be done to the 1st floor's half bath. I'm hesitant to touch that kitchen, as some potential buyers have expressed interest in it (a professional chef thought about using the first floor as a small cooking school and living on the top two floors).

The house has been listed for a year and we recently dropped the price 20K, which has spawned a lot more lookers. However, the majority of offers that we get are to lease the space (both commercially and residential) but no purchase offers yet. We've had a $3K a month commercial lease offer, a $4K a month commercial lease offer (both for non-profit offices) and most recently a $2,500 a month residential lease offer (which we think is a little low).

I'm loathe to rent this place for a couple of reasons... The biggest issue is that I still have a 150K mortgage on it and leasing it wouldn't give us the large, up-front chunk of money to do more deals in small SFRs that I normally work in. The other problem is that it's basically a large antique, we've spent a lot of time and money putting the pieces together with as much integrity as possible and I'm scared of what (especially a commercial) renter would do to the place.

The most recent lease offer (residential for a doctor's family, 2 year lease) at $2,500 prompted my agent to try to do a dual deal, whereby he would sell the house to an investor and simultaneously close the lease to the renter. They're working on this now, so we'll see.

However, if the investor liked this deal at $2,500 a month on lease, he might have loved it at $3K or $4K on lease. Compared to my small house, section 8 rentals, the money doesn't sound so great, but I'm totally outside of my comfort zone when contemplating renting such a large place.

Here's my question... at what sort of monthly lease would this look like a good deal for someone that buys rented properties? (I assume the answer might be wide). And how does the tenant type effect that equation? Are commercial tenants more desirable than residential tenants? In short, I'm wondering if I should have leased it a while ago to a commercial tenant and then listed the property for sale?

As always, any thoughts or advice is much appreciated.

Best,
- Chuck

PS. The 3rd floor, 1BR, currently rents for $700 a month (includes utilities), but hasn't had an increase in seven years. It should probably rent for $900 a month but I can't raise the rents as the most recent tenant wants a year-to-year lease and with trying to sell it, they have to endure showings and the possibility of moving out at any time.

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    14y

    First, any property that has set on the market for a year is overpriced.

    Second, if, after one year, you've dropped the price from $399K to $379K (5%), I think you're not a very motivated seller.

    Third, its an unusual property. Its sort of commercial, sort of residential, sort of a fixer to turn it into something someone would actually use.

    Fourth, you're emotionally invested in it. You say "it's basically a large antique". No, its just another property.

    As far as someone buying this as a rental, the numbers don't look good. I'd want to see something like $6000 a month in rent for this to be interesting at your price. If its really commercial, then a triple net lease at a lower rent might work. That's easy to analyze. Speak with a commercial broker and find out what cap rates are in your area. With a triple net lease, there are very few expenses for the owner - they're all shifted to the tenant. A broker can also help you with typical commercial lease rates. Apply the cap rate and the lease rate to figure out what its worth. This is an easy calculation. If lease rates are, say, $10/sqft/year, and you have 3000 sq.ft, annual rent is $30,000. If common cap rates are 10%, its worth $300K. Thats assuming the lease shifts effectively all the expenses to the tenant. Commercial tenants will typically do what they want with the property, so you have to get past worrying about this if this is where you're headed.

    If it could be converted to a SFR, do the typical comps analysis to figure out the value. Do a rent analysis to figure out the rents. If monthly rents are 1% of purchase price, you might get an investor interested as a rental. If they're less than that, it will be tough unless there's some upside.

    Maybe it could be converted to several smaller apartments. Is that feasible with zoning? That might net a better price than the other alterantives.

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  • Chuck B.
    OP
    Investor · Louisville, KY · Member since 2011 · 296 posts · 248 votes
    14y

    Jon,

    You're right, I'm not overly motivated to sell it. I figure if I can get a great price out of it, it would be worth moving, but letting it go for a lot less isn't very appealing to me.

    You're also right in that it's a unique property, the zoning, age and size make it unusual. My agent said there's possibly 7 or 8 folks a year here in town looking for something like this place (a large live/work setup) but he's convinced it will sell residentially (eventually) to a family. Despite the price per sqft being one of the lowest in the area for these really large, old houses, I still think that selling it commercially is the best shot I have of getting a good price out of it, so I'm on the other side of that bet.

    It is zoned for and actually could be converted easily into three or maybe even four separate apartments, but I'm not sure it would actually bring more from a lease perspective that way. In fact, I'm positive it wouldn't bring the $4,000 we were offered from one of the non-profits (for use as offices).

    Talking through this, I think you've helped me realize that I should have taken that $4K lease offer and just moved out, despite the sort of deal I'm looking for.

    15% cap rates are what I look for personally (more distressed properties, rougher areas) but it doesn't seem like you can get anywhere near that here in Louisville with nicer properties / nicer areas. I've never understood that. Yet, folks still buy them and lease them out, so someone must have a plan that makes sense to them.

    On the upside, I've done a project every month for the past year, getting the place looking better and better. I actually feel like I live in the house I've always wanted, so that will have to be my consolation until someone comes along that wants it more than me I suppose. That's the good and bad of it.

    Thanks for your thoughts!

    Best,
    - C

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  • Chuck B.
    OP
    Investor · Louisville, KY · Member since 2011 · 296 posts · 248 votes
    12y

    So often in the forums I wonder "what happened" as there's never another word about the deal mentioned.  I figured I'd be a good community member and update this old thread.  It's good news so it doesn't hurt to do so.   Ha!

    I got an offer to lease the property for offices from a group that was just up the street.  They'd been in the neighborhood for 15 years but their lease was not renewed by their landlord and they didn't want to move far as they have a small manufacturing operation down the street.  I told my agent it'd have to be a good deal or I wasn't interested in leasing it out.  Here's the deal we eventually worked...

    The tenant pays $3,450 a month. They're also responsible for all utilities, lawncare and any repairs at $250 or less. I refinanced the ~150k owed into a 25 year fixed mortgage at 4.1% and PITI comes to $1,100 a month. (I believe I have $240k into the place total.)

    They've been there two years and I couldn't be happier.  Sadly, the word is that they're not renewing at the end of their lease (end of next year).  I have however started some talks with a law firm that likes the property (420k price). If they buy by next summer I can use the homestead exemption to sidestep the worst of the taxes.  If I can't though the wife and I are planning on moving back in, putting a big luxury kitchen in and waiting until we qualify for homestead again before we attempt to sell it.  I think it could sell for 500k with a high end kitchen, and certainly in another few years (assuming the system doesn't collapse again).  Who knows though.  

    I wish they'd never leave as it's completely hands off but we'll take what we can get, while we can get it.  

    Ps. Going to my first KREIA meeting Thursday night here in Louisville and am looking forward to meeting some other like minded folks.  

    Best,

     - Chuck

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