Small Commercial Property Question

Investor · Miami FL 33137 · Member since 2019 · 40 posts · 29 votes

I have the option to buy a commercial property currently as a seller finance transaction for 36 months. $200k purchase price, $1,650 monthly payment ($1,500 principle + $150 interest) with 10% down for 36 months. At the end of the 36 months I will owe the seller $126,000 lump sum to fulfill the agreement. This is essentially about 1% interest which is great.

The issue is it's a commercial property & will need a full rehab on 4k sqft. The first floor has a restaurant & the 2 upper floors have 3 residential units. The property insurance is very high. Getting quotes of around $6k-$14k per year. The property will be valued at about $450,000-$500,000 after the renovation. The renovation will cost about $150k. Thoughts?

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Henry ClarkPro Member

Developer · Member since 2020 · 4k+ posts · 4k+ votes

OP are you in Bill, Wyoming or San Francisco?

Point is what NOI will you bring in at say 85% occupancy.

What is your total cost all in? What is your NOI? That will answer your question if this is a good investment financially.

What will be your Property tax?

Add your carrying cost until stabilized. Tax, ins, P/I payments. 18 or 24 months?

If you need a construction loan. Who will accept second position?

Most lenders require 25% down. Will they accept your 10% down?

Then it becomes a marketing question. Is this a good location? Parking? Access? Competition? Etc etc.

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Kasing Ng
Accountant · San Francisco, CA · Member since 2026 · 74 posts · 38 votes
3d
Hi Stephen, numbers look workable, but the thing I'd flag that usually gets missed here is the tax side of that seller note. At $150 a month your stated interest is around 1%, which is below the rate the IRS expects on seller financing, and when that happens they can impute interest under the OID rules. In practice that means more of each payment gets treated as interest, and your basis in the building can come in below the $200k price, which quietly lowers your depreciation. Worth having a CPA model it before you sign, not after.
It's also mixed-use, so the restaurant floor and the residential units run on different depreciation lives, and a $150k rehab is a good spot to look at cost segregation to pull deductions forward. I'm a CPA on the CRE side, so the note structure is just what jumped out at me first.
The spread to a $450-500k value is real, but thin once you're carrying $6-14k of insurance and a restaurant tenant, so I'd stress the operating side as hard as the rehab budget. What does the rent roll look like across the four units today?
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Henry ClarkPro Member
Developer · Member since 2020 · 4k+ posts · 4k+ votes
2d
OP are you in Bill, Wyoming or San Francisco?
Point is what NOI will you bring in at say 85% occupancy.
What is your total cost all in? What is your NOI? That will answer your question if this is a good investment financially.
What will be your Property tax?
Add your carrying cost until stabilized. Tax, ins, P/I payments. 18 or 24 months?
If you need a construction loan. Who will accept second position?
Most lenders require 25% down. Will they accept your 10% down?
Then it becomes a marketing question. Is this a good location? Parking? Access? Competition? Etc etc.
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Kamila Kowalska
Specialist · Tampa FL · Member since 2026 · 19 posts · 10 votes
2d
Stephen, adding a practical step to Kasing's point about cost seg on the rehab: ask your contractor to itemize the $150K by space (restaurant vs. each apartment) and by item, rather than one lump sum. I work in cost segregation, and on a restaurant-plus-apartments building, things like kitchen equipment, finishes, flooring, and interior improvements to the commercial space can often be depreciated over 5, 7 or 15 years instead of 39, and much of that can be eligible for bonus depreciation. Itemized invoices make that split faster, cheaper and easier to defend.
Also worth asking your CPA whether the building counts as residential or commercial for depreciation, since that depends on how much of the total rent comes from the apartments.

Are you planning to run the restaurant yourself or lease it to an operator?
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Ashish AcharyaBusiness Member
CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
1d
Stephen, the seller financing is definitely interesting, but I’d look at the entire project rather than getting too focused on the roughly 1% stated interest.
Based on the numbers you gave, the $200K purchase with 10% down leaves $180K financed. At $1,500 of principal per month for 36 months, you’d pay down $54K and still have the $126K balloon at the end. So I’d want the refinance or payoff strategy figured out before signing, rather than treating the balloon as a problem for three years from now.
The bigger thing that jumps out to me is the $150K renovation. You’re potentially putting another 75% of the purchase price into the property, so I’d want very strong support for the $450K–$500K post-renovation value. With a restaurant on the first floor and residential units above, I’d also pay close attention to zoning, permits, building systems, insurance, and whether the renovation budget includes all of the commercial requirements.
The $6K–$14K insurance range is another number I’d pin down before closing. That’s a large enough difference to materially affect the property's operating economics.
I'd model the deal based on the actual stabilized NOI, not just the projected value. If the refinance depends on the $500K valuation and everything going perfectly, I'd want to see what happens at $400K–$425K and with a larger rehab contingency.
Feel free to DM me, I’d be happy to send over our Commercial Property Analyzer so you can model the seller financing, rehab, operating income, refinance, and balloon payment together.
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Jason MalabuteBusiness Member
Accountant · Los Angeles, CA · Member since 2016 · 2k+ posts · 901 votes
22h
The structure looks workable, but that roughly 1% stated rate is the part I'd get looked at before you sign anything. A seller note priced well below market rates can get recast for tax purposes, which means more of each payment is treated as interest and your basis in the building ends up lower than the $200k price. That quietly shrinks your depreciation for as long as you own it, so it's better to model now than to find out at tax time.
On the rehab, a restaurant downstairs with three apartments above means two different depreciation lives in one building, and whether it's treated as residential or commercial comes down to how much of your gross rental income comes from the apartments - at 80% or more it's generally 27.5-year property, and below that it's 39-year. Worth knowing which side of that line you land on before you model returns. A $150k rehab is also a good candidate for a cost segregation study, so have the contractor break invoices out by space and by item instead of handing you one number. Kitchen equipment, finishes, flooring and the interior work on the commercial side often land on much shorter lives than 39 years and a good chunk can qualify for bonus depreciation, and itemized invoices make that far easier and cheaper to support.
I'd also stress the whole deal rather than just the note - $6k to $14k of insurance plus a restaurant tenant eats the spread quickly, so run it at a $400k to $425k finished value with a bigger rehab cushion and see if it still works. All of this turns on your specific facts, so worth sitting down with your own CPA before you commit.
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Michael K GallagherBusiness Member
Real Estate Agent · Columbus OH · Member since 2018 · 1k+ posts · 1k+ votes
22h
so first floor is a restaurant space, top two floors at a total of 3 residential units, so 4 total units correct? first question I have: is the restaurant use really the highest and best use for the space? is there a user or tenant that would pay to rent needed for the space, and are you prepared to offer things like TIA to help them outfit the space as part of the leaseup? does a restaurant on the first floor create a deterrent for residential tenants upstairs? what's your ARV based on the NOI of the property fully leased? how long is your leaseup in the numbers? restaurants can take 6+ months to market and another 6 to build out before they are open and you are getting rent -
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Erik EstradaBusiness Member
Lender · Member since 2022 · 6k+ posts · 1k+ votes
17h
Financing this property with 1st & the rehab financed will be ideal. Unless you are able to take on a partner that can cover the rehab side, however if anything goes wrong, you may be stuck in a position where you cannot exit via refi or sale since the property is not finished yet.
[email protected]818-269-7983
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Don KonipolBusiness Member
Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
15h
I don’t want to duplicate other replies, especially the sage advice of @Henry Clark
I’ll just say that after 48 years in commercial real estate, I’m very wary of the ability to refinance low value commercial property as local banks are not usually interested, major banks now have extremely strict guidance, and small balance commercial lenders charge close to hard money rates.
Unless I was sure I could refi I would not do the deal unless the loan was either 7 year balloon or more, or there was an extension feature for additional 4 years.
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