All Forum Posts by: Adam Johnson

Always go to the municipality having authority, they will determine that. Start with City, Town, or Village first. If they don't have zoning regulations, then go up one level. Start at the micro level first. The regulations are nearly always at that level, so don't assume based on a nearby municipality, go straight to the source.

@David Ronka - it is one of the age-old challenges.  You can't gain confidence without experience, but it is tough to gain experience without confidence.  You are taking the right steps by asking questions, keep going with that.  I have been out of the buying mode for a couple of years, but I am jumping back in again.  I have intentionally been kicking the tires on properties that I already know that I likely won't like enough to write an offer.  My reasoning is that the due diligence steps are the same and I can use these "dud deals" as a way to refresh my thinking and get my head straight so that when a more solid deal comes along, my mind will be right.

Check local zoning first, before you commit

@David Ronka - I think you answered your own question with your last post "...but right now it's pretty sleepy...".  I think you are making a fundamental error here which both @Brent Shields and I have hinted at.  You are looking for a way FOR SOMEONE ELSE to tell you what you should be paying for this property!  Stop right now!  Please, for your own sake!

This rule applies to every piece of property or asset you will ever buy - what is it worth to YOU?  You mention that maybe this area will have something happen in the future.  How much is it worth to you to gamble on that happening?  Are you willing to spend $ 5,000/year for 15 years waiting for that to happen?  (I'm making up numbers here based on absolutely nothing, just using something to make my point).  If you answered "...yes, it is worth potentially laying out $ 75,000 in order to profit $ 75,000 over 15 years...", then move forward.

The fundamental questions you need to ask YOURSELF:

1)How much is it going to cost ME?

2)How much am I going to make?

3)How long will it take me to make it?

4)How likely is it that what I am predicting is actually going to happen?

The last question might be the most important.  It appears from your posts that you keep struggling with how to determine the offer price, with at least a partial basis being the ASKING price.  That's a mistake, in my opinion.  The real questions need to focus on determining what the risk is for you, then pricing that risk.

I will use a real deal that I closed on to demonstrate.  I will start by saying that I am not bragging.  My style has seen me thrown out of rooms when I present my offer at times. That's ok.  I am investing to win, not investing and hoping I win.

In my deal, commercial property, the asking price was $ 950,000.  At my very first glance, it seemed worth a little time to dig into to see if it was worth pursuing.  The more I dug, the more problems and the more risk I uncovered.  As I did my analysis, it revealed a truly daunting project.  BUT, at the same time, I also saw the potential, after a lot of effort on my part (read time and more money), for a respectable upside.  I also could see that what it needed matched up fairly well with what I was capable of.  In short, there was risk and reward, and I felt they were fairly well matched.  However, my risk was still present as soon as I took title to the property and there was no guarantee that what I thought would happen, would actually happen.  With all of that in mind, I came to an offer price that was based on what that particular property was worth at the time of acquisition.  The offer turned out to be less than half of the asking price.  That was what the property was worth to ME at that point in time.  It had NO basis of what the seller was asking, it was worth I, as a ready willing and able buyer, was willing to pay.  I eventually closed and still own the property today.  It makes money for me and I have decent equity, but I also worked my tail off and took on a lot of risk.  It could have gone the wrong way too and I tried to account for that with my original offer price.  At that price, there was a chance that I could have sold it and at least broke even if things went south on me.

My point is, I don't buy anything based on what someone else tells me they think it's worth.  I buy based on what I think it's worth.  When I commented that this is a great way to learn, it really is.  You are now learning more about what it is that you need to learn more about.  Some of my best deals, and some of the ones that taught me the most, were ones that I never closed on.

I don't see much mentioned on what the demand for the USER of this building is in that particular area.  It's all great to make numbers work on paper, but it's a whole different story in reality.  I think a critical part of your due diligence has to be determining what the chances are of it becoming occupied again.  That is true whether you are going to hold it or flip it.  Once you own it, it becomes your problem, not his.

You mentioned waiting for your "cash buyer", so it sounds like your intent is to flip it.  Know your numbers and don't paint yourself into a corner.  You also mentioned that the property is 15 minutes from a town that is happening.  In commercial and particularly retail (which this sounds like), 15 minutes from a happening place doesn't carry much/any weight.  It's kind of like saying you are 15 minutes from a great location (remember location, location, location - which is even more important in retail).  Not a great selling point, in my opinion.

My suggestion is to use this as a chance to learn, but be very hesitant to commit to this deal.  My gut is telling me that you are trying to make something out of nothing, which can be good...or could be very bad.  If you can't negotiate the deal to the point that there is no way you can lose, move on to the next one.

You will need to understand the lease terms of the last tenant, you may not be able to evict, depends on the written lease terms which will survive the sale.

Any chance you can contact either or both of the former tenants? If so, ask THEM why they left. You may learn more about the property and landlord and/or confirm your suspicion about the recycling place. Either way, worth the effort.

@Chad Kastel - just to understand correctly, after re-reading the original post and your later response, it appears that the 2 residential units are vacant and the commercial space is a month to month commercial tenant that has been there for around 5 years that you plan to try to sign on a lease soon?  If I also understand, the property consists of a 2-family house and a separate building that is used as commercial?

Assuming that I have that all correct, a few more thoughts to clarify my earlier post.  Very generally speaking, the residential space will more likely be easier to fill vacancy than the commercial.  This isn't a hard and fast rule, but based on the type of property you describe, I would expect that to be fairly accurate.  My comments were to express more concern about losing the commercial tenant and being stuck with that space vacant since it will likely be tougher to find a new tenant for.

You stated that you bought it based on NO rent increase, but it sounds like you have 2 out of 3 total units vacant, so the fastest path to stronger cash flow is obviously to address the vacancy.  It makes a lot of sense to research market value rents for the commercial space.  However, if I were in your situation, I would pause to increase the rent AND try to lock the current commercial tenant into a 3 year lease right out of the gate out of fear you might create a vacancy there.  An alternative to consider would be to do your market rent research and either 1) leave them month to month or 2) have them sign a shorter term lease, say one year, at the current rate and stabilize the other 2 units first.  You can always revisit bumping the rent several months or a year later for the commercial tenant, but I wouldn't rush in and bump them right away unless you have done something substantial to improve the value to them.  Giving is some time will allow them to develop some sort of relationship with you along with you time to learn more about them and their long term goals.  It will also buy you a little more time to do your homework.

Either way, it makes a lot of sense to know what the space, both residential as well as commercial, is worth on paper to potential tenants in the area.  It will better equip you to make decisions on management in the short and long term.

I am shooting from the hip here, making a few assumptions.  First, I assume that this is either a converted structure (home) to create multiple units, or it is an older style mixed use building with retail first floor and residential upstairs.  I am also going to assume that there are other comparable structures in the area.  Final assumption is that you are not too concerned about potential turnover in the residential units, you're thinking that they will be relatively easy to re-rent (correct me if I am wrong).

Based on the assumptions above, if I were looking at this deal, I would be looking at the commercial space differently.  Instead of focussing on potential upside, I would be looking at the downside risk - what if this space goes vacant for some reason?  What does that do to the long-term viability of the investment?  How difficult will it be to find ANY tenant to occupy it?  Remember, you make your money when you buy, meaning if you spend too much when you buy, you will never make it back.

I am in Western NY.  The markets are different, but not completely so.  I suspect that neither of us will see major appreciation of value due to our location alone, so we need to analyze based primarily on cash flow or it's potential.  I would be careful to not buy based on rent increases in the commercial space if you think there is a reasonable likelihood it could be vacant for a while if the current tenant ever left for any reason.  Instead, I would buy based on it being vacant.  Keep in mind that my comments are also based on my assumptions above, which could be way off since I don't know the true picture as I type this response.

As an example, a couple years ago I purchased a mixed use building - 3 apartments and one vacant retail space.  It is located in an area that I know will have normal absorption of vacant residential units, but abnormally long vacant periods for the retail space.  When I analyzed that deal, I simply assumed the retail space would ALWAYS be vacant.  I figured I would make a reasonable effort to rent it, but it wouldn't be likely.  I purchased the building in January of 2015, and the retail space was occupied for just under a year total since I owned the building.  However, I bought with that in mind, so it still cashflowed because I bought it right.  Keep that in mind as you do your due diligence.

To answer your question more directly about finding the market rent, I just re-read your original post and see that you have already purchased the property, so some of what I typed above may need to be considered slightly differently (I didn't realize you already bought it before I typed all of that).  Ideally, the market rent research would have been done BEFORE you owned it.  Regardless, drive the area (I assume you live relatively close), see what else might be available in the area and look at the viability of the other businesses in the area.  Do the other businesses seem to be something someone could potentially live off of or are they more "hobby" type businesses that are not a primary income source for the business owner?  If there are a number of vacant storefronts, tread lightly with your current tenants.  If they have choices on where to rent and you come in and jack them up, they may simply move to a competitive space.  If the retail market is stronger and has few/no vacancies in the area, see what the vacant spaces are being marketed for, how long they have been on the market, and weight them as inferior, equal to, or better than your space.  Keep in mind that the comparables should be similar, you can't compare a square foot price in a commercial strip plaza that is a 5,000 sq. ft. "vanilla box" if you have a 1,000 sq. ft. downtown retail space that is somewhat cut up by walls/partitions, they aren't similar spaces.  Ask other area businesses what they pay in rent, some may actually tell you.  This will all give you a better idea on the stability of the area as well as the demand for comparable space.  That information will be helpful in deciding if you should rock the boat with a rent bump or not.

All of that said, you also need to go back to the lease with the existing tenant.  The lease survives the sale, so if they are locked in at a certain rate or under certain terms for a period of time, it is highly unlikely that you will be able to change that without the tenant also agreeing to such a change.

I'm with @Jon Holdman on this one.  On the surface, it looks very much like mortgage fraud.  I will also add that if you enter into a contract to sell shortly after purchasing, regardless of it's form, there is a possiblity of losing any potential tax advantages to selling your primary residence.  I would advise you and anyone reading this thread to consult your attorney and CPA before pursuing such a path.

I wouldn't live by that rule of thumb.  Commercial mortgages tend to be more deal-based than personal-based, but unless you are looking at a very large deal and have already done quite a few of them, they will consider your personal finances and credit score to some degree.

There are lots of ways to put together a deal creatively with less money down, but again, they would be deal-based on a case by case basis.

Keep reading, you will certainly learn something!  When you are done with that, read something else.  The more you learn, the better equipped you will be to close a deal when it comes your way.