I think I already know the answer to my question, BUT I want to run it by you all as well to get your reactions. The salon I mentioned in another post would like around 2,500 sq ft of space. How feasible/profitable would it be to build something for them if they signed a “long-term” lease? I know the owners of the business and they are very busy and successful. I found a lot for sale close to their current location for $60K I got an initial quote for a 2,600 sq ft steel building with nice upscale looking front facade of… stuccoish looking material based on an exact building already built by the builders a few years ago. The quote was for $245K (including build out and parking lot, etc). So 245K + 60K = 305K! This would not be doable with a lease of $12/sq ft am I right? So, my question is at what total total price would it be doable and make a decent return? The building they based the quote on had quite an extensive build out inside and a custom/expensive looking front with expensive looking doors. I am wondering if I can cut some cost there because the salon won’t need such an extensive build out. I also wonder if I could save money by having them just build the shell and I sub contract out the build out as I know people to handle each job of the build out. Would they even do that? If I could get my total cost down to $260K would it be worth it then? 2600 sq ft X 12/sq ft = $31,200/year. 260,000/31,200 = 8.33 31,200/260,000 = .12 I know I am forgetting a lot, that’s why I want to find out what I’m missing by posting. $2,600/month in rent might not even cover my loan… Thx
Hi,
2600 sq. ft. at $12 per square foot per year equals $31,200 minus 10% vacancy factor equals $28,080 divided by 2 (50 / 50 Rule) equals $14,040 for expenses and $14,040 for debt service and cash flow!
Cap rate is net operating income (NOI) $14,040 divided by $305,000 equals a 4.6 cap rate.
Adjusted Gross income Expenses = NOI
You would need at least $15 per foot to make this work with 20% down!
Unless your going to literally pay 100% in cash yourself and sub-contract 100% of the work and I think your going to have to have a GC since this is commercial and your construction lender will want everything handled by the GC and since it’s commercial every trade needs to be licensed.
Your tenants should pay for the interior build out (Sometimes the landlord will offer incentive cash for interior with a longer lease) once basic exterior walls and mechanicals are in place, if you custom build the interior for your renter the more reason you should charge more per square foot to recover the build out cost’s!
GR
Thanks much for the reply GR. New construction is just too pricey to make it work. Thanks for explaining things.