Commercial Office opportunity

General Real Estate Investing
1

Hi all, I am looking at purchasing my second commercial building. My first was a $26,000 small town main street building… so far so good with that one (renting it out). I am now looking to get another building. This time it’s in a larger town (about 100,000 people in the area). I would like to get your opinions on whether this new building sounds like a good investment… at least good enough for me to get more serious about actually buying it. Here are the facts on it: Built in 1999… 3300 sq ft building with 3 condo units… zoned office. Each unit is 1,100 sq ft and all 3 are currently leased. This building is in a small office complex on a corner. The street the complex is facing is a main very busy street in a good area. The complex has 3 other buildings, each with 2 or 3 tenants. There are no vacancies in the complex. The building that is for sale is the “best” one… because of it’s location in the complex… it faces the main street with HIGH visibility for the 3 tenants. The other buildings in the complex are behind this one building that is for sale. More info:

Asking Price: $350,000 (owner paid $280,000 in 1999)

Total gross income from rent: 39,600/year (each unit rents for $1,100 per month = $3,300 per month total)
Known expenses: City and county taxes = $5,400/year
Association fees: also $5,400/year (covers building exterior repairs and insurance, also landscaping and parking lot and parking lot lights)
(still waiting on an insurance quote from my insurance agent for the interior)
NOI: $28,813/year

Obviously, I would not want to pay asking price… let’s say I could get it for $320,000. What do you think of this deal? Good, bad, OK? I am scheduled to view the property with my agent next week. I plan to look each unit over and talk to the tenants and ask them how long they have been in the building, any past or current issues/problems with the building and what their future plans are… are they planning to stay in the building. Any advice is appreciated. Thanks!

2

Hi,

Wow, I am amazed by the basic lack of understanding of commercial property investment and the requirements to be successful.

I am here to help so take this with the best intentions!

First to get commercial financing a commercial lender will look for you first to include a vacancy factor, these lenders could care less whether the property has been full since the birth of Christ they want and need a vacancy factor and since we buy real estate, especially commercial based on value derived from revenue this is important.

$39,600 Gross Scheduled Income
<$3,960> - 10% Vacancy Factor
$35,640 Gross adjusted income

$35,640 -

<5,400> - City and County Taxes (I assume this is property Taxes)
<5,400> - OA Owners Association Fee’s
- Legal
- Interior Repairs Reserves - All interior replacement
- Advertising and Marketing Fees
- Replacement Reserves - Hot water Heater / HVAC Unit / Sprinkler System / Alarm / Wiring & Internet
- Insurance
- Compliance Fire / Life / Safety - ADA - Access Ingress / Egress - Fire Extinguishers / Code Compliance / Exit Signage
- Management
- General Repairs and maintenance
- Office Supplies / Contracts

Now normally in commercial property 50% of gross adjusted income goes to expenses and reserves and 50% to debt service and positive cash flow.

$35,640
/ 2
$17,820 - Expenses / Reserves
$17,820 - NOI Net Operating Income / Debt Service / Positive Cash Flow

Their $350,000 asking price is basically a 5 cap rate. So this is great in a building that is class A and less than ten years old where cash flow is sufficient to cover debt service.

You have to pay less than $250,000 in order to pay debt service and provide a 5.750 cash on cash positive cash flow return.
Which is a 7 cap rate which still should denote a class A property less than 10 years old!

You will be denied your commercial loan approval if you can not show a full financial projection!

I think this property is way over priced!

                  GR
3

This is a sound analysis GR …

Michael

4

Some people really do not do any analysis with regards to their pricing but instead resort to some trial and error. They will lower the price if it seems no one is willing to pay that much or raise it if their are too many people who want to buy. After all, pricing is just a matter of supply and demand, but analysis such as this can be a good way to convince a buyer that your price is fair in the market.

5

Thanks for the help and input! An update… The owner dropped the price by $50K suddenly… It’s been on the market only since December. I have not made an offer at all… He just dropped the price. I’m just going to keep my eye on it a while I think.

6

couldn’t have said it better my self GR.