First commercial property - help

I have an older individual in poor health offer to sell me his fully rented two suite commercial building. Tenants (both Doctors) have been in the building for nearly ten years. Gross rents are $50,000 ($4166 per month) per year. I can assume the property on a land contract with zero down. Selling price is $440,000 (which is the current appraised value). Property is in good condition with new roof and HVAC in the last three years. Six year land contract with payments of $3906 and a $300,000 balloon payment in six years. Interest rate is 10 1/2%. I know that the monthly is tight, but is this a good deal considering that I am putting nothing down and have a small positive cash flow?

How fast can you run from this deal???

You’ve raise so many red flags here it’s hard to know where to start.

Commercial property is generally valued by cash flow, not appraised value, and not on the health of the owner (which is completely irrelevant but very telling as to why you think this is a good deal).

A few questions:

  1. After expenses, what is the cash flow? Just based on the gross income minus P&I payments you state, it’s just about zero. And this doesn’t include expenses. How much are the expenses and how will you pay them? Is this a true NNN deal?

  2. Who would refinance this deal when the note comes due in six years? You’ll need a debt service coverage ratio of around 1.2. If this is a strange term to you then please re-read my first sentence.

  3. Even doctors move and/or go out of business. How much time is left on the leases? What are the market rents you can expect when your tenants leave? How is the overall economy and associated rental market? What are the projections?

  4. Do you think that 10½% interest is a tad high?

Putting nothing down is not a good thing here. It means you are way, way, way overleveraged. To say cash flow is tight on this deal would be an understatement. I could go on. Please do yourself a favor and stay away from this one. The guy selling this is not as motivated as you think.

My advice:

  1. 100% financing is what ANYONE should look for, assuming the property will cashflow after debt servicing.

  2. Gross rent is $4166 per month. Do you think your NET income is going to be at least $3,906? Unless you have absolute net lease w/your tenants. Even if it is, with this loan, he’s basically saying … “ok buddy, you do all the work and I get all the cashflow”.

  3. 10.5% is high… You should probably negotiate down. I would offer no more than prime + 1.

  4. How big is the building? What’s the price/sq.ft?