First RE deal -- commercial pls. provide input.

I had posted earlier indicating I was trying to get started in RE but did not want to manage apt./condo tenants. I decided to look for commercial properties instead and am currently loooking at one for sale with the following details:

Stand alone building ~ 9500sqft space. Appraised at $700K. Zoned retail. Decent location.
Current occupied by single tenant with a triple net lease through the next 18 months.
The NOI is ~65K.
Asking price is $695K. Gives a Cap rate ~ 9%

I have uninvested cash and do not want to put it in stocks. I can put down 20-25%. I have an excellent credit score and excellent regular income. Some questions I have:

–Where do I go for a loan (my bank won’t do commercial < 35-40% down. I have the $ but don’t want to put 35% down)?

–If the tenant does not renew after 18mos. how much vacany should I factor into the numbers?

–If I find out prior to the purchase that the tenant will not renew, is it too simplistic to think I can hire
a broker (@4% of rent commission), to look for a tenant and not have much vacancy?

–I hear commercial property “is too risky”? Is it too risky because you can have long vacancies? How much risk am I really taking with the lease only 18mos out?

–What else should I think about?

–Would you do this deal?

Your input would be much appreciated.


Howdy VV:

I too am like you, I do not like residential management. As long as the tenant is there and paying commercial property is great. Your deal sounds like you are paying retail for the building which is OK if you are wanting to clip coupons so to speak and maybe get some appreciation over the years. I too would be concerned about a 1 tenant building. I am currently doing an office warehouse of 30,000 SF that I am buying for $165K. I got a hard money loan to buy it and fix it up at a cost of $200K. It appraised at $800K rehabbed and rented. It is 15 units that will rent at $600 each. I will make money at 50% occupancy. A no brainer deal. There are other deals like this out there. I know of several but they are too big for me alone. How about a 45,000 SF office building for $300K plus rehab of $600K that would have a value of $1.5M or more. Sure deals like these take hard work and are a lot more risky but the reward is a lot higher.

The only real problem is vacancy and maintenance. If vacant it could take a year to release. If the roof needs redone in a few years and the tenant moves out and you can not replace it then you will not be able to rent it with a bad roof and nothing but down hill from there. I am very optimistic but always look at the worse case as well. If you can handle the worse that can happen then you will have the confidence to go forward with the deal. I wrote a post a while back about the knowingness of doing a deal. A gut feeling, the force with you as in star wars. When I get this feeling about a deal nothing can stop me.