My first investment "opportunity"

General Real Estate Investing
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I am researching commercial real estate in my town and looking to invest if I can find a good opportunity. I have no experience in commercial, but am trying to learn all I can. I would appreciate a
any feedback/suggestions on this investment:

•2 unit Commercial retail building 7500 sq ft, built in the year 2000 (steel building with brick front)
•Owner (music shop) occupies about 6000 sq ft unit and has beauty salon as a tenant in the second unit (1500 sq ft) beauty salon pays $12/sq ft per year to owner = $18,000/year
• salon is a great established business and would like to expand to 2,500 sq ft
• Music shop would like to reduce to 1,500 sq ft… this leaves about 3,500 sq ft
• This would require splitting the 6,000 sq ft unit into 2 units making a total of 3 units (3,500, 2,500 and 1,500 sq ft) and adding a door for the new unit.
• Owner is asking $494,900 for building, taxes are $8,000/year
• Owner is motivated to sell and sell soon.
• Lets assume everyone (including tbd new tenant) pays $12/sq ft rent = $90,000/year, $7,500/month
• Building is in good part of town where growth is, but not in the high rent ($20 -$25 sq ft) area, but very close to the high rent area.
I am trying to figure my roi, cap rate, etc… and what sales price would make it a good investment… trying to figure out if this is a good opportunity or not and if I could survive with that new 3,500 sq ft space empty for a while (I am trying to recruit a well established bike shop to move into the space)

I admit I don’t know a lot about the workings of commercial financing… interest rate, years on the loan, down payment, closing costs, etc

I have learned a lot already, but still have a long way to go… thanks for any help!

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Sorry for the double post! I don’t see a way to delete the other one :frowning:

3

TNF,

Do you have any residential real estate experience?

If not, I would recommend residential first. It is much more forgiving and has a built in market of 300 million customers.

If you are going to pursue commercial, I would recommend finding someone experienced to show you the ropes or maybe even going to work for a property management company to get some experience before you jump in.

4

Hi,

TNFrontier you have gut's, but you have a few problems to think about!

Although purchase price in relation to the 50 / 50 rule which is 50% for expenses and 50% for debt service / positive cash flow fit’s nicely even after adjusting for vacancy factor these are my concerns.

I will list these so there easy to review:

  1. Does zoning and current commercial code allow a third unit on the property?
  2. Being brick in front you would have to cut a permanent door, this is now permanent to the faced of the building.
  3. Cutting a door could mean re-routing electrical run through front wall?
  4. Do you have ability to separate metering for electric, water, gas, phone, cable, internet, etc. ?
  5. Do you have a way to separate and control the HVAC system individually for 3 units?
  6. Is there a third existing back door for this unit for a fire exit?
  7. Since this is a 7,500 sq. ft. building it probable has a sprinkler system and stand pipe. How does the system operate and where are sensors located and how will system need to change to support 3 unit’s?
  8. Since the building was built (Grandfathered as built) has requirements for restrooms changed?
  9. Fire / Life / Safety issues require a fire burn through rating between units which can include HVAC dampers, and special fire stops for utilities between units?
  10. Does your current units have lighted emergency exit signs over doors?
  11. Is there emergency lighting in your existing unit’s?
  12. What is your maximum amperage supplied to existing building and what would new demand be?
  13. What will parking demand be for 3 businesses? What is existing parking supply?
  14. Do you have a current handicapped space and will creating a third unit require a 2nd handicapped space?
  15. Since this property was originally built and approved as 2 unit’s what steps need to be taken for county zoning and planning approval to create a third unit?
  16. Is their space between the 2 numbers and between neighboring properties for the post office to assign a third address?
  17. What is your lot size? In relation to unit’s and parking?

This gives you enough to start thinking about for now?

Good luck,

             GR
5

Thanks for the responses! I have no residential experience either :shocked except for buying 3 homes for my family (primary residences) Wow, a lot to think about. I am seeing that this first deal is probably a little too big and complex for me! I have another potential deal that would probably make a good “starter property” for me. It’s on Main St in a small town (suburb of larger town). It’s only 15 minutes from my house on a typical “Mayberry” type small town. It is a small 1,360 sq ft building right next to a old small town 3 screen movie theater that just upgraded to digital. The theater brings in good traffic and is the highlight of the street. This building is currently for sale for $35,000, but the realtor tells me he thinks the owner would take $27,500. According to the realtor, it had a new roof installed just 2 years ago. It was built in 1944 (many of the buildings on the street were built in 1900/1901ish.) It is currently rented to a beauty shop for $350/month. It is probably in the best location on the street being so close to the theater. I am meeting the realtor tonight to see it for the first time. I could pay “cash” for this one and get my feet wet in commercial. The price is so low I see it as very low risk… hopefully the current tenant will want to stay on at least until I figure out what I’m doing. Ideally, I’d eventually like to do some light remodeling (rip down the metal siding covering the brick exterior and paint the brick… or leave it alone if it is in good shape.)and attract a coffee/ice cream shop or something similar that would benefit from being next door to a theater… and possibly be able to raise the rent to maybe $450month. But for the moment, I am glad it has a tenant. Does this sound better for my first property? Oh, also, there is a downtown development loan program where I could get up to $20,000 for up to 10 years at 3.25% to finance it… already been approved. That might be a good way to go… thoughts or questions? Thanks!

6

Hi,

Property built in 1944 could include hazards such as:
  1. Asbestos
  2. Lead Based Paint
  3. Leaded Waste & Drain Joints
  4. Galvanized Water Piping
  5. Outdated Electrical Service

To abate Asbestos and Lead Based Paint could cost you all of what you paid for the property as removal is not cheap!

          GR
7

TNF,

Yea, that look like a better deal to learn on.
All of GR points are very valid.
Get an inspection and phase one environmental site assesment done to verify any potential hazards. ($2500?)

I would base my offer on the numbers as they are now.
Your 20k loan will cost you 200/month.
Will taxes, insurance and maintenance be covered by the other $150/month?
If yes, you might offer 20k so you’re all in for closing/due diligence costs.
If no, lower your price until the numbers work for you so you at least break even.

Good Luck!

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Thanks for the insight. Asbestos would not be fun, but definitely need to find that out. On the lead paint… is that necessary to remove? I’m sure it has been painted over with non-lead based paint as the current tenants wave done recent painting. My understanding is that lead paint is only dangerous if you eat it or breath dust from it (while sanding/removing, etc), is this correct?

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Lead paint laws are still evolving in the United States and are being enforced to varying degrees. In many parts of the country, lead paint laws are taken very seriously. Becoming compliant can be expensive, and so can violations (up to $25,000 per day!). You should research your local laws and ask around how serious they are. In any event, lead paint laws will continue to become stricter as time passes.

This is a step I skipped with my 12-unit building because, well, I was ignorant about lead paint laws.

I ended up ordering the lead inspection after I closed, so I didn’t save any money by skipping the step and it cost me a bunch of money to address the issues. I should have asked the seller to address these items or either reduce the purchase price further or get a repair credit.

I’ll give you a quick crash course on lead paint laws as I understand them for Washington, D.C. and Maryland. Again, they may be different in your area, but at least it will make you sensitive to them.

The lead paint inspector uses an “XRF gun” to determine if and where there is lead paint. The ultimate test is a “dust swipe” which checks for the existence of lead paint dust particles (costs about $200 per unit). The dust is dangerous to younger children in particular. The existence of lead paint in itself is not considered dangerous, it is the flaking paint that is.
You can be either lead-safe or lead-free.

Lead-safe means that there is lead-paint in the building, but it’s not flaking or chipping.
Lead-free means that there is either no lead-paint at all, or it has been covered in some way as to never be exposed.

Becoming lead-free is obviously ideal, but depending on the scope of the lead paint, it may be cost prohibitive.

Therefore, being lead-safe is the only other option. In order to stay lead-safe, you have to make sure you don’t have any flaking or chipping paint anywhere. You may have to disclose to your tenants that the building contains lead paint but is lead-safe. You may have to pass a dust swipe test before an “at-risk” tenants moves in. An “at-risk” tenant is a young child or pregnant woman. But since you can’t ask a woman if she’s pregnant, and you may not know if the woman has her granddaughter visiting 5 days a week, it’s safer to do the dust-swipe test before any new tenant moves in.

Often, any contractor that works in a building with lead paint has to be lead-paint certified.
All I’m saying is: spend some time researching the local lead paint laws to make sure they don’t bite you later on!

My building thankfully didn’t contain any lead paint in any of the units. But the staircase railing did. It’s very expensive to “get rid of lead paint” and it’s not necessary to be lead free. You just need to make sure lead paint can’t be exposed in any way. I ended up going with the “lead-free” option, which involved wrapping the stair case railing in dry wall. We also had to wrap the exterior window framing in aluminum.

Hope that helps …

Michael

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But you’re going to get something, and there are tax advantages, too. Look at it as a store of value, but not as a huge investment opportunity…