Jeff,
Thanks for all of the great advice so far. I'm looking into a potential commerial property as my first investment. I was wondering if you had any particular advice that would pertain to commercial property that you haven't covered already?
What are typical lender requirements for a commercial loan? I can put 20% down but I don't want to if I don't have to.
The asking price is 129k, its 1,100SF in a high traffic area in the downtown business district. Taxes are about $800/year. The property is currently vacant.
I'm thinking my total PITI would be around 1k/month. So a positive cash flow should be feasable. Is there anything else I'm overlooking? Thanks.
Ah, commercial. How I love to talk commercial.....Please let me know where you are. The more details the better. I promise not to scarf up your deals (I rarely go out of state, but will for really good ones).
I'm in the upstate SC area near Charlotte. Small typical mainstreet type town that is booming due to the growth in this region.
20% down is typical, but the funny thing about commercial is that the sellers are often even more flexible than residential sellers. Why?
1. They are business savvy. They bought commercial, didn't they? That was for an investment not for a home (unless it is a Mom and Pop store with living space over it / behind it - then that's a special class called "mixed usage").
2. They know (or should know) that the market is smaller for commercial buyers.
3. They know the financing can be difficult.
You know where you stand as soon as you find the property. How you find it is telling. Online? Friend? Realtor?
The property is listed in MLS and has been on the market for some time. So there is some reason for concern there. Looking at the comps I feel it is overpriced by 30k. This may be why it hasn't sold.
Few people know that most realtors are not legally allowed to sell commercial real estate, yet many do.
They can tell you it is not true, but it is. Realtors will try and use a NAR contract for commercial, and that contract will get laughed out of any court or bank. For example, if you say that you're going to buy a farmhouse on 120 acres and develop it, would you write a contract to buy the "house" for $2 million dollars and take that to the bank? That doesn't make sense.
The correct realtors have a CCIM license. Real estate attorneys can also do the deal. CCIM's will defer to attorneys anyway for the contracts.
T
he listing agent does not have a CCIM designation but I am liscensed. I have never done a commercial deal though. But I am researching what I need to do.
But anyway, to your deal....
129K, 1100 sq ft, high traffic, vacant.
You need to figure out some numbers.
What's going to go in there?
Not real sure, it is set up as an office space right now. The previous tenant had some type of consulting business. The make up of the rest of the street is mixed; barber/hair salons, several antique shops, a couple of restaurants, attorney offices, etc.
Do you know what the lease rate is in the area? How much per square foot?
Not sure yet. I did speak with one tenant a few doors down that runs a small boutique and she only pays $500/month. So thats definately not good. I'm going to check some of the office spaces in the area to get a better idea though.
How long are the typical leases? Is "triple net" ("NNN") typical?
Not sure, will find out.
For those who don't know, a "Net" is something the tenant pays. Taxes, Insurance, and Maintenance compose the 3 Nets in a Triple Net, aka NNN, aka Net Net Net property.
Once you have a lease amount, you need to figure your expenses. If you have a NNN property, there's basically no expenses.
I'll make a couple of assumptions to evaluate this, then backfill in with your real numbers.
Assume you get $2,000 a month for the space. You agree to pay Insurance and Taxes but not Maintenance ( a "Net" lease ). The $2K covers your PITI of 1100 a month.
I'm thinking $1,500 might be the high rent estimate right now. There's a brand new office building going up down the street. I'm going to look into their lease rates. If I can discount this place 15-20% compared to the new building I shouldn't have any problems renting it out.
Why not $1k for the PITI? Commercial loans are usually over 20 years, not 30, but you can certainly try. Bank relationships matter here.
Ok - so $2K covers $1100. They pay maintenance. You net $900 a month.
What's your NOI? That is your Net Operating Income, which is $$ left over after expenses on an annual amount but NOT including mortgage. Let's assume here htat you pay $800 a year for tax and $400 for insurance. That's $100 a month, $1200 a year.
Annual rent is $24K. That's $22,800 NOI. Very nice so far.
Your CAP rate is your "recapitalization rate", which is NOI / Sales Price. Here we have 22,800 / 129,000 for 17.7%.
Is that good? Um, yeah. Very. Anything over 10% is considered good in general, but your local commercial brokers can tell you would a typical office space cap rate would be. Just ask.
One last metric for you is your "cash on cash" return. You put down 20%, which is $25,800. Your NOI is $22,800, so that is 22800/25800 = 88%. I'll take that any day.
I would take 30-40% or better, actually, so if you can get that kind of rent you are doing fantastic.
I fear I overestimated your rents, so let me know. If you don't know, ask the neighboring store owners and the commerical realtors in the area (that will give you the cap rate anyway).
Thanks for the analysis. This gives me a good starting point. Just got to dig a little further.