Author Topic: Buy or not buy this property investment (Asking for a friend)  (Read 1044 times)

MrsDinero

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Seriously for a friend.

My friend sent me this information and asked me if this would be a good investment.  My initial thought is no, because there are so many unknowns but I wanted to run it by the experts before responding.

My friend (an electrician) was approached by his boss of over 8 years with an offer to sell my friend the building the company is run out of.  This is part of his boss' plan to sell off parts of the company until he retires in 3-4 years.  My friend has been working on certifications to run his own business.

There are several apartments and a hardware store in this building.  There is 1 tenant (hardware shop) that has an agreement with the current owner to not pay rent for the next 3 years.  After 3 years that tenant will put their business up for sale. 

No money down, this will be part of a business loan, not sure of the type.

Building (sqft unknown): $220,000 15yr@3.92%

Current Known Rental Income: $3400

Monthly Expenses:
$1638 $1600 - Mortgage (I added estimated $7700 closing costs to the mortgage )
$700 - Utilities
$46 - Taxes ($550 Annually)
183 - Est. Maintenance Costs  (Maintenance costs are unknown but using 1% as a rule for $2200/yr)

Total Expenses
$2567

Est. Cash Flow
$833

« Last Edit: May 10, 2018, 01:55:01 PM by MrsDinero »

daverobev

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Re: Buy or not buy this property investment (Asking for a friend)
« Reply #1 on: May 10, 2018, 06:22:10 PM »
Nothing down, that looks like $800 a month for free to me...

Papa bear

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Re: Buy or not buy this property investment (Asking for a friend)
« Reply #2 on: May 10, 2018, 06:41:36 PM »
While there may be a lot of unknowns (which we know less than you do) I would consider looking at this more.

So. Definitely maybe.


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MommyCake

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Re: Buy or not buy this property investment (Asking for a friend)
« Reply #3 on: May 11, 2018, 06:06:30 AM »
From the information given, this looks like a good investment.  I'm nowhere near an expert but I would pursue it.  I'd have an inspection to make sure there are no major issues.  A mixed use building with I'm assuming about 3 residential units and 2 commercial (wherever your friends works + hardware store)has potential to earn good income.  Not sure of the location but the purchase price, taxes, and interest rate are all low for my area.  The free rent thing is weird and the upcoming vacancy will need to be dealt with, but the building is already turning a profit without it, so anything that unit earns in the future is all gravy. 

MrsDinero

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Re: Buy or not buy this property investment (Asking for a friend)
« Reply #4 on: May 11, 2018, 06:37:57 AM »
So I got more information about this. 

The hardware store is owned and managed by my friend's boss.  This is what will be sold to my friend in 3 years.  An electric general contract company is run out of this store and it doubles as a retail store.  So this is the business that will be sold to my friend.

There is also a plumbing company that is run out of the store by the boss, but since my friend is not a plumber that part of the business will go away at the time of the sale, unless he can find a partner

I think my initial reaction of no is base more on an emotional response because I am extremely close with my friend's family.
« Last Edit: May 11, 2018, 06:43:09 AM by MrsDinero »

MommyCake

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Re: Buy or not buy this property investment (Asking for a friend)
« Reply #5 on: May 11, 2018, 07:22:09 AM »
So the one unit has 3 businesses running out of it, with 2 of them owned by the current owner/boss?  What about the electrician, does he have to pay rent?  will he move on after the 3 years as well?

Even though that situation seems a little strange, I still think the building is potentially a good investment.  I'm not sure about buying into the business, but that could be determined in the 3 years time frame, after reviewing its financials.  If your friend pursues this he will need to make sure he has a competent attorney to review the leases of these 3 businesses. 

MrsDinero

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Re: Buy or not buy this property investment (Asking for a friend)
« Reply #6 on: May 11, 2018, 07:37:11 AM »
So the one unit has 3 businesses running out of it, with 2 of them owned by the current owner/boss?  What about the electrician, does he have to pay rent?  will he move on after the 3 years as well?

Even though that situation seems a little strange, I still think the building is potentially a good investment.  I'm not sure about buying into the business, but that could be determined in the 3 years time frame, after reviewing its financials.  If your friend pursues this he will need to make sure he has a competent attorney to review the leases of these 3 businesses.

The boss electrician (a licensed contractor) will be retiring in 3-4 years and selling the business to my friend who is in the process of becoming a licensed contractor.

MommyCake

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Re: Buy or not buy this property investment (Asking for a friend)
« Reply #7 on: May 11, 2018, 07:44:24 AM »
oooohhhhhh I get it now!  So there is only 1 commercial unit, where your friend works.  Three companies run out of it, the owner runs all 3.  Your friend can buy the building now, and can buy the retail store and 1 of the contracting businesses in the future.  Interesting scenario.  I wonder what the more experienced people have to say.  I like the numbers on buying the building.

MrsDinero

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Re: Buy or not buy this property investment (Asking for a friend)
« Reply #8 on: May 11, 2018, 07:47:27 AM »
oooohhhhhh I get it now!  So there is only 1 commercial unit, where your friend works.  Three companies run out of it, the owner runs all 3.  Your friend can buy the building now, and can buy the retail store and 1 of the contracting businesses in the future.  Interesting scenario.  I wonder what the more experienced people have to say.  I like the numbers on buying the building.

Exactly.  It took me several conversations with my friend to get it.  I thought there were multiple retail businesses too.


calimom

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Re: Buy or not buy this property investment (Asking for a friend)
« Reply #9 on: May 11, 2018, 07:06:01 PM »
It sounds like the building seller/business seller is doing this in stages to perhaps cushion the blow of capital gains? It does sound like an intriguing deal, depending on the condition of the building systems. If the current owner is a contractor does this mean things are in pretty good shape? Or the shoemaker's children and all that?

wanderin1

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Re: Buy or not buy this property investment (Asking for a friend)
« Reply #10 on: May 13, 2018, 12:38:51 AM »
A couple of thoughts from a serial entrepreneur who has sold businesses:

Your friend is being asked to buy a business, with real estate. He needs to do his “due diligence” on all the business financials. This means his boss opens the books and your friend hires an accountant with expertise in business valuation to look at the financial history and current condition of the business, the real estate, as well as the sales deal overall. It doesn’t sound like your friend has done this—otherwise he’d have a good sense for whether the real estate portion made sense. Your friend should not proceed without due diligence on the whole deal.

I sold one of my businesses to a long time staff member, and we did it in stages, something like what is being proposed here. The reason we structured it that way: the business had many “moving parts” and it would have been a lot—maybe too much—for someone inexperienced in business ownership to take on all at once. The staged approach let the buyer take on the “weight” of full business ownership gradually. Today, six years after complete transition, the business is still extremely successful, the buyer loves what she does—and she credits the staged transition as a foundation for all that.


Dicey

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Re: Buy or not buy this property investment (Asking for a friend)
« Reply #11 on: May 14, 2018, 12:51:15 PM »
I sold one of my businesses to a long time staff member, and we did it in stages, something like what is being proposed here. The reason we structured it that way: the business had many “moving parts” and it would have been a lot—maybe too much—for someone inexperienced in business ownership to take on all at once. The staged approach let the buyer take on the “weight” of full business ownership gradually. Today, six years after complete transition, the business is still extremely successful, the buyer loves what she does—and she credits the staged transition as a foundation for all that.
What a cool thing to do! I'm glad it worked out well for both parties.

MrsDinero

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Re: Buy or not buy this property investment (Asking for a friend)
« Reply #12 on: September 26, 2018, 01:47:06 PM »
Update:

I wanted to give an update on this topic.  After much thought, my friend started negotiation on the price of the buildings.   During these conversations they had several days of heavy downpour.  During this storm, lots of leaks and problems were discovered and my friend decided to not continue with buying the property.  I don't know the full extent of the leaks, but from what I understand these were not small, easy to take care of leaks.