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Learning, Sharing, and Teaching => Real Estate and Landlording => Topic started by: icebox92 on December 21, 2015, 08:11:59 AM

Title: Commercial Property Opportunities
Post by: icebox92 on December 21, 2015, 08:11:59 AM
A little background:  My husband and I  began our moustachian  lifestyle bout 7 months ago and started into the rental home arena around that time as well.  We are currently struggling to find rental home properties that meet our requirements in our area.  We know we could branch out to other areas of the country, but at this time that is not something we would look for.  We currently own one home as a rental, as well as our primary home.  A real estate agent we have worked with in the past has brought two opportunities to us that are commercial properties.  I am now trying to do as much research as possible, as this was not the direction we anticipated heading in.  That being said, I think they may be good opportunities, but with our level of nativity, I wanted to get some fellow Moustachian opinions.  Here is the breakdown of the two opportunities:

The Salon:

The property is a Hair and Nail Salon.  The seller is asking $230,000. It grosses $37,200 a year or $3100 per month and nets after expenses $33,100. The building is 887 sq ft.  It is has been remodeled and is in very good shape. There are five hair stations and one manicurist station.  The value here is in the high rental volume for such a small place. That is what the asking price of $230k is based on and a cap rate of 14%. If the building were vacant and in need of renting out it would only get about $1500 per month and be priced at $180,000.
Right now each stylist is contracted to the seller on individual contracts. She is not selling the business but is selling the building and rental income. The seller (current stylist & owner of the business / building) contracts with us directly for the monthly rent and they in turn stay contracted with her individually. She would continue to manage it but would want a fee for doing so with an understanding that it would be for a fixed amount of time and then she would like out of the management part of it.  We would then be responsible for the management of it, or preferably, we would look for the current manager /owner to groom another stylist to take over the management in two years.  We would anticipate this would be the same person who the current manager /owner would also sell the business to.

The Small Strip Mall:

The other property is a small strip mall.  The seller is asking $260,000. It consists of three suites. It could be made into four suites with some minor remodeling. It has a new roof and is cinder block construction, very low maintenance. The three suites are filled up. One is a karate studio that rents at $700 per month. One is a dog grooming business that rents at $1300 per month. The third one is a hair salon that rents at $1000 per month.  All the businesses are self-managed. You just collect the rents and keep the building maintenance up. However, the hair salon has better numbers for the return. The cap rate on the strip mall is about 8%. All three leases have a year or more left on their terms and want to stay on in place. The hair salon should be paying equal to the dog groomer, so there is room to increase the rents. This one would be easy to self-manage as the current owner does that himself. Total rents are $3000 per month. Net to the current owner is $2500.00 per month.  It grosses $36,000 a year or $3,000 per month and nets after expenses $30,000.

We are being told that the businesses associated with both options are well established and have been there for several years.  We are concerned with a few items:

1) If we lose a business out of the strip mall, we are assuming it is relatively difficult to find another business to rent out the space.  Its not like finding another tenant for a house...  it take more effort, your vacancy rates are higher, etc.  Also, we would be losing 1/3 of the income.  But the management is pretty easy, until that happens.
2) The management of the hair salon.  We do not have time to actually do this ourselves, we would absolutely want one of the stylist to take this on.  It doesn't "sound" like much (making coffee, / treats for clients, doing the laundry, tidying up, etc.), but obviously a factor we can't handle ourselves. 
3) If we loose the Salon business out of this space, we loose 100% of the rental income, and would have to find another tenant.  Same problem as before...  However, the business is established, doing well, and the building is a perfect set up for a salon.  We can hope all we want that the business wouldn't leave the space, but it's an obvious risk factor. 

So our questions:
1) What are we missing? I'm sure its a lot.
2)Are these actually good opportunities?  If they are which is the better one and why? 
3) What besides CAP rates should we be looking for (location, stability of the area, etc.)?  The CAP rate on the salon is outrageous... it seems too good to be true.  But then again it could possibly take more time if we can't have a stylist manage it. 
4) What other questions should we be asking?

Thank you in advance... We are complete newbies to the idea of commercial properties...  Heading out to continue my internet research on the topic :)
Title: Re: Commercial Property Opportunities
Post by: Fishindude on December 21, 2015, 09:16:39 AM
I prefer commercial rentals over residential.  You can get long term leases, you are dealing with a smaller number of clients, the monthly income / revenue is better, and you can often work remodels into the rent rate making a few more bucks on that.

In the case of that salon, I would avoid anything to do with management of it.   Set up a rental arrangement with an individual or business.   Your only responsibility should be to provide them a quality rental space, keep the building in good shape, etc.

Some things you need to work into a commercial lease rate would be property insurance, lawn care, snow removal, etc.   You will also want to be setting money aside for big ticket things that occur like roof replacement, furnace replacement, exterior building upkeep, etc.
Title: Re: Commercial Property Opportunities
Post by: icebox92 on December 21, 2015, 01:09:38 PM

In the case of that salon, I would avoid anything to do with management of it.   Set up a rental arrangement with an individual or business.   Your only responsibility should be to provide them a quality rental space, keep the building in good shape, etc.

^^^This should have been accompanied with a palm to face (or whatever its called).  Duh.  We have had issues with the idea of the management, but it wasn't until I read your sentence above that the light bulb went off.  Why would we ever consider managing part of the business for the owner?  She isn't selling the business, and we wouldn't be getting any sort of profit cut for the business, so why the heck would we manage a part of it, no matter how small?!  It now seems incredibly ridiculous that the owner would even include this as part of her conditions.  Anyway, thanks for making a very simple idea clear to me... not sure why it didn't quite click until your post. 
Title: Re: Commercial Property Opportunities
Post by: icebox92 on December 22, 2015, 09:25:28 AM
Anyone else?  We feel pretty naive heading into these options, and while we are educating ourselves as quickly as possible, we would love input form fellow MMM'ers. 
Title: Re: Commercial Property Opportunities
Post by: totoro on December 22, 2015, 09:42:36 AM
I'm not an expert in commercial real estate but I have been reviewing opportunities for a year now.  Unfortunately, in my neighbourhood, commercial real estate is expensive and very hard to come by and the cap rates don't make it attractive.

Anyway, the biggest risk I can see with commercial real estate is vacancy.  Vacancies that go on for some time can make it very difficult to make ends meet. 

My view is that location is extremely important.  A desirable location that suits businesses that have not been or are not going to be replaced by e-commerce and home-based workers is important.   In the downtown core where I live I see the effects of the internet on commercial vacancy rates.  As people turn to Amazon and big box stores like Costco the vacancy rate on commercial spaces that used to be small retail and large offices has risen dramatically.

Nail salons, karate, hair salons and dog grooming are examples of businesses that require personal interaction.  However, one year remaining on a lease is not that great.  In Canada a bank wants to see a minimum of three years for financing purposes and generally about 40% down - not sure about where you are.