Author Topic: Mixed res/commercial Property - Go or no go?  (Read 2143 times)

rocketpj

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Mixed res/commercial Property - Go or no go?
« on: May 24, 2017, 05:59:05 PM »
I'm looking at a mixed use commercial/residential property with some attractive numbers, but I'd like some outside perspective.  It's an ugly building but is in a great location and has solid rental income.

Asking price: $699,000. 

1.  The property currently has 2 legal rental units ($1000 and $850) both with long-term tenants,and one unrented unpermitted unit.  My assumptions ignore the illegal suite.
2.  There are 26 storage units (all rented at right now) with rents totaling $2680/month.  The units vary from $.84/sf to $3/sf because the current owner has negotiated rents individually over the years.
3.  Also 10 artist/office suites (between 120 and 250 sf each) renting for a total of $2680/month.  Again, units were individually negotiated so rates range from $1/sf to $2.35/sf. 

Total rent is currently $6120/month, with 3 office and storage units currently in use by the owner (which would add another $800 if rented).  Bringing the illegal suite up to code would add another ~$1000 to the rent as well.

After purchase costs, property transfer tax and upgrades I`m estimating the total cost to be $730,000, with a cash downpayment of $183,000.  Monthly mortgage on a 20 year term (which is the max available here) would be $4500, and operating costs (including utilities, property tax, vacancy estimates, maintenance, insurance etc) of $1265 - so total monthly costs are $5765, leaving a paper thin cash ROI of about $350/month.

Opportunity - most of the units are rented at below market rate and have room to go up as people transition in and out.  Conservatively, I see an increase of about 5%/year for the first 10 years.  Also, upgrading the unrented illegal suite would add $1K to the monthly rent, which could happen fairly quickly as it is empty now. I've attached my spreadsheet, but I'd appreciate some input from anyone with more experience in commercial real estate.

At present:
Cost/Bldg   $728,678.41
Capitalization Rate   9.18%
GRM (Gross Rent Multiplier)   8.80
Cash ROI   5.63%
Total ROI (incl Equity)   25.99%
DSCR (Debt service coverage ratio)   119.01%
Annual Cash Flow   $10,253.60

Comments?
« Last Edit: May 31, 2017, 02:26:07 PM by rocketpj »

suntailedshadow

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Re: Mixed res/commercial Property - Go or no go?
« Reply #1 on: June 18, 2017, 02:23:37 PM »
I wish I had something to add personally. I'd also be interested in reading an assessment of this if someone has a bit more experience in this space.

curler

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Re: Mixed res/commercial Property - Go or no go?
« Reply #2 on: June 19, 2017, 09:19:44 PM »
My gut reaction, without having any experience with things like this, is the biggest cost you haven't accounted for is your time. You will be dealing with about 40 different leases.  Even if you only spend 20 minutes on each one a month (just 3 hours a year), valuing your time at $20/hour drops your return $90/month. 

Blindsquirrel

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Re: Mixed res/commercial Property - Go or no go?
« Reply #3 on: June 20, 2017, 06:37:22 PM »
    Sounds like a big PITA to run. Unless you are a very veteran RE investor, not my cup of tea. If you rent SFRs 3 bedroom and above you PITA factor will be way, way lower.

Cwadda

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Re: Mixed res/commercial Property - Go or no go?
« Reply #4 on: June 21, 2017, 06:56:06 AM »
What would be the cost to have commercial property management?

rocketpj

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Re: Mixed res/commercial Property - Go or no go?
« Reply #5 on: June 21, 2017, 08:36:36 AM »
Thanks for the comments.

Update.  I've been through the property and have learned a lot about it.

Current owner is an idiot who has run the place terribly.  There are about 2000 sf of unused space on the second floor that could be converted into storage units with a month or so of basic framing, drywall and electrical work.  Which he hasn't even thought to do thus far. In this community there is exactly zero available storage space, mostly due to a constant influx of downsizers retiring up here.  Roughly, that's about $2500 in unrealized potential revenue every month.

On top of that he is in trouble with the municipal government for failing to do the fire safety upgrades he needs, with multiple years of back taxes as well. 

Which creates an interesting, but risky situation.  Short term he is facing foreclosure, and will probably sell at about $600k to avoid bankruptcy.  The upgrades can be done for about $75k at the outside.  And the revenue has potential to go up dramatically and quickly.  Long term it is in a prime commercial location in the heart of a growing town, and is likely to appreciate.

I need to revise my numbers.  The points made about potential for PITA are well made and must be considered as part of the equation.

If I can get the revenue up by $2500 that moves me up to partial FIRE in about 2 years, and full FIRE in less than 10.  That has some appeal, so PITA might be worth it in the long run. 

Cwadda

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Re: Mixed res/commercial Property - Go or no go?
« Reply #6 on: June 21, 2017, 08:48:38 AM »
Thanks for the comments.

Update.  I've been through the property and have learned a lot about it.

Current owner is an idiot who has run the place terribly.  There are about 2000 sf of unused space on the second floor that could be converted into storage units with a month or so of basic framing, drywall and electrical work.  Which he hasn't even thought to do thus far. In this community there is exactly zero available storage space, mostly due to a constant influx of downsizers retiring up here.  Roughly, that's about $2500 in unrealized potential revenue every month.

On top of that he is in trouble with the municipal government for failing to do the fire safety upgrades he needs, with multiple years of back taxes as well. 

Which creates an interesting, but risky situation.  Short term he is facing foreclosure, and will probably sell at about $600k to avoid bankruptcy.  The upgrades can be done for about $75k at the outside.  And the revenue has potential to go up dramatically and quickly.  Long term it is in a prime commercial location in the heart of a growing town, and is likely to appreciate.

I need to revise my numbers.  The points made about potential for PITA are well made and must be considered as part of the equation.

If I can get the revenue up by $2500 that moves me up to partial FIRE in about 2 years, and full FIRE in less than 10.  That has some appeal, so PITA might be worth it in the long run.

Figure out his magic number. From there, you can make an offer he can't refuse. Do you have commercial lending already in place? You'd need a 30% down payment I believe.

electriceagle

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Re: Mixed res/commercial Property - Go or no go?
« Reply #7 on: June 28, 2017, 11:48:41 PM »
This sounds like a deal that is risky but has potential. A few questions:

1) What can you expect with regard to appreciation? Is the are shrinking or growing substantially? How resilient are the patterns of change?

2) Is the owner really an idiot, or are there reasons that he has not done the obvious/smart thing? Complex local regulations, shallow customer markets, etc?

3) Can you afford to bankroll a slow start? How large is this relative to your liquidity?

rocketpj

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Re: Mixed res/commercial Property - Go or no go?
« Reply #8 on: June 29, 2017, 12:18:48 AM »
This sounds like a deal that is risky but has potential. A few questions:

1) What can you expect with regard to appreciation? Is the are shrinking or growing substantially? How resilient are the patterns of change?

Appreciation is likely to be strong.  The town is growing dramatically and it is a prime location right in the middle of town, close to the main road etc.  Residential has increased dramatically in the past few years, a combination of spillover from the absurd market in Vancouver, and retirees downsizing/ cashing in on that absurdity.  Commercial has been slower, but is tagging along. 

That said, aside from a large and growing commuter population, the biggest employer is a single pulp mill.  If it dies it will hurt the town.  It seems to be surviving well enough, but it constitutes a long term risk.

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2) Is the owner really an idiot, or are there reasons that he has not done the obvious/smart thing? Complex local regulations, shallow customer markets, etc?

You would have to meet the guy.  No mustache at all.  A big, broken down motorhome in front of the building that he is 'working on' but will be done 'someday'.  Literally $2000 in unrealized revenue on one floor (after some basic framing and drywall) but he hasn't even thought to do it.

I've spoken to the town about the issues they have with him, and their opinion is that the work they want done is fairly minor but he has been playing games with them for years.  Not showing up to meetings, not letting them see stuff when it's been prearranged.  The inspector is an acquaintance of mine and he has come to despise the guy. 

Quote
3) Can you afford to bankroll a slow start? How large is this relative to your liquidity?

It's a stretch for sure.  My current thinking is that I can do a rolling renovation, keeping the revenue flowing while I upgrade the building one section at a time.  Time is an issue.

Fuzz

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Re: Mixed res/commercial Property - Go or no go?
« Reply #9 on: June 29, 2017, 05:33:26 PM »
If you like the location, that sounds really, really promising to this novice.

It appears to be a big lot/building, or have good height allowance. If it's truly an ugly building, in a great location, you may want to get in there now and figure out if it's a tear down later. Obviously that would change how much money you put into renovations.

RE: the leases, that does appear to be a huge number of leases to deal with. My guess is the average tenure is pretty long. As you raise rates, you'll have a bit of churn.