Mixed use property deal evaluation

[Archipelago]

Property is a 2 family plus a large outbuilding zoned and occupied as a daycare.

Offer price: $1,200,000
30% Down payment: $360,000
Loan terms: 20 yr @ 5.5% interest
Estimated closing costs: $15,000
Short term repairs: $5,000

Monthly operating income:
Daycare rent: $7300
Apt #1 rent: $1475
Apt #2 rent: $1200
Total: $9975/mo

Monthly operating expenses:
Mortgage: $5778
Taxes: $1500
Management fee: $250 (paid to myself)
Insurance: $290
Vacancy: $100
CapX: $250
Water/sewer: paid by tenants
Trash: paid by tenants
Lawn/snow removal: paid by tenants
Utilities: paid by tenants
Total: $8168

Cashflow: $1807/mo
CoC return: 5.7%

After raising rents to market value in 2 years:
Daycare rent: $8400
Apt #1 rent: $1475
Apt #2 rent: $1400
Total: $11,275/mo

Expenses: all else same

Cashflow: $3,060
CoC return: 9.7%

Other notes:
Daycare is on year 1 of a 10 year lease, and is interested in purchasing the property later on.
Daycare rent automatically increases by 15% in 4 years.
Daycare pays for all maintenance within building. Owner pays for outer building maintenance e.g. roof and siding
Property is located within walking distance to elementary school, extremely well situated for a daycare business. School system has ranked in top 3 over many years.
None of my numbers factor in appreciation.

Tear apart my analysis!

[Archipelago]

@waltworks  @Jon Bon

[Papa bear]

Commercial loan?

Make sure you know the numbers on that daycare to make sure they can stay solvent and paying rent! This place hinges on that staying in business.

I don’t know a ton about commercial properties or loans, so do your homework.


Sent from my iPhone using Tapatalk

[Another Reader]

Day cares are not prime tenants.  How long has this one been in business?  How long have they occupied the space?  If they went under, what's your strategy?

Your vacancy and collection loss is too low, as is your management fee.  Any time you have a vacancy, you will pay that tenant's share of the expenses.  What is the basis of your capex estimate?

I want a commercial or mixed use property to have a more stable, higher quality anchor tenant.  Too much risk and too high a percentage of your income disappears if they do.  I would pass at this price and cap rate.

[Archipelago]

Commercial loan?

Make sure you know the numbers on that daycare to make sure they can stay solvent and paying rent! This place hinges on that staying in business.

I don’t know a ton about commercial properties or loans, so do your homework.


Sent from my iPhone using Tapatalk

My understanding is that this place was completely outbuilt to be a daycare. Also, the daycare has completely remodeled the interior recently. The facility is rated for 100 children. Seems to be a very strong business especially given the school system. I wouldn't see too much of a problem finding another daycare business for the space if something went wrong. If this place didn't have such a strong location, I'd be skeptical as well.

[Another Reader]

Have you talked to any of the other day cares in your market?  How many day cares are looking for space in your market?  How many have opened or closed in the last year? What are they paying in rent in your market?  You have no idea how easy or difficult it would be to find a daycare tenant to replace the current daycare until you do that research.

The space is built out for day care.  What other type of tenant would be interested in that type of space in that location?  Any other use would require a different build out.  Where would you get the capital for tenant improvements?

Based on your comments, I don't think you have a very good understanding of the property or your major tenant's business.  In your shoes, I would not write any checks until I did the homework.

[Archipelago]

Have you talked to any of the other day cares in your market?  How many day cares are looking for space in your market?  How many have opened or closed in the last year? What are they paying in rent in your market?  You have no idea how easy or difficult it would be to find a daycare tenant to replace the current daycare until you do that research.

The space is built out for day care.  What other type of tenant would be interested in that type of space in that location?  Any other use would require a different build out.  Where would you get the capital for tenant improvements?

Based on your comments, I don't think you have a very good understanding of the property or your major tenant's business.  In your shoes, I would not write any checks until I did the homework.

Oh yes, of course. A contract wouldn't be even considered until 2 months from now. This is an off market occurrence where the owner is not in any rush. This is still very much in the early stages and I've done zero research. I haven't even seen the place yet.

[Jon Bon]

I dont love the deal. You would probably be ok, but it is not a home run. My question more to you is what do you want to do, what are your goals? Also how are you valuing this? You metnion its an off the books deal, so market forces are not able to find the FMV of the property. I dont know a ton about how to value businesses. Have you seen the daycare's books? Usually a quick and dirty rule is a multiple of EBITDA depending on type of business.

360k in CASH is a shit ton of money to put into any single investment. Basically you are tying the entire deal to the health of a single daycare. That is all your eggs in a single basket. A basket that is full of children, and they break shit all the time!

I guess the larger question is what are you trying to accomplish? Do you have the RE bug and want to get investing? Good deals are hard to find. Not even good deals. Deals that will give you a decent return for the work you put in are hard to fine! Start smaller and perhaps wait 6-12 months. All the talking heads tell us a recession is on its way.

Are you secretly mega rich and 360k in cash is just a blip in your finances. OK sure go buy a commercial property as a hobby investment. If 360 is a decent part of your net-worth I think this is way to much to have in a single risky asset class.

my .02