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 :)
