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New to REIN. Looking for a second set of eyes for mixed use

Monica D

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Hi Everyone! I am new to REIN and hoping to get a second set of eyes on an investment property I am looking at. This will be my first one and its a big one and frankly I'm scared to death. After speaking with many investors, they all leaned towards the same piece of advice; if you can go big. My experience spans property management (retail) and I am now a Realtor(6yrs). My investment strategy will be a little different in that I am looking to purchase 2-3 large mixed use properties and hold them for 5-10 years until I can hopefully retire.

I am refinancing my home to provide a small down-payment on this property. The owner of the building is giving me 20% VTB for 2 years. The rest I will need to finance if I can. My concern is the numbers. They look tight to me and I do need to sit down with an accountant next week to confirm the numbers but wanted to advise on the flip side from others. Here they are:

The building has two retail units below with good leases for the next 5 years and both have been there for over 10 years. There are two completely renovated apartments above that have also been rented out for years by same tenants. Further, the basement has storage units that many businesses in town use for there extra paperwork, etc. The majority of them are lawyers and such. Only half of this is currently rented out and owner never bothered to market it to its full potential.

Purchase Price $ 1,700,000.00
Mortgage $ 7,420.00
Utilities $ 113.00
Private Down $ 1,350.00
2nd on House $ 230.00
Property Taxes $ 959.00
Insurance $ 250.00
Total Expenses per month $ 10,322.00
Total Gross Income per month $ 11,140.00 - Per Year $ 133,680.00
Contingency $ 818.00/month

The storage will provide additional income when I get them rented. Also the area this building is located in has some major developments with a small rise condo being built two doors down. I'm worried the small contingency a month is tight. Even though this building is making money I would have felt saver with a larger contingency a month.

Also, I need to somehow write off the huge mortgage principal yearly or the revenue this building generates will kill me in taxes. I will be putting the building in its own corporate name. I think I can creatively do this with professional fees and such but its about 72k a year that I have to write off, which is substantial!

Any thoughts on the crazy investment would be appreciated!
 

Thomas Beyer

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Some questions, three topic areas:

a) Commercial units:

Are these triple net leases ?

How strong are the commercial tenants ? Might they go bankrupt next year ?

How easy is it to re-rent if someone moves ?

How much land is there ?

How much parking is there ?

What do comparable buildings go for, per sq ft of leasable space or per sq ft of land ?

Is there deferred maintenance ? If s.th. breaks, say the A/C unit, or the parking lot needs paving, who pays for it, commercial tenant or you, the landlord ?

Is there upside on the leases ? Is there an escalation clause every 2-3 years ? Are these ten year leases or month to month ?

b) Apartments upstairs:

How big are the upstairs units ?

How much rent per month ?

How nice or ugly ?

Who pays for their utilities ?

Quality tenants ? Bumms ?

Rent at market or well below ? Upside with some improvements ?

c) Area:

Did you walk around the area in the day ? at night ? Is it safe ?

Is this area creepy or quite nice & in high demand ? is this area improving ?

What is next door or in each direction ( N S E W) up to 3 blocks ? The good, the bad and the ugly ?
 

Matt Crowley

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This will be my first one and its a big one and frankly I'm scared to death.

You should be scared to death. If this goes south it would ruin most people. Can you survive if that happens?

Only half of this is currently rented out and owner never bothered to market it to its full potential.

Check for permits with the city. It may not be leasable space.

Hopefully there is a good reason the vendor never rented them out. This is the same guy you will be dealing with the VTB for the next coming years. Red flag for me.

Finances:
I can't understand your numbers but if you redo them I will take a look. If you can organize them like shown below I'm happy to look at the result. I think you have a lot of work to do on the financials. Your accountant can only tell you what the numbers are, they should not give you any investing advice. That is your responsibility.
Income:
Unit A
Unit B, ect
Expense
Property tax
Insurance
Maintenance
PM
Marketing
Legal / bookkeeping / accounting
Utilities
= NOI
Debt
Mortgage 1
VTB
HELOC
Cash flow

What is your plan for when the leases renew? How are you going to fund the TIs?

Commercial is typically a business to enter when you have large amounts of money you want to invest and you triple net the leases so that you can put the rent / property value and get that yield. It is something you do when you are cash-heavy.
 

Monica D

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Sorry my descriptions are a bit vague I know. Answers to some questions:

The building is in a downtown core and across the street from my office. The only parking is on the street and town owned/maintained parking lots in the core (free parking). The land is only what the building sits on. Commercial tenants do tend to salt and shovel the front area but the town is also responsible for the sidewalk maintenance. The downtown core is an extremely desirable area to rent out (rents are lower than anywhere else in town and very high foot traffic). We have a laundry list of business owners and residential tenants that would love to get into a unit if one becomes available (as we are the only real estate company on the street, we deal with most of the rentals in the area).

Buildings do not come up for sale very often here. The last sale I cannot compare as the top portion of the building needed to be demolished as it was in such bad shape. They are making condos out of the upper half and restoring the street level heritage building. It was sold for 2.2 early this year and from what I heard they will be investing another 9mil into the restoration and building of the condos. Last sale before that was a smaller building than the one I am looking at in 2002 for 620k.

Landlord will be responsible for Building mainenance. Roof was redone early this year and is shingle (which is great as most other buildings are tar and gravel). Newer windows and hvac in last 5 years. All tenants comm/res pay their own utilites.
No escalation on the commercial leases which will renew in 2019.
The apartments rent for market value and are very, very nice! Completely redone new kitchens baths. $1300 and $1250 for them with 2 beds. I cannot improve on these for higher returns. Both tenants are professionals and have been there for a while. No issues with either of them. They are currently on month to month but I would get them to sign leases if I purchase.

The area is very nice. Downtown core in high demand. Very safe area and I know it well.

Owner is retiring and selling most of his properties. This is the only one I am interested in as the rest are way over my head with property management and maintenance.

Hope this sheds light on some questions.

Some questions, three topic areas:

a) Commercial units:

Are these triple net leases ?
How strong are the commercial tenants ? Might they go bankrupt next year ?
How easy is it to re-rent if someone moves ?
How much land is there ?
How much parking is there ?
What do comparable buildings go for, per sq ft of leasable space or per sq ft of land ?
Is there deferred maintenance ? If s.th. breaks, say the A/C unit, or the parking lot needs paving, who pays for it, commercial tenant or you, the landlord ?
Is there upside on the leases ? Is there an escalation clause every 2-3 years ? Are these ten year leases or month to month ?

b) Apartments upstairs:
How big are the upstairs units ?
How much rent per month ?
How nice or ugly ?
Who pays for their utilities ?
Quality tenants ? Bumms ?
Rent at market or well below ? Upside with some improvements ?

c) Area:
Did you walk around the area in the day ? at night ? Is it safe ?
Is this area creepy or quite nice & in high demand ? is this area improving ?
What is next door or in each direction ( N S E W) up to 3 blocks ? The good, the bad and the ugly ?
 

Thomas Beyer

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Aug 30, 2007
Messages
13,881
Well then do this:

Get property under contract with a two month due diligence period.

Hire an appraisal firm and get an appraisal.

Hire an engineering firm and get a report of building condition and any structural, mold, plumbing or wiring issues.

That will cost your about 2 x $4000 but will help you in the decision.

In parallel get a mortgage broker to get some financing options and get a real estate lawyer that specializes in commercial leased to give you feedback on the commercial leases.

This property might be a gold mine, it might be overpriced or it might be just ok.

Once you have input from these four experts, having spent $10,000+ you can then waive conditions or walk away.
 

Monica D

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You should be scared to death. If this goes south it would ruin most people. Can you survive if that happens?

This is a risky en devour for sure. My only fall back is that the building was assessed for 250k more last year than I am purchasing for this year. I will obviously have it re-assessed. If I cant hack it, I will sell it and hopefully walk away with what I invested into it. This is not my future plan but it is a safety net of some degree. My strength is that I have a large network of great professionals at my aid to make this work. You can never have enough great help around you.

Check for permits with the city. It may not be leasable space.
It is leasable space. The vendor owns a fair amount of properties and manages then himself so he point blank told me that the basement was not on his top priory list to rent out. There are a total of 32 small units so a lot of "tenants" to deal with. It will require work and a bit of advertising to get them rented out and he never bothered.

Hopefully there is a good reason the vendor never rented them out. This is the same guy you will be dealing with the VTB for the next coming years. Red flag for me.

Finances:
I can't understand your numbers but if you redo them I will take a look. If you can organize them like shown below I'm happy to look at the result. I think you have a lot of work to do on the financials. Your accountant can only tell you what the numbers are, they should not give you any investing advice. That is your responsibility.
Income: Annual
Unit A $68,202
Unit B $14,400
Apt 1 $15,600
Apt 2 $15,000
Mini-Storage $17,000 Current (Potential 100% Rented Out $38,484)
TMI Recovery $7,200
Expense
Property tax $11,500
Insurance $2,989
Legal / bookkeeping / accounting $2,400
Utilities $1,356
= NOI
Debt
Mortgage 1 $91,704
VTB $22,100
Cash flow
Reserve Fund: $15,000

What is your plan for when the leases renew? How are you going to fund the TIs?

Commercial is typically a business to enter when you have large amounts of money you want to invest and you triple net the leases so that you can put the rent / property value and get that yield. It is something you do when you are cash-heavy.
 

Matt Crowley

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Joined
Dec 14, 2013
Messages
980
What do you mean the building was assessed? Tax assessed? Appraiser assessed?

I'm not sure I understand the numbers. So there are 32 residential units and commercial? Purchase price is $1.7 million. So about $50k / unit before commercial.

How are you going to repay the VTB? (VTB = you need to make the building worth what it costs today + the cost of VTB interest + risk profit. How are you going to create that margin? )

Do you have an operating expense budget and where are the market rents?
 
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