Which Building Would you Buy?

[Nir]

Hi All,

Which of the following 2 buildings would you prefer buying:

- 8 units building. all 8 are residential

OR

- 8 Units building: 6 residential and 2 commercial units.

Please assume everything else is the same: financing, neighborhood, price, total rent, total expenses, building condition, etc..

The only difference in the 2nd option is instead of 8 apartments you have 6 apartments and 2 commercial units (say a barbershop and a store)

THANKS.

 

[TheVancouverLife]

I would pick the second property as it provides some diversification by including commercial space and because commercial leases typically run for 5 years at a time.

Commercial also require less maintenance as the tenant is responsible for just about everything.

That is just my take on it. Hope it helps...

Alan

 

[terri]

QUOTE (investmart @ Aug 11 2010, 10:17 PM) Hi All,

Which of the following 2 buildings would you prefer buying:

- 8 units building. all 8 are residential

OR

- 8 Units building: 6 residential and 2 commercial units.

Please assume everything else is the same: financing, neighborhood, price, total rent, total expenses, building condition, etc..

The only difference in the 2nd option is instead of 8 apartments you have 6 apartments and 2 commercial units (say a barbershop and a store)

THANKS.

it would depend on location and the demand for commercial space in the area.

 

[markl]

also factoring in to my decision on which property to buy would be the mix of the residential units. I also second Terri`s question on where the commercial is located. Is it in a bad area where it may take you longer to rent out the property?

Residential even in not so good areas goes pretty quickly where as Commercial not so much and turn over for commercial properties in those areas is greater as it is harder for them to make a go of the location.

Regards,

 

[housingrental]

I would choose 1)
Additional risk level from commercial - vacancy as noted above by Mark - and financing requirements in future might change

 

[Nir]

Thanks everyone, good points! In reality, the 1st is better due to the need to put down around double the amount on the 2nd!
(in the question though there is a similar financing assumption)

 

[Pheenix]

QUOTE (investmart @ Sep 18 2010, 05:39 AM) Thanks everyone, good points! In reality, the 1st is better due to the need to put down around double the amount on the 2nd!
(in the question though there is a similar financing assumption)


I have an associate who would have jumped all over the second a few years ago, if some additional factors were in place;
(and again, notwithstanding differences in the leveraging)

the stability and long term viability of the commercial tenants themselves,
escalation potential on the commercial units,
opportunity to increase the coverage ratio,
opportunities for additional revenue sources.

I get the impression he also worked conversions so that the property became all one or the other, although we have never discussed this in detail. So it depends on your experience and expertise.

Interesting case question.

 

[GarthChapman]

The `same financing` assumption is only valid if the commercial space is less than 20% of the total rentable space in the building (and a few other criteria re location, quality of commercial tenat requirements, etc but let`s ignore those). If over 20% of the total space then a CMHC insured mortgage is NOT an option, hence much higher interest rate and larger down-payment required.

Outside of the financing issue, it will generally be easier to manage a single purpose asset than a multi-use one, but the commercial space will often offer more income lift opportunities. And the type and quality of the commercial space and tenants will be a huge factor.