How to do a Commercial Deal?
- Thread starter scorpiox
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QUOTE (scorpiox @ Aug 12 2010, 10:42 AM) I am looking at a commercial building. and the owner is willing to sell it for city assesstment at $670k, Monthly rent coming in is $4000. Is this a good deal?
As a REIN member you should be aware of the 10% rule. so lets calculate: 4000x12 = 48,000, 48000/670000= 7.2% << 10% ---> Very bad deal!
As a REIN member you should be aware of the 10% rule. so lets calculate: 4000x12 = 48,000, 48000/670000= 7.2% << 10% ---> Very bad deal!
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QUOTE (scorpiox @ Aug 12 2010, 10:42 AM) I am looking at a commercial building. and the owner is willing to sell it for city assesstment at $670k, Monthly rent coming in is $4000. Is this a good deal?
more specifics please .. but an annual rent of not even 50K divided over 670K is about a 7% CAP rate .. more or less ..
Unclear is what expenses come off the rent.
7% might be an OK price if expenses are paid by tenant .. but it depends where it is and how strong the tenants are. In a small town, especially if very few tenants, or weak ones, or one tenant only 7% CAP is probably too low. Needs to be more like 8-10%. 7% in a big city in a strong market with a strong tenant who will likely not default is an OK deal.
You have to analyze:
a) tenant strength .. how likely will they default .. and if they default: then what ? how easy to get them out.
b) re-rental possibilities: How easy to re-rent ? maybe for higher rent ? maybe for much lower rent ?
c) lease in place: does the current lease allow for increases ?
d) deficiencies in building or environmental issues that you might be on the hook for ?
e) mortgage ability .. what would a bank lend you ? is the cash-on-cash ROI acceptable to you for the commercial risk ?
f) who manages this asset .. especially in light of tenant not paying or re-rentals ?
g) competition .. what else is for rent close by .. now or soon ? Perhaps the seller know s.th. you don`t .. namely that a new center 2 blocks away with brand new buildings is going up in 6 months and that your tenant will likely vacate shortly?
h) what is the upside in this city/town ?
Commercial is a great way to make money .. with better returns and less hassles than multi-family until the tenant stops paying. Then the headaches start .. as vacancies lasting a year or more is not uncommon plus expenses to renovate/clean up for new tenant ! be aware of those costs.
more specifics please .. but an annual rent of not even 50K divided over 670K is about a 7% CAP rate .. more or less ..
Unclear is what expenses come off the rent.
7% might be an OK price if expenses are paid by tenant .. but it depends where it is and how strong the tenants are. In a small town, especially if very few tenants, or weak ones, or one tenant only 7% CAP is probably too low. Needs to be more like 8-10%. 7% in a big city in a strong market with a strong tenant who will likely not default is an OK deal.
You have to analyze:
a) tenant strength .. how likely will they default .. and if they default: then what ? how easy to get them out.
b) re-rental possibilities: How easy to re-rent ? maybe for higher rent ? maybe for much lower rent ?
c) lease in place: does the current lease allow for increases ?
d) deficiencies in building or environmental issues that you might be on the hook for ?
e) mortgage ability .. what would a bank lend you ? is the cash-on-cash ROI acceptable to you for the commercial risk ?
f) who manages this asset .. especially in light of tenant not paying or re-rentals ?
g) competition .. what else is for rent close by .. now or soon ? Perhaps the seller know s.th. you don`t .. namely that a new center 2 blocks away with brand new buildings is going up in 6 months and that your tenant will likely vacate shortly?
h) what is the upside in this city/town ?
Commercial is a great way to make money .. with better returns and less hassles than multi-family until the tenant stops paying. Then the headaches start .. as vacancies lasting a year or more is not uncommon plus expenses to renovate/clean up for new tenant ! be aware of those costs.
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QUOTE (scorpiox @ Aug 13 2010, 12:59 AM) Wow.. thanks for everybodies input... appreciate it.. i guess it is hard to find good commercial deals?
how hard to fly a 747 from New York to London ?
not so hard .. with experience & training !!
how hard to fly a 747 from New York to London ?
not so hard .. with experience & training !!
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QUOTE (scorpiox @ Aug 12 2010, 10:42 AM) I am looking at a commercial building. and the owner is willing to sell it for city assesstment at $670k, Monthly rent coming in is $4000. Is this a good deal?
I don`t think you`ve provided enough information to determine whether this is a good deal or not. For example, if this commercial property is a building holding a branch of the Royal Bank in a large growing city, and the 4000 per month is a triple net lease (ie, they pay all the other expenses) I would say its a good deal.
On the other hand, if its a rundown strip centre in a small town with a drycleaner, independent restaurant, and the local scrapbook store as tenants, where the landlord is paying expenses, then its a terrible deal.
Based on the rent to purchase price you`ve provided, it probably needs to be pretty close to the first option to be worth doing.
Michael
I don`t think you`ve provided enough information to determine whether this is a good deal or not. For example, if this commercial property is a building holding a branch of the Royal Bank in a large growing city, and the 4000 per month is a triple net lease (ie, they pay all the other expenses) I would say its a good deal.
On the other hand, if its a rundown strip centre in a small town with a drycleaner, independent restaurant, and the local scrapbook store as tenants, where the landlord is paying expenses, then its a terrible deal.
Based on the rent to purchase price you`ve provided, it probably needs to be pretty close to the first option to be worth doing.
Michael
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There may also be other opportunities that go with the property that you have not mentioned. Is it a huge lot? Could you add another building? Are there vacancies?
Not to mention you don`t have to give the guy what he asks. I want 10K for my 12 year old van and there aren`t any line ups
Not to mention you don`t have to give the guy what he asks. I want 10K for my 12 year old van and there aren`t any line ups