First Commercial Prop Would Like Input
Greetings all. I have been lurking for a long time here and have learned a lot from all the knowledgable people here. I have an opportunity that I would like your insight on. Actually, I have three here in Anchorage, Alaska but lets look at one at a time.
Commercial building plus adjoining lot for 625k. It has three auto repair type tenants in the middle of 4 year leases (2 left). Gross income is 89k per year (no vacancy allowance). Expenses (taxes, utilities, insurance and 5% allowance for repairs) total 21800 per year. I feel like I could do the day to day management myself but I would probably have some fees for finding new tenants when that time comes and those expenses are not included in the numbers listed above.
The owner is willing to take 10% down and finance the rest at 9% for 20 years. My P&I would be just shy of 61k per year.
What do you think? Part of me says this would be a very low capital way to get a commercial property (closing costs would be negligable) but it seems a little negatively geared at least for the first couple years. Thanks so much for your input.
Its a pretty good deal. Not a home run but definitely a viable transaction. Here are some spiff-it-up ideas.
It is possible to find commercial mortgage money these days at 6.5% rather than have the owner carry paper at 9 see about a bank first for 70% or 80% of the deal. See if the Seller will, instead of a first carry a 20 or 30% second. Voila, not only have you created a no-money down deal but you have reduced your carrying costs by lowering your interest rate.
At least consider renegotiating leases now. Maybe you can get the tenants (or at least some of them) to agree to a small increase in rent now to lock in their rate for two more years on the back of their existing leases. Even if only one accepts you have also staggered the expiration dates so that you are less likely to have all three units vacant at the same time.
How big is the lot? Is there income potential there? It is never a bad thing to get some additional land in a deal that makes sense based on the current uses. Might you sell the lot and reduce debt?
Thank you for the reply.
To answer your questions both lots are 15,000 sqft. The vacant lot is directly behind the property and one of the current tenants leases it for parking for about 2350 per year. I feel like it may have some potential in the future to put a covered garage on it. The current owner bought it because of the lack of parking on the original property. I don't know if selling it would be a good idea. It doesn't seem to be factored into the price too much anyway.
Your idea of the seller second is very intriguing. I did the math and my payment would be around $5079 with no money down versus $4858 with the owner finance option. No problem considering I don't have to cough up 60k. I have one concern about that however. I was told that in deducting depreciation I could only deduct the amount I have "at risk". With no money down I would have none of my own money "at risk" and would lose the depreciation deduction. Am I wrong on this?
thanks again and I will keep you posted...
if you are personally liable on the mortgage then you are "at risk" on the whole amount. At risk rules mostly apply in Limited Partnerships.