Is this office even a deal? - Posted by david kopp

Real Estate Investing Office
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Posted by ray@lcorn on October 15, 2006 at 22:38:39:

Emily,

The gross income is only part of the picture. In order to gauge the viability of a deal it is necessary to know the Net Operating Income (gross income - operating expenses = NOI).

Then subtract the debt payments from the NOI to get cash flow. The cash flow divided by your investment (i.e. down payment) equals your return. If the return and the risk is acceptable, then so is the deal.

For more about valuation, see this article: http://www.real-estate-online.com/articles/art-216.html

ray

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Is this office even a deal? - Posted by david kopp

Posted by david kopp on October 12, 2006 at 15:16:23:

I have been doing mobile home deals for a while and I am starting to get curious about commercial real estate. I have found a office for sale for $129,000. It has been rented out to a political party for the last 3 years for 500 per month. The lease is coming due in December and the current owner is confident he can raise the rent to 1000 per month. The realtor suggest that I make an offer subject to the signing of a new lease at 1000 per month. I am thinking that this could be a good property as I doubt it would require as much work as other properties due to the more infrequent use. I am 25 years old and I dont have a lot of money. I would like to finance the majority of the deal and still have the payments cover the mortgage. I am so new at this I am unsure if this is even a good deal and worth my time. I have done five mobile homes with my dad, but because I now live overseas (Morocco) i have to do my deals through the internet. Anyways, is this what is considered a good deal? And how would you suggest making it an even better deal? Thanks

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Re: Is this office even a deal? - Posted by Frank Chin

Posted by Frank Chin on October 19, 2006 at 07:56:08:

David:

I’m not saying this is doable or not, but these are the issues.

1- It is not the type of deal that’s easy to get a real “commercial mortgage”, because it’s so small, and the cost of processing it, and then servicing it makes it very unprofitable.

2- Usually, a 129K asking is puffed up by at least 10% or more, and the seller is not expecting 129K. I don’t know your area, so a price of 100K to 110K as FMV would be a good guess.

3- Usually, commercial tenants pay taxes, utilities, insurance. Does the rent include these?? If not, if you net 1,000/month, or 12K a year, that’ll be a 10% cap rate already, which is on the very high side, these days.

4- One thing with commercial properties is vacancies are much longer to fill than residential ones. In our area, where vancancies are actually very little, it normally takes more than six months to find a tenant. Do you have reserves to last this long?? In the meantime, you pay the taxes, utlities, insurance, besides mortgage payments if any.

5- This deal makes sense for you with seller financing. But does it make sense for the seller?? If I were him, I’m looking at a very young guy, no commercial RE experience, putting little down, collecting the rents, and if YOU DON’T PAY THE mortgage, do I have to run to Morrocco to find you?

6- I answered one of your posts some time back, I mentioned that when my dad was asked for “seller financing” on his commercial property when he considered selling some time back, because small commercial loans are hard to get. His question along these line are “if I’m selling because I’m tired of running down there to chase the tenant for the rent a few blocks away, how much harder is it to chase some guy in Morrocco for the mortgage payment”??

7- If the FMV is around 100K to 100K, and one can net 10K to 12K/year, this deal makes sense for someone with 100K in loose change looking for a 100K investment. Something like a doctor, a professional, or someone with retirement funds not comfortable sinking the money into high flyers like Yahoo or Google. For a guy with 100K in loose change, if it nets 10K a year, the way I figure it, unlike stocks, the 100K will not fall to 50K, but if it did, I would’ve made 50K in rents on it over 5 years anyway.

In deal making, you’ll have to determine not only if the deal makes sense to you, but does it make sense for the seller as well, as well as other buyers.

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Re: Is this office even a deal? - Posted by ray@lcorn

Posted by ray@lcorn on October 15, 2006 at 22:15:05:

david,

Given that you’re out of the country, have limited funds and experience, and are relying on the word of an owner who wants to sell to justify the price, I’d say no, this is not a deal you’d want to take on.

For more about how to value the property, see this article: http://www.real-estate-online.com/articles/art-216.html

To quote Warren Buffett, the first rule of making money is not to lose money. The second rule is don’t forget the first rule.

For more about the dangers of overleverage, see this article: http://www.real-estate-online.com/articles/art-203.html

ray

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new girl, same question…any ideas? - Posted by Emily Cross

Posted by Emily Cross on October 13, 2006 at 06:47:53:

I am in a similar situation. I am looking at an office building in my home town with three offices that rent out for 900 per month (combined) and there is a lease in place for the next 20 months. I would like to make an offer but I want to know how to approach a deal like this if I only have about ten thousand in borrowed funds for a down payment. I have read how it is best to approach the first deals with little money, as that will help you learn, but I need to know how to approach the seller to ask for owner financing or a cut in the price. I guess my big question is, should I bother with this deal or look for something cheaper? Oh, by the way, the asking price is $120,000. Thanks in advance for any help for the new girl.