Commercial Property Value

[Brandon Bee]

Fairly new to RE investing. I do own two SFH which I rent and feel I have a good grasp on the SFH market. Looking to get into a commercial office building and would welcome input.

Building is in a moderately affluent southeast Michigan suburban area and is sandwiched between two other office buildings. The Unit is a 5,500 sq. ft class-C, two story building. Currently being rented at 50% capacity month-to-month leases (due to seller selling the building--tenants willing to sign longer-term leases). Asking price is 259k and the numbers I have run NOI is pretty much break even. I did calculate if I had 80-85% occupancy and did minor cosmetic rehab to the building my NOI would be in the 15-18k region.

I do know some potential tenants for the building as well, but no one has committed.

Seller I believe is burnt-out from managing and wants to transition into residential flips from my understanding. It's also co-owned and I think he and his partner are on different terms and want to just separate from co-owning the building. I did ask if seller would be interested in a master lease agreement and he declined.

My question is: How do you determine the value/offer price on a property like this? Surely it has some value given the upside of only needing minor cosmetic rehab and filling the building to 85-90% occupancy including increasing rents.

[Brian Ploszay]

Be careful with class C office buildings. Make sure that you will not buy a building that is difficult to find tenants. Looks like you are buying it for a bit under $50 per square foot. If your NOI is 18K, then you are buying that at a 6.9% cap rate. I'd think that would be low, plus you have to work to get it to that level. If you hit 15K NOI, then the cap rate is 5.7%. Maybe you should take a pass on this investment, unless I am missing something...