First timer: two apartments, two retail units and a ball of angst

[Erica Anne Langston]

My partner and I have been looking at multi-family house for the past two years or so and have even gone under contract on two properties before pulling out because of inspection discoveries. We hadn't considered commercial until a very unique building came across our path this month. It was purchased by the state to run headquarters out of for a major infrastructure project in our town. The project is done and the state is looking to offload the property asap. We have the potential to get this property at what seems to be a screaming deal (possibly half of what it's appraised for), but it is a huge property--two residential units (1br/1ba each that could rent for $1100) and 2 retail units, totaling about 4k sqft. The retail units need a lot of work before they are leasable, and the building is circa 1900, so lots of delayed maintenance and likely unforeseen expenses. The exterior was also stuccoed over by the previous owners, which slightly terrifies me. We were still getting our legs under us and building confidence to pull the trigger on multi-family, and we would likely have to tap into our home equity to pay cash for this deal. The whole thing seems like a big endeavor, but also like it could be a really good opportunity that isn't likely to come around again. What should I do differently when running the numbers here compared to a multi-family? Has anyone taken on a property like this? How did it go? What do you wish you knew/did beforehand? 

[Tim Delaney]

@Erica Anne Langston first, curious why it’s such a smoking deal if it the retail space is empty? With commercial buildings the appraisal is based on the Net Operating Income (all revenue minus costs of operation), so a building that doesn’t have revenue won’t appraise for very much. So use that to your advantage when negotiating.

Now the upside of a commercial property is that typically the tenant is the one to do their own build out which means you don’t actually have to spend money fixing up the commercial space. You can also negotiate with tenants over who is responsible for future expenses like HVAC, electrical and plumbing. Once you get it rented out and keep your expenses low you can get it refinanced based on the increased appraisal.

One thing to watch for as you mention is that deferred maintenance. I bought a large commercial plaza a couple years ago and I’m still discovering large issues that need to be addressed. If there are older mechanicals or roof issues those can cost quite a bit on an older commercial building. It would also be good to have some perspective tenants lined up before you even close. You may want to talk to some commercial realtors that specialize in leasing space in your immediate area so you have an idea of what to actually expect for rent.

Good luck!