Commercial Retail - Big box store Out of State

[Rick R.]

Hello Investors

I need some advice on this out of state Commercial purchase. We own small Commercial office spaces and are looking into purchasing a Retail building with 2 tenants with one of them being a big box corporate tenant which sells furniture and another a local restaurant. Big box tenant occupies 80% space and has been at this location for about 4+ years. This is managed by a Property management company

Purchase price is $7.3mil at 7.15% cap, NOI = 522K, NNN leases and both have 5+ years lease on their primary lease term with 3x 5-year options to renew. We will be financing this with 25% to 30% down at about 7% interest rate. With the current rents it works about about 7%-8% Cash on cash returns with Principal loan payment + cash flow. Our cash flow will increase if interest rates go down in next few years.

1) Any input on this deal? Our biggest concern is what happens if the Big box tenant goes out of business. It can be challenge to replace them

2) What gotchas to look out in the Lease agreements?

3) Any creative loan options to go for a lower interest rate? 

Appreciate your advice

[Drew Sygit]

@Rick R.

We think the Midwest is a GREAT place for OOS investors to consider!

YES, we may be a little biased, but check out our blog here on BP comparing Detroit to other cities and Deep Dives on Metro Detroit cities & neighborhoods:

https://www.biggerpockets.com/...

(BP search feature can be problematic, so we’ve also added links @ our website under View Cities & Neighborhoods We Service)

Your biggest question shouldn't be WHERE to invest, but HOW you will invest!

Many OOS investors set themselves up for failure because they don't truly take the time to understand:

1) The Class of the NEIGHBORHOOD they are buying in - which is relative to the overall area.

2) The Class of the PROPERTY they are buying - which is relative to the overall area.

3) The Class of the TENANT POOL the Neighborhood & Property will attract - which is relative to the overall area.

4) The Class of the CONTRACTORS that will work on their Property, given the Neighborhood location - which is relative to the overall area.

5) The Class of the PROPERTY MANAGEMENT COMPANIES (PMC) that will manage their Property, given the Neighborhood location and the Tenants it will attract - which is relative to the overall area.

6) That a Class X NEIGHBORHOOD will have mostly Class X PROPERTIES, which will only attract Class X TENANTS, CONTRACTORS AND PMCs and deliver Class X RESULTS.

7) That OOS property Class rankings are often different than the Class ranking of the local market they live.

8) Class A is relatively easy to manage, can even be DIY remote managed from another state. Can usually allot 5-10% vacancy factor and same for maintenance.

9) Class B usually also okay, but needs more attention from owner and/or PMC. Vacancy and maintenance factors should be higher than for Class A as homes will be older, have more deferred maintenance and tenants will be harder on them.

10) Class C can be relatively successful with a great PMC (do NOT hire the cheapest!), but very difficult to DIY remote manage. Vacancy and maintenance factors should be higher than for Class A or B. Homes will have even more deferred maintenance and tenants will be even harder on them.

11) Class D pretty much requires an OWNER to be on location and at the property 3-4 times/week. Most quality PMCs will not manage these properties as they understand most owners won’t pay them enough for the time required and even then it’s too difficult successfully manage them.
***Only exception is if an owner has plan & funds to reposition Class D to Class C or higher.

https://www.biggerpockets.com/forums/776/topics/960183-what-they-dont-tell-you-about-cheap-rental-properties?highlight_post=5562799&page=3#p5562799

Also, SERIOUSLY consider - do you really have the time to be a DIY landlord or should you hire a PMC?

Good luck with whatever you decide😊

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