Owner Financed Mixed Use Building with vacancy?

Question

Hello,

A fellow property owner let me know that he has decided to sell.

He has offered to owner finance it to me with a $50k down payment, 7% rate for 20 years.

I'm looking to buy a property like this to be my retirement fund when I get older and I don't need the potential cash flow now.

The building has been cared for, has 4 small apartments on the second floor, two medium storefront commercial spaces and located in a very nice city.

One commercial space tenant just moved out last month.

As it stands right now, it will cash flow negative -$8500 annually.

If I include depreciation, still negative -$2400.

The apartment rents are long term tenants and 25% lower than comps.The owner is elderly, has owned the building for over 40 years and is confidence that the vacant space will rent soon.

History verifies several months of vacancy, but usually it's rented.

I am concerned and don't want to put myself in a tough spot.  I am very comfortable with residential spaces and own several. Everyone needs somewhere to live.

Not so much with the commercial spaces.

Any advice on taking on a property like this with a monthly loss right at the beginning?Or if I should even do it?

Thank you!

Account Closed · Answer

What's the hipster ratio? I'm serious they blow serious money on rent, food and haircuts. Look for wide brim felt hats and bearded men with bald fade haircuts.

Henry Clark · Answer

1.  Need more info.  What are the size and rental income splits between units?

2.  Why are you mentioning Depreciation impact on cash flow? Can understand from a tax cash impact, but that doesn’t apply since you’re at a loss.   3.  Negative cash flow. Easy answer is no don’t do it.  Is there any value add?  You mentioned you owned a business or building.  Is this next to yours and you can combine or use parking?

4.  If you raise the rents and the tenants leave what is your rehab costs since they have been there a long time?   $10,000. $20,000 etc per unit?

5.  The remaining commercial tenant.   What type?  Contract terms and length?

6.  Capex outlays.  Roof, side walls, sewer, road or sidewalk.  How do those look in your numbers?

Has to Cashflow or have a value add component where you make at least 50% over ask.

Ronald Rohde · Answer

I laughed more than I should have!

Matt Devincenzo · Answer

Since this is private note terms can be structured to address the issue. Define an event like leasing that space prior to which you only owe XXX/mo. Or you could even do it as a TIC structure, you buy the residential at $XXX valuation via a TIC. And then close on the remaining space once leased. If its not worth doing that way then maybe you just wait out him getting the space leased up and then close.

John McKee · Answer

It has to cash flow or break even with significant upside.  I do love the mixed use space on a vibrant street.  These kinds of towns are making a comeback.  Remind them how much they are saving by not using a broker and perhaps they can come down in price.  Get an Email from a bank on how they would underwrite the deal from a cash flow standpoint and share that with the Seller.  Perhaps they will even have more respect on how your analyzing the deal.

Michael Greer · Answer

Its a very nice street and great visibility, but no street parking.

If there were street parking in front of the door, it's much more likely that the impulse to "stop in," but the parking lot is behind the building so a coffee shop-like business doesnt really fit.The old tenant was an accountant who's 3 year lease expired and that's probably the best kind of fit for the location.

Thanks for the responses and questions. It really helps.

Ronald Rohde · Answer

Let them lease it up, this is not an attractive deal. The price must come down.

Account Closed · Answer

Urban core? If yes, can you get a sense of the daytime population? What's going on nearby, development and progress? IS IT WALKABLE?, is it in an area where people are walking around restaurants and cafe? The vacancy concerns me, can you contact a local retail broker to determine a procurement timeframe, product like that can sit for YEARS without tenant income? What about conversion to 100% res? Do you feel it's a good acquisition price?

Account Closed · Answer

Why did the tenant no renew? What kind of business fits there? What is street visibility and parking? Consider a proposal to seller; seller makes pro forma cap rate equivalent payments OR seller makes 100% debt service until new tenants are procured for 100% occupancy or 12 months, or some combo. Does this make sense?   (No agency here)

Zane Cress · Answer

Ask for 4% if it makes the numbers work in the properties current condition. He should understand if he's been around this long that you can't walk into a bad deal. Or extend to 25 or 30 years and have the payments go to his children, or church, or charity, whatever he wants if he passes away before it's paid off.

Owner Financed Mixed Use Building with vacancy?

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