Questions about commercial property investment opportunity, I am clueless

[Aaron Crow]

I have a property that I am looking at, it is a converted house now zoned commercial.  Property has been updated, has 11 parking spots, covered patio and storage building.  Was listed at 239,900 and was just reduced to 180,000.  I know the owner, went to high school with him and he has been my mortgage broker that I have closed quite a few houses with.  He changed companies and doesn't need an office any longer.  My former real estate broker is currently occupying the space but is also moving out at closing. 

Yr Built 1950, 1044 gross sqft, 4 offices, small kitchen, bathroom, office furniture stays

They said it could rent for 1400-1600.  It is not located on a major street, it is behind an old sonic that is now a catfish place.  You can see it from the main street, just not much traffic on the residential street it is on.  

I don't know where to begin trying to put a evaluation to what it may be worth, but seems like I could negotiate with the seller and if the numbers make sense then pick it up.  It is in the small town that I live in which makes it easy to manage myself.  

[Daniel Chang]

@Aaron Crow

I'm personally not a fan of these residential houses converted to commercial offices.  In general, these are always older houses that are on a residential street that has become busier over the years, or has corner visibility.  This creates a functional obsolescence  for residential, and hence the owners usually turn it to commercial, not so much to raise value but rather to retain it.

If these type of offices were in demand, developers would be building. Instead, most offices you find in the 1000 SF range are usually part of a multi-unit complex in a commercial area. There generally is no demand for a office converted from a SFR. The only office users that seek these out are purely for the lower rent.

This is not to say you can't get creative and try and install a tenant that will do well based in a residential area.  Also, these tenants typically are very similar to residential, in that they are looking for an annual term lease.  You generally will not be locking in a 5 year term for instance.  

I'm going to take your numbers as fact (although you should probably verify).  Since we don't know your actual expenses, I'll just utilize the 50% rule.  Let's assume $1400/mo in rental income, and a price of $180K.  You are look at a 4.7 cap.   That's pretty poor for a class C office building.

Remember, once you are considering commercial, the property is valued based on cash flow.  You generally can't go in and increase value by installing a new kitchen or bathroom (does a office user really care/pay more if there's granite countertops or stainless steel appliances?)

Of course, it is not with $0, and there is a price point that would make a lot of sense to buy it up.  I'll leave where that is up to you.