Mixed Use Deal in Los Angles County-Long Beach Retail/Apt ValueAd

[Will F.]

Hi.

I'm currently looking at several apartment buildings in the Long Beach area. I wasn't intending on it, but I found a mixed use (retail ground level with apartments on top) that I'm interested in. It is a value-ad property and has a lot of issues (empty retail and under-performing apt income). Properties in the area sell for significantly higher that are fully rented. This could perhaps be valued at $200-300k higher if units are rehabbed and fully rented with solid retail tenants. It also requires some roof, siding and other deferred repairs.

What do most of you investors think of retail/ mixed uses in general?

This is in a fairly hot drag with a lot of little coffee shops, hip vintage stores, and some retail....but it's mainly a residential area.

I've already invested in apartments and done some commercial leasing - of medical and small office space.

Here's the property:

$1.1 M purchase price

9 units total

x4 0/1 studios (low rents for area)

x1 1/1 (empty needs to be gutted and rehabbed)

x4 small Retail spaces 500 SF each - (street frontage, charming area, mainly residential but on a street with some retail, theres a significant amounts of foot and auto traffic)

$600k down with $500k loan (this is due to the property being mixed use and the empty spaces) for $1.1M total in.

GSI is currently 60k but could potentially be 100-110k

I think it could be appraised for $1.3-1.4 after it's been renovated, rents raised, and retail fully rented with long term tenants.

The problem is 3/4 of the retail spaces are empty and one studio needs to be gutted and rehabbed. I have experience with flipping and rehabing houses so it seems to be a value-ad project I can take on.

I'm just wondering about general advice for moving into retail space. Has anyone else done a similar value-ad deal like this in an already hip up-and-coming neighborhood?

I kind of know apartments are so much easier--as this is what I do mainly small apartment long term investing, but I'm just trying to do something new with some value adding.

It has been hard analyzing this deal as there's so much to put into it in order for it to work.  I'm really banking on this area improving as well as this area has really sprung up in the past several years and the city also is encouraging business growth of this area.

[Christopher Telles]

Don't count your chickens before they hatch.

No really, hopefully your underwriting isn't including a 'value add' for gentrification of the neighborhood in this property. Transforming areas take decades, not years. 

Many today would consider South Park and the Staples Center to be a good investment area, but if you would have been an investor in that marketplace in the early 2000's you'd know if was a tough place to get tenants to rent, the homeless and transients didn't help. Fast forward ten year and not to much had changed, except the Staples Center was an island development. The came residential towers, then restaurants, then retail, then more development.

Same goes with 2nd Street in Long Beach. Early 1990's that street was silent. Busy on weekends with local bars and restaurants, but not the destination place it is today. That was also two decades in the making. Don't 'add' a value that isn't there when making an investment. Cashflow (proforma cashflow to guide your underwriting in a value add deal) should be the only measuring stick for this deal.

To your potential investment, underwrite the deal like a typical value add deal, if you haven't already, and then ensure you can improve the building(s) on budget and can raise rents to market.

As for mixed use, their desirable by many. Atypical apartment investors may shy away because they don't understand the commercial component, but there are many yield seeking investors who will buy a well maintained high yielding mixed use investment.