Am I taking too big of a risk?

[Ryan Cole]

I'm pretty new to real estate investing. I currently own 4 cash flowing multi fams in Morgantown, WV that I have acquired over the last 2 years. A commercial building located down town is about to go on the market for around 650k that I am interested in. It's in great location and has 3 businesses currently bring in $3400 a month. I am interested in the property because of the potential units that could be built on 2nd and 3rd floors.  After construction, which I had estimated at 200-250k, it would have three 1 bed room apts, two 2 bed room apts, one 3 bed room apts and a coin operated laundry for the tenants. After completion it has the potential of bringing in 9-10k a month. I have spoke with lender and can get financing. Assuming I can get the property at 600k, lender would give me 850k loan at 15% down with the first 12 or 18 months being interest only, which would be nice because the building doesn't cash flow as it sits today.  It sounds like it could be big op for me. Just need some advice? Maybe some motivation? It's a huge step for me and I'm honestly pretty nervous about getting into this. 

[Joel Owens]

You need to review the leases of the three businesses. See if they are pro-tenant or pro-landlord in their structure and return.

You want to find in the leases:

1. 2 to 3% increases in rent PER YEAR.

2. NNN versus gross lease

3. Tenant has to disclose audited annual sales minimum and hopefully quarterly upon request. This is important to determine the health of the business versus a percentage of the rent they pay you.

As an example a business doing 1,000,000 in sales you generally do not want to see more than 10% going to rent or 100,000.

4. No termination clauses.

I would want more yield for undergoing what you are going to do but if it;s close by it might fit your portfolio.

Try to get the interest only to convert to a permanent loan at today's rates. Save on refi costs.