Evaluating an opportunity to purchase office space?

Question

Hello Everyone,A strange convergence of events in the last 48 hours has led to the real possibility of purchasing a solid B class office building in my town. The majority of the office space is leased to tenants that have all been there 10+years with recently renewed 3 year leases. I am the most recent company in the building in last 10% of the space with a 1 year lease and moved in several weeks ago. I really like the building and the location.So is this a good opportunity to expand beyond SFR or am I better off just renting my corner? My inclination is to stretch and go for it but as my experience has all been with SFR, I would appreciate input from those with more commercial experience before I pursue this conversation with the owner. Asking price: $245,000 - reasonable for the areaEstimated Monthly Rent under current leases: $2500.00 - on the low side of the range for the area but the tenant base is long term and stableAnnual Taxes: $5000Annual Insurance - Unknown/information requestedUtilities - Unknown/information requestedBuilding Owner pays for alarm monitoring,electric and water bills - have asked for monthly cost averages but do not have yet.Individual tenants pay their own internet and phoneDescription: 2400 sqft, brick building with a 10 space parking lot, good location Known upcoming repair is HVAC for the downstairs (est $5k), upstairs HVAC has already been replaced.Thank you for your time as well as your opinion on this deal, recommendations for additional questions, additional information etc. Amy

Amy Webber · Answer

Paul,Thank you for the reply! We took the plunge and bought the property a couple of days after the original post as our time to decide was limited. Fortunately, our long time real estate attorney was able to help connect us with a commercial lender and it worked out. We put 20% down and have 4.12% rate on a 20yr am. I have no complaints for our first and totally unplanned commercial deal. Unfortunately, I did not get to squeeze the asking price due another offer but I was glad the owner called to see if I wanted to extend my lease before she signed the contract to sell. If she had not called, I would not have even known it was for sale until it was too late. I actually ended up paying $250k instead of $245k but we beat out the other offer on the table. I am very happy with my office and the other tenants are thrilled as the other buyer wanted everyone out as soon as their lease was up. I think it will be a good solid long term property and it is a great location for me personally (5 minutes from my house, 15 minutes from where my kids attend school, and walking distance to my favorite Mexican restaurant).I have been able to trim operating expenses over $250 per month so far and think I'll potentially be able to trim them another $200 or so per month within the next month or so. That makes things run pretty well. The rent comes in, I pay the payment and leave the rest in the account to build up for payment coverage, those future repairs, and the day when one of the other tenants decides to retire! So right now we collect monthly rent of $2800 and have a payment of $1235.00, which gives me a buffer for the unexpected.Part of the summer rent increase from the prior owner was splitting the utilities among the tenants and there are rent increases built into the new lease for the next two years. I'll have to revisit those numbers when it is time to renew the leases in 2019. I was able to cut the monthly alarm bill from $85 per month to $25 (with more features too!) and reduce the the monthly yard and interior cleaning costs from $450 per month to $200. I am contemplating getting rid of the $200 per month as well as the yard is tiny and the only cleaning is the small common area and two single bathrooms. I have been watching, and it just doesn't seem to take that long so I thinking about getting rid of that as well. My kids can do as good job of raking leaves, taking out the trash, and cleaning the bathroom. Then they can have some spending money and start contributing to a Roth IRA to build some good habits.Thanks again for the encouragement and have a great 2017!Amy

Amy Webber · Answer

Thank you ! One additional clarification - the commercial loan is a 5 year loan on a 20 year am so we will have to pay off the balloon at that time or redo the loan at that time at the going interest rate. The payment listed is just the loan payment. Taxes and Insurance add another $500 per month. Still very happy with it though !

Paul Halphen · Answer

That is an awesome success story. Sounds like you have added close to $100k of value, added $1,000 a month of tax smart cashflow to your bottom line, improved your personal quality of life, reduced your company's business expenses, and still have more upside. That ain't just a homerun, that's a grand slam! Congratulations.

Paul Halphen · Answer

As an owner occupant you should be all over it. It's not a bad deal, not a great deal. But, to own your own building and operate it at a 9/10 cap is a very solid play. Squeeze the asking price 10k. You need to work to pass through those utilities and CAM and it will perform well for you. People respond better to utility passthroughs than rent increases. Get it on a 20yr am and it'll be plenty comfy in lean years.