Commercial Property... Doesnt make sense to me... Change my mind!

[Matt Blake]

Greetings,

*disclaimer.. we are Canadian*

My wife and I are typically SFD types.  Buy Improve Hold Rent types.  We've recently been able to realize some capital out of a couple of a couple properties, and are expanding our horizons to include commercial properties.  Currently, the multi family comercial in our area, just doesnt exist.  If it does, its a very low cap <5.5%, and older buildings, and not great areas at that.  So we've expanded to commercial or commercial retail

We seem to be allergic to selling any of our 6 rentals, , so instead, we somewhat cannibalized our current cashflow, to get some capital out, to apply to our primary residence(in Canada our primary residence interest is not deductible)

We've paid off all but $75k of our $550k primary residence and have a $355k HELOC at our disposal(which if we use for investing, becomes deductible interest).

We've found 2 individual neighboring properties.  

for simplicity we will look at property A

Asking $860 000 CAD
4240 sq ft.
Taxes $14, 170(bore by landlord but paid by tenant)

$13.50/sq ft.

NOI $51, 560

Least to provincial government that it was built for.  Roof was replaced in 2018.

Schedule in place that outlines the tenant is responsible for everything.  

3 years remaining on lease(that has been there 20+ years) and has a 5 year renewal option.

So, using my thought process on this.

$51,560/12 = $4296/mo

$860 000*0.25 = $251k down
$645 000 mortgage 5 year term, 25year amort at 4% = $3400/mo($1261 amort $2139 interest)

$4296-$3400X12= $10 800 Cash on cash return 
$1251(amort) X 12 = $15 132 Amortization in year one

Total $25 932/year

Now in order to purchase this we'd have to take $251k from our HELOC. Which would cost approximately $937/mo at 4.45% interest only

$937/mo or $11 244/year 


$896/mo net cash flow - $937/mo interest on heloc = -$41/mo(-$492 year)
$25 932 -$11 244 = $14 688 'net income' including amort


Is there something I'm missing here?  Because based on this, no commercial property under a 6% cap rate would ever cash flow unless you had the downpayment in Cash.  Granted, this is our cash... in effect.  But we're just currently enjoying little to no debt on our personal residence.

Am I looking at this the wrong way?


THANKS in advance!

[Emilio Ramirez]

Also 4% seems low for an interest rate on a commercial property, but maybe in Canada? 

Your math doesn't seem right. If I do 4240 * 13.50 I get $57,240 which would put you at a 6.6 cap. Not great but if you truly have zero expenses then it's not bad. I would double and triple check what the tenant is responsible for. Usually if the tenant is responsible for all CAM and up keep, the Owner is still responsible for structural items and building enclosure plus exterior improvements. I would make sure that all of those items are included. 

The game would be to negotiate yourself to a better cap rate. Would the tenant be willing to sign a new lease as a contingency on closing. That happens all the time and could help with lending and downpayment. 

Lastly, by using your heloc, you are essentially buying with 100% financing and highly leveraged properties are hard to cash flow in general. I would also check to see what your monthly hold costs are if your tenant leaves. Can you hang on to the building if it is vacant for a year? I would look for a strip mall or warehouse that can have multiple tenants. That way if one leaves you are not footing the entire cost by your self.