Good deal or too much for newbie?

Question

Hey all - I'm brand new to real estate investing. I've been doing a lot of research and have primarily been focusing on single family and multi family homes. That said, I have a family member who is a realtor and brought this commercial, multi use building to my attention. Here's some important details.

- Original hotel (built in 1898) in a small town of <1000 people about 15 minutes from two university towns with population >50,000. The town itself is slowly becoming a place university employees are living due to the proximity to work but rural space and small town feel.

- Currently has 7 rental units (1 studio, 5 1 bed, 1 2 bed) all grossing about $2775/mo currently all with tenants and a waiting list.

- Has the towns only liquor store with liquor license

- Has an attached tavern with kitchen space and billiard table

- Has 1200 sq ft. of extra space outdoor and indoor for whatever you heart desires (tasting room - we have some wineries and breweries local, retail space, etc.)

Some of the #'s:

- Sale price is $375k

- Current gross monthly income for liquor store is $3579, apartments is $2775 and tavern is 2175-4275.

- Total expenses is $3317

- Total net profit recorded is $5211- $7311/mo

- Cap Rate = 22.35%

I haven't looked at the building. It's a historic hotel made of brick and I'm sure needs some work but looks as though it's functional from day 1. Really up to the owner at how nice they want to make it.

What else should I be looking for/at? What am I missing? Any major things I should be on the look out. This is a huge bite for a new investor to take, I realize that, but on paper seems to be a great deal if the income streams could stay (current owner has owned and operated the place for the past 40 years and is "retiring" at age 60.)

Any thoughts and ideas would be greatly helpful.

Thank you!

Eric

Darius Ogloza · Answer

This sounds like a fabulous deal.  I would look into the status of the commercial tenants.  How long are the current leases for? How do the rents check out against market in that locality?  Is the liquor license in good standing?  Is it renewable?  If so, for how long?  What is responsible for the variation in the tavern's rent (I assume it is based on a percentage of receipts but inquiries should be made as it seems the business is seasonable given the wide variation you cite).  Answers to these and similar questions should beget more questions.

Darius Ogloza · Answer

Also, check to see how much the property taxes will increase based on the $375K purchase price and make sure to consider that additional expense in your calculations.

Bob Langworthy · Answer

Risk tolerances vary widely as the responses on this forum. I say go for it.

1) See if you can get seller financing which is a win-win for you and the seller.

2) Keep everything the same for 6 - 12 months so that you can learn the property, regulations, tenants, etc. and then make changes.

3) Use the first 6 - 12 months of cash flow to build cash reserves for the big capex expenses that are coming.

4) Ask the seller for a list of capital expenditures over the past 10 years. By process of elimination (and with the help of a good inspection) you'll be able to develop your own list of projects to work on.

Hope this helps,

Eric Lunsford · Answer

@Dion McNeeley thank you for the insight. You make a good point about all of the different regulations. I would intend on purely being a landlord and leasing out the bar/retail but I’m sure I’d still need to be knowledgeable about laws and such. I understand the cash flow. This property has had decades of stable rents and cash flow but still doesn’t mean I wouldn’t need some reserves.

Rob B. · Answer

It is awesome that you are motivated and ready to jump into it. I actually love the sound of this deal from a numbers standpoint but I think that there are some realistic things to consider though. For one, this is an aged property so you're going to have a lot of moving parts as far as maintenance and upkeep (things that even seasoned REI professionals might have a hard time with). Doesn't sound like it'll be one of those rentals that you'll be able to manage passively but from a numbers standpoint, it sounds like a great opportunity.

Eric Lunsford · Answer

Thank you all for the responses. I would want this to be as passive as possible for me. The current owner lives in this building and runs the tavern and liquor store. I would not be living in the building (freeing up a rental) and I would not want to run the tavern or liquor store. The tavern could be leased, possibly even to the current owner. If not, I would need to find someone wanting to run their bar/restaurant out of there. The liquor store is a different story. I would want to run that but not the day to day so I’d likely need to hire someone. Leasing the tavern out would cut my income down some but would also cut her existing expenses she cites out of my equation as those are business expenses. I have yet to offer her, but I most definitely will offer seller financing.

Ronald Rohde · Answer

Three separate businesses, underwrite each one separately. Doesn't look passive either.

Dion McNeeley · Answer

I agree it is a lot to take on when you are new. Partly because of the learning curve. Tenant laws, tenant relations, state agency requirements for retail etc. The list is pretty big.

There is also the concern of cash reserves. Can you handle the entire building being empty for months. When qualifying for loans a lot of lenders require a reserve to cover at least three months of the mortgage.

Do you have someone who has rentals that can help you? Not a real estate egent who sells properties, but more a person who has several rentals they have success with? That would help a lot.

Good deal or too much for newbie?

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