Thoughts on analysis of a residential w/ commercial building?

Question

Hey everyone, I'm fairly new to real estate investing & have been researching lately trying to understand & analyze properties better & I stumbled upon this unique listing that caught my attention in CA:

Commercial Building Storefront (retail building) + Opposite Side of the lot is a residential property 3 bdrms + 1 bath Year Built 1951 Price $219,000 est cap rate 10%

-Total Lot Size 6,000 sq ft /Building sq ft 2,262 +/- Commercial Building 1,162 sq ft +/- /Residential 1,100 sq ft +/-

* Lot stretches between two parallel streets, both properties are back to back (but not attached to each other) each facing a different street

(Commercial Building)-has a showroom, back office, storage & bathroom complete w/shower. Central heat/cool, and currently gets $850 per month base rent, NNN lease where tenant pays (reimbursement) for property taxes and insurance.
Lease Term: 10/1/17 – 9/30/2020
Base Rent: $850/month
NNN Tenant Reimbursement to Landlord: $170/month
Landlord Annual Expenses: $1,020 water/sewer/garbage, $1036 property taxes, $506
annual property insurance.
Gross Annual Income: $12,240
Annual Expenses: $2,562
Net Annual Income: $9,678
Zoning CMS Building Class B

(Residential 3/1 Home)-Lease Term: Month to MonthRent: $1,100/monthGross Annual: $13,200Net Annual Income: $13,200

Combined GROSS ANNUAL INCOME: $25,440 Combined ANNUAL EXPENSES: $2,562 Combined NET ANNUAL INCOME: $22,878

I have not looked at the property, based on pictures looks in good condition & would probably need an inspection report to see if there is anything major that needs to be done but after running the numbers factoring in all costs ( *considering this would be a cash purchase) the ROI would be around 9%. How can I better analyze this deal? What other things am I missing or should factor in? What are your thoughts so far on this type of investment property considering its a 2 in 1 lot/ half commercial half residential?

Thank you!

-Nay

Nayeli A. · Answer

Thank you all for taking some time in responding, I appreciate the advice!!:) You all made some great key-pointers that I should definitely factor in. Still, lots to learn here!

Jo-Ann Lapin · Answer

Keep in mind that mixed properties at the best of times can be a challenge to get conventional financing. What type of zoning uses does the commercial have. If you have a hold period of 10 years what repairs could you foresee and where do you see the trend of the overall neighborhood going ?

Kevin Dougherty · Answer

Hi - My experience has been that smaller mixed use properties are always hard to keep leased, like @tylerBobo said. The smaller commercial units usually attract Mom & Pop types of businesses that are often times in business today and gone tomorrow so you are constantly turning tenants. The exception is when the location is in a well populated area with major foot traffic of people who have moderate to higher income levels and they frequent the businesses in the area. These types of businesses may have what is considered credit type tenants that have a strong financial statement, experience, business plan, bank references and haves signed the lease as a corporation and with a personal guarantee, etc... The Mom & Pop types may or may not be as strong financially. This by no means should be a knock at Mom & Pop types of business, as we all know they are the business back bone in most communities.

I did not see any expenses for the residential unit as well as the additional expenses for the commercial unit such as vacancy %, management %, repair reserves % and future capital expenses % (Cap EX). To be safe, allocate 20-25% against the gross income for both properties and then use the remaining numbers as the true NOI. The lender will also be looking at theses financials and will use them when they underwrite the loan. If you include all of these numbers in your loan package from the beginning, the lender will know that you have done your homework and that you understand how the property works.Contact a local commercial real estate broker to see what the market is like as far as vacancy, credit tenants vs. non-credit tenants, demand for this type of commercial property. If it still looks like a good deal then consider a purchase.

Good Luck

Tyler Bobo · Answer

Full disclosure, I didn't look at the numbers you posted well... I clicked because of the mixed use of the building.  Every market is different however when I purchased a mixed use building I had a hard time finding residential tenants who wanted to be near (above actually) the commercial stuff, and the commercial tenants wanted to be able to make noise even late into the evening if the workday got long.  So we had a hard time keeping out vacancy rate as low as we thought we'd be able to...  So my advice is to keep that in mind when you're looking or rental comps (even if it's rented now) to make sure you factor for a potentially higher vacancy rate than other properties if you can't find solid comps that are similar to yours.  Good luck.