***Opinions on 1st investment with Family - Complex Commercial Space

Commercial Real Estate Investing
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***Opinions on 1st investment with Family - Complex Commercial Space

Dean B.
Investor · Petaluma, CA · Member since 2010 · 21 posts · 11 votes

Hey all, Thanks for viewing the questions and apologies in advance for the long message.

I'm in a bit of a struggle deciding on a new, first investment that is as follow:

Property: Previously a 60 year old gas station, most recently a fully functioning restaurant. Unsure of exact details but it had issues with gas station cleanup due to minimum ppm for ground water/gas. the laws have changed minimum to now make this "pass" code, but that is major issue with property. Otherwise it needs some rehab to get up and running (approx $20k).

I have about 150k in cash and use this for mainly business expenses/inventory. My family has locked in (paper work-wise) a property that was sitting on market for some time due to a 60-year old gas station on property - proper cleanup issue (was most recently a restaurant). If we do not make cash payment, owner will release offer and go with another offer at $180k from another investor. Property most recently sold for ~$300k in 2008. It is an ideal location for our needs (family business).

Laws have changed the minimum ppm in our area and it now should pass code to allow construction on property for restaurant/tasting room (this is reason no one would touch this property until now). My family has winery/vineyard and wants to turn this property into a tasting room. However, they are unable to purchase said property with cash as they are not as liquid right now. I am. The deal that would be arranged is that I would buy the property at approx 150k cash, then have a NNN lease of about $1000/month billed to them. My family would do full construction and development of property on their dime. (previous tenant was paying $5000/month in rent). It is currently unusable as functioning restaurant and would require about $20k rehab to get it up and running, approximately 6-8 months timeline for completion with permits factored in.

The two overwhelming questions I have are:

1. Is this a good first investment for $150k cash? Or would a multi-tenant rental be more ideal (residential)? I need to put this cash to work, but I'm in a struggle between helping my family and other investment options.

2. (this one I do not know answer to at all) Would I be able to leverage this property (prior to construction) and "get" money out of it for business expenses (i.e. equity business loan)? Or would construction have to be done prior to this happening. The issue is that I use cash on a bi-monthly basis to purchase inventory and I would at some point need to use the property for a business equity loan.

I realize this is a pretty complex scenario and I do understand that whoever responds...it is only an opinion. So please feel free to respond candidly. I am consulting multiple parties on this as the deadline is in the next 48 hours, so know that any responses will be treating with caution.

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  • Navi Veski
    Contractor · Potomac, MD · Member since 2013 · 64 posts · 3 votes
    13y

    Good Morning, Dean

    I'm no expert --- here's my opinion.

    You say you want to make a good investment. You say you want to help family. You say you need your capital to fund an existing business. This is a confusing. So

    What's the ROI for purchasing the said property and then leasing it to your family? That should be an easy one.

    Do you want to help your family or make the best business decision. My experience tells me that's an important distinction.

    Do you not need the $150K for inventory until Labor Day?

    And. $20K for rehab sounds like a couple of bathrooms and a dining room. It's not a lot of money. is that an accurate estimate?

    All the best

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  • Andrew B.
    Real Estate Investor · Pacific Palisades, CA · Member since 2012 · 3 posts · 0 votes
    13y

    I've heard it be said to not do investments with family, but I'll let someone else who has done so with success/failure comment on that.

    If your total cash outlay for the investment is $150k - $170k and you'll be collecting $12k a year, that's a 7-8% CoC return once occupied. If the information is accurate, it sounds like it will make a positive return. Additionally you might be able to finance a good chunk of your money back out of the property once it's up and running, you could conceivably use that same $150k again just a little ways downs the road.

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  • Dean B.
    OP
    Investor · Petaluma, CA · Member since 2010 · 21 posts · 11 votes
    13y

    Thanks for the quick feedback….to respond:

    @Navi – Thanks for the comments. I have an outside investor I can finance my own working capital business needs. But they collect interest on investment, however. If I used my 150k, I pay no interest. No I do not need 150k for inventory by labor day. 20k for rehab is based on my experience working with my family on numerous projects as they have a vast RE/Development experience on small and large projects with very very small budgets. $20k is actually a high estimate. And yes, I’m 100% sure of this. Thanks again Navi.

    @andrew – Thanks for the breakdown...yes that is what I’m seeing as well. $12k estimate is very accurate and it starts immediately once purchased, not occupied. The only issue is that it will take it to be “up and running” to get the money back out (at least that is my worry). The question is whether I can leverage the property immediately once purchased. I am not too familiar with equity loans on properties like this one. As for investing with family…this will help considerably with a number of logistical concerns moving forward the family business. Without too much detail, both the property and location simplify many things…this is the reason we moved forward to make offer and tie property up. If I do not use this cash, we have to search for hard money lender--> $$$$ interest. Thanks Andrew.

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  • Marc Bodinger
    New York City, NY · Member since 2012 · 253 posts · 7 votes
    13y

    In my opinion a red flag before really reading your description are the issues with gas cleanup. With so many more environmental regulations in the world could this affect the property and your wallet down the road?

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  • Dean B.
    OP
    Investor · Petaluma, CA · Member since 2010 · 21 posts · 11 votes
    13y

    @Marc. Very true. And obviously one of my biggest concerns. We have worked with a previous property with a similar situation and the family is familiar with this topic as the family does own a large gas station property as well built from dirt up. I am still looking into this as it would obviously change timelines significantly if there were problems.

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  • Marc Bodinger
    New York City, NY · Member since 2012 · 253 posts · 7 votes
    13y

    I think you need to decide is this property worth a full environmental examination or would it be wiser to put your dollars into a different property(s).

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