Buy existing space, or build from scratch?

Question

My wife operates a profitable salon located in a small 10,000 sq ft strip mall and is currently paying rent of $5k per month for 2,000 sq ft space within this mall. We have saved up approximately $250k of cash and have been mulling over investment options. One idea we like is potentially buying or even building a commercial retail space for her business so we are paying ourselves to rent the space instead of throwing money away on rent. Also the appreciation of the property and if we purchased or built a larger multi tenant property, there is the potential cash flow aspect.

My question is, would it be better to look into purchasing a unit within an already developed commercial property just for her business, or would it make sense to purchase a lot and build something from scratch? Obviously, buying a unit in a ready built space would be easier and cheaper, but the issue here is we haven't been able to find a good location and the existing spaces (been looking on Loopnet) are all not quite right (too old, bad location, wrong layout, etc). Purchasing land and building the space would give us much more flexibility, but Im not even sure how much cash we would need for this. Is this even an option we could consider with a down payment of 250k?

I did find a really good lot off a busy street in a growing area on 1 acre for $600k but then how much would it cost to build? Is $250k enough to buy some land and build a small property using a commercial loan? Is buying land and building from scratch too ambitious as a first foray into real estate investing?

Bob Langworthy · Answer

A third option would be to purchase a multi-tenant building and move her salon in to a vacant spot. Depending on market, building could be a lot more expensive and time-consuming than buying.Hope this helps,

Bennet Sebastian · Answer

In my experience a bank would lend you about 70% of the total costs once you have enough leases in place to cover the debt service plus a little more. On 10,000sf I would assume soft costs of $15-20/SF and hard costs of $150-$200/SF (depending on where you are at) so best case you are looking at an all in cost of $2.2M so you would need to bring about $700k to the table.

Ronald Rohde · Answer

I don't think thats enough capital or a strong enough business for a lender. Can you save more money?

Spencer Vickers · Answer

@Michael JudkinsRegarding the land you found, usually a bank will leverage 40-55% of the cost of land and then 50-70% construction costs, so I don’t know if $250k would be enough to get started on a 600k lot + construction costs. Run the projections at those leverage ratios and see how much equity you would need. You may need to raise some private money and/or get creative.

Spencer Vickers · Answer

@Michael JudkinsI always like to have exit options. Before you can really know what your options are, you have to find exactly what you’re looking for and don’t get distracted by the next “shiny object” opportunity. Happens to all of us. 😅Ask yourselves a few questions including the following:Do you want a similar-sized retail center for your development/acquisition?If so, are you going to occupy the whole 10,000 sq ft? If you will have tenants, are you excited about that or does the idea turn you both off?Are there good property managers in your town? What is your timeline? If you want to be out quick, I would not count on a development. If you can wait AND you have a stomach for downside risk (be honest with yourself), AND the MSA drivers —pop and job growth to name a couple— are headed in the right direction, a development may be the best thing for you both. Regarding LoopNet, it’s okay for comps, but you’ll rarely find a good deal on there. Commercial brokers guard the good properties pretty closely, so you’ll want to reach out and get connected with a few of them in your area. Yeah, they can be a headache and you pay an arm and a leg in commission, but a good broker can really point you to a good property for your situation. I hope these few notes are helpful! Good luck to you guys.

Peter Lee · Answer

Michael,Construction cost going to depend on where and what your building. I am sure there are contractors that can do the whole process turn key but it will be pricy because they also need make money too. If you want to do it yourself need to hire an architect, pay the city for permitting / required inspections, and hire contractor to build the property. I work for a general contractor and don't think it would be worth the headache doing it yourself! Like Bob mentioned you would be better off purchasing a multi tenant building.