Commercial with apartments valuation

[David Bowles]

I just had an agent bring me an opportunity that I have a few questions on! It's a 2 story commercial building with a barbershop on the bottom and two 2/1 apartments on top. There is also a 2/1 SFR on the list next to it. Rents for the 4 "units" are 1300, 550 (discount to the downstairs shop owner), 700 and 950 respectively. 3500 total monthly gross. 8k yearly tax/ins. Everything has been rehabbed except for 1 upstairs apartment in the last 18 months. They are asking 350k for the whole lot of it.

Obviously it's a great ROI, but how I know if I'm overpaying for the commercial property? I've only dabbled in residential up until now. What am I missing? Should I just buy this and figure it all out?

[Katie Neason]

You may have more information than is listed here, but you cannot calculate the ROI based on the information provided. Three are no expenses here. Who pays utilities? Are they metered separately or is the landlord paying for them? Is there common space? If so I suspect there are janitorial services needed to keep that space clean. Is the building sprinkled if so you will have annual fire monitoring and inspection costs. I do not know what your property taxes are, but in Texas they would be about $8200/year. I own a couple of similar properties with some common space. The tenants pay their own electric bill. Landlord pays water, sewer and trash and my expenses before financing run about 25% of collected rents. Based on similar assumptions with a 7% vacancy factor, your operating income before financing and capital reserve would be ~$29,000/year. Assuming 25% down and 25 year amortization at 4.5% interest, your Free Cash Flow before Capital reserves is ~$9,000/year. That makes your annual ROI 10% before capital reserves. Still may be a good deal for you, but wanted to make sure you are looking at the full picture. I would try to get a handle on all the expenses, make sure it is a product that is in demand and explore what the zoning is on the house. Can you develop another mixed use building there? This is how I would explore the opportunity. I would worry less about "am I paying too much for it" and more what can I pay based on the returns and appreciation I am looking for. Hope that helps.