Multi Use Help for unsuspecting Real Estate Investor

[Ryan Busk]

I am a dentist. A dentist with an unfulfilled interest in real estate who always entertained the idea of having several small multi family rentals someday. Someday being in the future when my kids are a bit older, as part of my retirement portfolio, small being SFHs or duplexes. Suddenly, I find myself the owner of one NNN property and wanting to make an offer on a second property that is a bit more complex.

The first commercial property my wife and I bought is the dental condo that our practice is in.  The practice and real estate were for sale as a unit 2 years ago, so we bought both, and it has worked out very well.  From this experience, I have some knowledge of commercial real estate investing.  I read some books and blogs, but it's fairly low risk, we rent from ourselves.  Rent $$ comes in, mortgage payments go out, there a little left over every month, and the practice pays for everything else.

We recently bought a second, satellite practice in a town nearby, and have been given the opportunity to purchase the building.  We love renting from ourselves at the first practice, and would like to do the same here, but this building is multi use, with our dental practice on the first floor, and 7 apartment units (2 in the basement, 1 on the first floor, and 4 upstairs).

I have been taking a crash course in multi family real estate here at BP and Google.  I have downloaded several different pro forma spreadsheets to evaluate the deal.  I have verified some of the data, waiting on tax returns and P&L data to finish the due diligence.  Here are the 2014 numbers I put together when I looked at the property late last year:

  2014
Rents (Total):       67497
Apartments:        37497
Dental office:      30000                
Expenses:           -24878    
Taxes:                 -5372
Insurance:          -3360
Utilities:               -9196
Maintenance:     -2000
Repairs:              -2700
Management:     -2249

Net Op Income:    42618

Asking price is $700k. The dental office rent has gone up and will be 3000/month in 2016, making the NOI about $48,500. The apartments had about 29% vacancy, but that is largely due to a studio in the basement that has not been leased since at least 2013 (no in unit bathroom, kitchenette only). Not counting that unit, vacancy was about 14%. I think this is partly due to rents that are a bit above market rates, and partly because the current owner has been rehabbing units when they turn over.

I have talked to the bank about financing.  Since the square footage split between the dental practice and the apartments is about 50/50, there are quite a few ways to finance the deal using equity in our dental practice to finance the down payment if we wanted.  One question I have is if we took that zero down financing option, the cash flow after paying the debt service is slightly negative.  Should I only consider the first loan, not the equity down payment loan when making that analysis?

We would like to buy and hold the property for a long period, but it seems like returns diminish over time as you hold a property.  I am also struggling to wrap my head around whether being our own landlord is a double bonus in this situation, and should make us willing to accept lower returns , or even negative cash flow at first, because otherwise, our $36k annually in rent is just gone every year.  We have a number of renovations planned for the dental office space, which would benefit us much more if we owned the building as well.

I mostly need to know what questions to be asking or critical information I may be missing, I don't want to buy something that ends up costing us money in the long run, just for the sake of being our own landlords.  On the surface, it seems like an excellent way for our own rent money to build equity in the property over time, and then provide us a nice passive income for many years as well.

Any help is much appreciated.  Please tell me what information I should be seeking out, what should I educate myself on?  I am afraid that I don't know what I don't know, but if this would be a safe financial move, I don't want to miss out on the opportunity.

Thanks!