Considering my first commercial property....is this a bad deal?

Question

Hi BiggerPockets community!

My husband and I are considering our first commercial property (1129 Pearl Street, Denver CO 80203). It's listed at $1,170,000. To meet an estimated 358k downpayment, we would pull $243k out of our other rental property and pay the other $115k in cash. The property has a new boiler and a relatively new roof (2012). Current rents on all 5 units gross $6924 monthly, but market rates are more like $7025 and they are all updated. It is a great, walkable area that is highly desirable in Denver. The location is AMAZING with this place.

Is this a bad deal? I know that the 1% rule is very important to the BiggerPockets community, but that's just unattainable in Denver. What questions do I need to be asking?

Also, we are currently renting a place at $1400 in the middle of this area. We get a 1-car garage, fireplace, huge kitchen, and our rent is WAY below market. Would it be a good idea to move into one of the units in this building, or stay in our current place and rent out all 5 units? Is it a wash either way?

Here's the brochure for the property:

http://images2.loopnet.com/d2/ZTz2OTUqUC_YhaZmxQfZ...

Thank you ahead of time for your input, we really like this property but don't want to jump into something that's going to be a bad investment!

Account Closed · Answer

@Sarah O'Neal

Hi Sarah,

I reviewed the offering memorandum you supplied. The expenses make up only  20.93% of the income. IMO, that seems low. There are expenses missing such as contract services, trash removal, legal fees, management fees, licenses,permits, pest control, landscaping, any maybe more etc.. But I don't feel comfortable with the fact that expenses are only 21% of the income.

Second, upon reviewing the rent roll, it seems the current rents are already above the market rents. The max current rent for a 1bd/1ba is $1525, where the market rent for the same unit is $1475. That doesn't make me comfortable either. However, it would make me comfortable if you have a plan to address your high rent compared to the market. Will you be doing any value add on this property?

Keep in mind, just one vacant unit will have a severe effect on your income.

Also, keep in mind the acquisition and closing costs related to property inspection, lead paint inspection, lender fees, 3rd party reports, title policy, survey, recording, transfer taxes, and any other lender requires reserves for closing.

In addition, just know that this is just an initial overlook based on what was provided in the OM. You will uncover much more during due diligence. What is the deferred maintenance? repairs costs?,  What is the market cap rate and at what rate are you buying at? etc...

Keep these things in mind as you progress to dig further in this property. Feel free to email or call me if you'd like to talk further.

All the best to you!

Mitul

Sarah O'Neal · Answer

Lots of great discussion here.....Thank you all so much!!!

I definitely agree with @Robert Herrera that I could cashflow better for the capital output, I just don't know where in the Front Range area. I've had an impossible time finding deals here, and have been looking all over Denver and CO Springs.

Thank you so much for telling me not only that this is a bad deal, but exactly WHY it's a bad deal!

Joel Owens · Answer

I do not like 5 units as you could have a 4 unit and get  a longer term loan.

Is there all students there? If not 1 bed and studio's tend to turn over like crazy. Better is 2 bed units as if people get engaged, married, have a room mate, have kids,etc. they need more space. With 2 bed you can make space manageable. With 1 bed it is almost impossible as friends or family grows in the space.

Could you convert one  1 bed into a 2 bed giving 4 units rather than 5? Check on financing. Deal seems very thin. Looks like a tall building a few blocks away. What about air rights? Could you slowly accumulate multiple buildings close by and then sell off years later for a high end project? Developers if they can go higher can create more density. Even if zoning laws do not allow now they may in the future. As some areas fill out over 10 to 20 years the local government allows increased density as the only where to go is up as all the land is taken for strong suburban to urban core.

That old of a building I would want to know what capital items in the ground and in the walls and ceiling have been completed? I do not care as much what inside looks like as that is really cheap to fix over structural and mechanical items.

Make sure and get a sewer scope to the street.

Shawn Ward · Answer

@Sarah O'Neal ALL THE BEST...but all of the previous responses are spot on and gives you a lot to think about. It does seem more of an appreciation play than a cashflow play as of now. If I were you, I'd low ball them if you really want it..have your max number and do not go beyond that...well worth giving it a try. But at the listed price, not sure it's the best deal.

Matt M. · Answer

That property is UC. Are you buying from a wholesaler?

Chris Lopez · Answer

@Sarah O'Neal

What are your investing goals? If it's cash flow, then as @Robert Herrera pointed out, you can do way better. If cash flow isn't the number one goal, that's a different story.

That is an amazing location and you'll more than likely make a lot on appreciation. Buy, appreciation doesn't pay the monthly bills!

The cap rate looks normal for the current state of the market.

However, my biggest concern is the year it was built. 1891 ?!?!

I think the listing agents are using the word "turn-key" very loosely.  A new roof and hot water doesn't mean much on a property that old.

Have you ever lived in an old property? Things are always breaking. I currently live in a 1940's construction house and have trouble finding replacement parts for plumbing and electrical.

To me, turn-key would be a remodel from the studs up! There are a lot of mult-units with similar or better cap rates.... with quite a few less years on them.

I've recently jumped into the researching the multi unit world in Denver. I have some past experience from L.A. I'll send you a message with a couple of things.

John Thedford · Answer

@Joel Owens may have some insight.

Considering my first commercial property....is this a bad deal?

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