Small Mixed Use Commercial property - Cap Rate

[Kyle McCorkel]

I'm looking at an off-market deal in Central PA, specifically in Mechanicsburg which is in between Carlisle and Harrisburg.

This property is 3 units, mixed use and zoned commercial.  There is a commercial unit on the first floor, and two residential units above.  I talked to my lender and I'll need to use a commercial loan.

My question is what cap rate should I use to determine the value (and offer price)? 6% feels right but I'd really like some more experienced (preferably local) guys/gals to chime in because this will be my first commercial deal.

[David Krulac]

@Kyle McCorkel  I've mixed use properties in Mechanicsburg, two on Main Street. I've bought and sold over 900 properties for my own inventory, and currently own mixed use properties.  In addition I did Bigger Pockets Podcast #82 and have spoken on real estate in San Francisco, Oklahoma City, Nashville, Indianapolis, Cleveland, Richmond, Philadelphia and Manhattan.

imho, Cap Rates are NOT effective measures for Single Family Houses, and 2-4 units.  One of the reasons that I say that many if not most are NOT sold based on Cap Rates, they are sold on sales comparables.  Many is not most are bought by mom and pops, small investors only owning a few properties, newbies and owner-users. (by that I mean the owner of the business operating on the first floor also owns the building to house their business.)  Their primary goal is to find the best location for their business at the best price, Cap Rate is furtherest from the mind if considered at all. 

Cap Rates are effective measures for 5+ units, and larger commercial operations.

As far as 6% Cap Rate, seems too low to me. Two that I sold were 10.95 and 10.75 Cap Rates.  There are other factors that I would consider:

size of building

length of leases, how long till expiration

is seller also the tenant

how long as current owner owned property

who pays utilities

is there adequate off street parking

is the current use conforming to zoning

any code/zoning issues

age of building

condition of building

recent improvements

age of key components, roof, heating, plumbing electrical service

who pays utilities

how successful is the business tenant's business, are they struggling

if commercial goes dark, how difficult to replace

David Krulac