Small Commercial Deal Analysis

[Pete Harper]

I'm looking for some feedback on deal analysis for a small commercial property.  This will be our biggest deal to date so I want to make sure I'm running the numbers right.  We have a total of 28 units so I'm fairly confident on my cost numbers, taxes, insurance, utilities, maintenance etc.  I have a few questions on the deal, see bellow.  

Asking: $800k

Gross Rent: $173k asumes 10% vacancy

Expenses: $93k

Net Income: $80k

CoC: 9.8%, Cap: 11%, $/door: $278, GRM 8.5: $1.468M, "1% rule" 2.2%

First question is does anyone use GRM anymore? I pulled this number from a bank appraisal on another property. Isn't this just another way of looking at "1% rule" GRM of 10 is 1%?

What is a good Cap Rate? We are a super small market and I don't have any sales comps to compare.  There are only 4-5 similar sized properties in town and I already own one of them.  

Our business model is to pour back any cash flow from the property back into renovations.  We want to drive appreciation.   Figure for every $100 in rent I get $10k back in property appreciation.  I estimate from other properties if we put $5k into light renovations we can get $100/month extra rent.  We wait for the units to come open and do the renovations on turnover.  It typically takes 2-3 years to update an entire property.

What if I take $120k in cash flow and reinvest it into renovations over the next couple years?

Gross Rent: $201k

Expenses: $110k

Net income: $91k

Cap: 12% $/door: $316

For CoC do I include only my out of pocket cost or do I include the renovations? Since the property self funded the renovations I only include my original acquisition costs.