I have the opportunity to buy a "commercial" property for peanuts. Is this a good move?

Question

For the record, I am a newbee. I have been lurking about on these boards for the last couple of months, and I've been reading everything I can, relating to real estate investment. I need some advice, and I was hoping that some of the "more experienced" among you could help. I have the option to purchase a 1,200 Sqft residential property in the NW corner of downtown San Antonio, TX. Even though the building in question, was built in the year 1900, it is not considered a historic home, and it will need about 20K in renovation, including foundation work for the pier and beam below. I can buy the place now, for 10K below the appraised property tax value, and once it's fixed up, it should be worth considerably more. All of this is already appealing enough as a potential "first deal", especially since I have enough money saved up to buy the place outright, and to renovate it as well! What makes it even more intriguing,  is that this property is surrounded by commercial buildings! The property is right next to the corner of two major, commercial streets.There is a restaurant to the right of this place, and a bakery to the left, and even a convenience store directly in front of it, on the other side of the street. So, my question is this... Would I be better off leaving the place as a residence, or should I try to get it re-zoned as a "commercial" property? I can easily see it being used as an office of some kind or even a small retail outlet. I'm not sure which way to go, but I feel fairly confident that if I were to make the effort to make the property into a commercial building, that it would end up being worth even more... Thoughts?  Suggestions?

Jon Holdman · Answer

Appraised (assessed, you really mean) property tax value is worthless for determining market value.  So step 1 is to really figure out what its worth as-is and fixed up.

The location may be a negative.  If its in the middle of other commercial, its probably not interesting to a tenant for a house.  Maybe its worth something to a commercial tenant, but then maybe its not currently the best configuration for commercial.  Old houses can be converted to restaurants or a few other things.  But scraping and building a better commercial configuration might be the "highest and best use" of the property.  Drive or walk the area and look for any commercial that's currently available and call the broker.  Look for signs that tell you "managed by ..." or speak to business owners about their management company.  Commercial property managers can give you an idea of the prospects for using it as commercial.

Ann Bellamy · Answer

@David Jacques

Perhaps I should have said "not on THE pro-forma"

This was a general statement that AJ made:  "My understanding is that with commercial property you don't use  comparables,  to figure out the value, like you would with residential.  It's all about the cash flow, and what you can rent it for, that  matters..."

I was simply adding my 2 cents to his general statement.  Meaning that the value changes depending on the quality of the tenant.  Or lack thereof.

Ann Bellamy · Answer

@Bill Gulley , I wasn't referring to a lending situation, I was referring to it's value to the buyer or seller.  I don't think the poster was asking how much of a loan he could get, I think he was considering buying and if the property would be worth more to him as a commercial deal.

I therefore was referring to the value to buy or sell, or produce cash flow, not discussing the finance piece at all.

Lending is only part of what I do.  I am also a multi family and commercial investor.  One of the most challenging parts of buying commercial property is finding properties based on actual numbers, not on pro-forma (or what you CAN rent it for).

While availability of commercial financing is a very important aspect of commercial investing, I wasn't referring at all to how a lender values a property, or an appraiser, but how A.J. as an investor might look at the property.  I think you misunderstood my comment.

A.j. Martinez · Answer

It's on market, but I don't think anybody has thought about making the property "commercial"...The back yard is huge and has plenty of potential to be a 12-15 car, parking lot...

A.j. Martinez · Answer

When I got started on this site, I only had intentions of buying a small, residential, "fixer-upper"... One that I could afford to pay for in cash, one that I could easily lease monthly for a small cash flow, and one that I couldn't "mess up" too badly, since I am new at this. The plan was to study as much as I could, BEFORE I bought it, and to also learn along the way... 
	
	When I found this particular place, and I realized that it could easlily be re-zoned into commercial property, it kind of changed my outlook on things... I hadn't planned on buying a commercial property, but the more I look into it, the more promising it seems as an investment. There is new construction popping up all around this property, in every direction. The building is only a few blocks away from both the IH-10 and IH-35 freeways, as well as being near the corner of two major streets, allowing for easy access, in and out of the area. The businesses that surround this property, all seem to have brisk sales, and seem to be doing very well. And as I stated previously, the place is literally surrounded by other commercial property, begging the question as to why nobody else had attempted to make this change before. 
	
	I agree, that most folks wouldn't want to live in the middle of all those businesses, so I am hesitant to buy this place, UNLESS I am certain that I will change the zoning into commercial. Although the layout of the old house isn't "ideal" for all businesses, I could easily see the place being a successful office space of some type (lawyer, insurance, loan, etc.), or maybe a small clinic, or even a hair or nail salon...

Bill Gulley · Answer

To clarify the restatement, it being all about cash flow is entirely about the type of lender that may be financing, it may well be all about cash flow if the lender is a hard money type lender, those who may not have much weight given to credit, management, reserves, condition and marketability of collateral that institutional commercial lenders who provide the lion's share of commercial lending will consider.

Valuation of a commercial property is not just cash flow, not by an MAI appraiser nor by any astute commercial real estate agent nor by the majority of lenders. All three aspects of the appraisal process are considered, the income approach is most often given the greatest weight, but that weighting is not 100%.

Any empty space is generally reduced by the estimated time and expense of leasing it, it is not just a gross reduction in value, it can be rather minimal depending on the market. :)

Ann Bellamy · Answer

To restate that a little:

It's all about the cash flow, what you HAVE rented it for, how long the lease is, and what the quality of the tenant is.

If you don't actually have a good quality tenant in place,  with a significant lease obligation, it's worth a lot less.

Bill Gulley · Answer

Yes, commercial financing looks at the income approach.

The issue is not zoning, it probably will be simple. The issue will be identifying which commercial zoning category you need, highest and best and then getting with building regulations and seeing what the degree of rehab will be required.

You can't know what the rehab costs will be until you know the standards to be met in the rehab. You also need to address any asbestos and lead paint issues, if any. There is a reason commercial values are higher, it's not entirely about rental income, properties must conform to higher standards in order to command higher rents. :)

I have the opportunity to buy a "commercial" property for peanuts. Is this a good move?

Most Popular Reply