First Investment - Residential/Commercial - Should we do it?

Question

Trying to get into real estate (buy and hold) in our local Bergen County (northern NJ/metro NY) market. Had a short sale under contract but it just fell through. (Made offer in August, right after seller dropped asking price from 299k to 275k, we offered 260, bank countered today with 380!)

Found BiggerPockets around the time we made that offer, and I've been learning a lot from the forums, blog, and podcasts. We just looked at another property that we've seen on the market for a while. Owner is a retired physician, house is both a residence and office. The office is firewalled off from the residence, and owner got a variance when he sold the practice to allow a non-resident to continue using the space as an office. Current physician uses the office only 2 days a week, has 4+ years left on the lease and pays $3300/month plus utilities and 50% of snow removal/landscaping. Owner is no longer living in the house and renters are month to month paying $3k. Agent showed us the residence, not the office - it's a large split level (6 bedrooms, including a master suite with master bath) but not in the best shape. We estimate putting 20% down and financing the rest, with monthly payments around 3,000 and taxes around 2k (at current assessment it's $25k/year).

Using the 50% rule, we're not doing too well, but wondering what others think about this idea. Current renters have been in the house a while and have been willing to pay at that level despite the condition of the house. If we keep them as long as possible, we can defer major renovations until they eventually move out, then renovate and raise rent significantly. One other factor is that there is a hospital 3 blocks away that also owns a building next door and has expressed some interest in acquiring this property down the road (or at least that's what the agent told us).

Is this a pipe dream? Too many what-ifs? A little concerned about what would happen if the office went vacant. Anyone see any potential here or have any ideas on how this could work, or do we just move on and look elsewhere?

Ray Browne · Answer

I'm going to ignore the issue of further leasing on the office property as I'm not knowledgeable enough on the market or on that type of leasing activity to comment. I think in certain communities you could market the space effectively..orthodontists, dentists, therapists, etc.. sometimes seek spaces in those type of spots.

That said, what is the upper realm (perfect world scenario even) on the rent for a house with a medical office in it? You are at $3,000 now...I'm in a high rent market and that seems towards the higher margin for living with a medical office in a residence on a beat-up property. Is the upper bounds $3,50 ? How much would you need to spending rehabbing to even get that extra $500 out of it?

Would it be feasible to begin the legwork to prepare plans for an intensive remodel and flip the property as a single family no office at the end of the physician's lease? Would it be possible to touch base with the physician with a year to go and perhaps gauge his interest in purchasing from you at that point?

Any chance of the owner holding the note on it ? With a lower down payment you'd have less cash in and perhaps a bit more flexibility in investing in the property and determining best use as the leasing situation continues to play out.

Nathan Emmert · Answer

If the taxes are $2,000 a month, you're going to be no where near the 50% rule I'd hazard. I'm not an expert (at ALL) on commercial properties... but within the 50% rule, taxes are generally in the 5 - 8% of rents range.

Jeremy Tillotson · Answer

first never believe an agent telling you something is worth gold, if they were interested he would have sold it to them. So NEVER buy on a maybe assumption, if it happens great otherwise back sure your numbers work. Way different numbers than our market. I am buying a house for 5k right now.

First Investment - Residential/Commercial - Should we do it?

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