First Commercial Mixed Use Deal - Need Input

[Kris Kaufman]

Hello BP community! Wanted to post this deal on here to see everyone's thoughts and if they would proceed.

The building consists of 13,000 square feet. It has a large commercial restarant space, 9 apartments (1-2 BD), and 20 rooms rented on a weekly basis. The rooming house shares bathrooms and doesn't have any kitchens (no open flames permitted). It has 20 offstreet parking spaces and is located on the center square of a small town and decent neighborhood. The purchase price is $1,075,000 with the seller carrying a 2nd of 386K (4% on a 30yr) and a bank financed 1st of 689K (4.5% on a 25yr). Both are fixed for seven years. Outstanding terms!

Rents and expenses are as follows yearly:

Income at full capacity = $218,280 

         Vacancy (10%) = $21,828

         Effective Gross = $196,452

Expenses:

Taxes = $11,924

Insurance = $6,180

Electric = $6,100

Trash = $900

Gas = $3,736

Management = $15,716

Mantenance = $9,000

Water/Sewer = $6,370

Municipal Fees = $1,125

Advertising = $609

Rental Fees = $2,500

Cable = $1,815

Extermination = $1,100

       Total = $67,075

Income = $129,377

        Total debt payments = $68,052

Net Income = $61,325

Keep in mind, rents are low for the property and should be raised by an estimated 14k/yr. This would push NOI to $75,325. I feel the management fee is probably to low on this building, considering it's partially a rooming house, but the amount of cash flow would give lee way for higher managment fees. Please give me your thoughts and thank you for your insights.

-Kris

[Roy N.]

Kris:

20 rooms w/ no common kitchens - sound more like a dormitory.  

Who are the clientele of this rooming house?  On our experience rooming houses typically server a specific population: students, employees of a large institution or business or those on the margins of society.   Different rooming house clientele require different management skill sets.

In this situation where the rooming house is located in the same building, the clientele of your rooming house will govern the clientele of your apartments.

If the commercial client(s) have a net lease and are paying for their own maintenance, $9K/year might be about right. If the commercial client is on a gross or other arrangement where you are carrying the maintenance, then 9K is probable a little low.

Depending on the rooming house, the management may be low (as you indicated)

The electric and water bills seem high ... is the landlord carrying all utilities?

Is that 10% vacancy the physical vacancy or the economic vacancy?  Depending on the rooming house clientele, turnover can be quite high as can delinquency.

On the surface the numbers look Ok ... but that normally makes me want to dig a little deeper.