Help! Grand Rapids MI dual use property options?

Question

Hi, all. I need some help deciding what I can do with a deal brought to me by a friend. Property is a two story with a one story side-addition, 3200 sq ft, century-old storefront-type building with 2 1-bed apartments upstairs. Property used to house a print shop and the owner lived in the larger 1 bed apt 3 years ago but it has sat vacant since then. It is on the up and coming west side of GR in a decent neighborhood with a few small business in the immediate vicinity. The property needs significant remodeling done ( flooring refinished, walls and ceilings patched/painted ( upstairs), drop ceiling removed and rewiring downstairs, some windows added, 2 small roofs redone in back, new bath and kitchen fixtures/cabinets( x2) and a few walls moved/removed depending on design) but the separately-metered mechanicals and main roof are newer and in good shape. I have never done a rehab like this before but I'm guessing it would need at least 50k to get it to the point of having 2 nice apartments and 2 nice commercial spaces downstairs. It could also possibly be converted to a 4 plex multi family if the zoning was changed. The property has the original high tin ceilings on the first level and original hardwood floors/trim throughout. It is aluminum sided and has 7 parking spaces. I personally think the property has a LOT of potential but I am not in a great position to buy it right now. I have two other investment properties and a SFR in escrow and after that closes, my cash will be wrapped up for a while. I do have the money to buy it and remodel it in retirement accounts but my husband does not want to use that money, especially for a rehab project this large! Also, the seller needs the money from the sale to pay medical bills and such so seller-financing won't work. I really don't want to let this one go but realistically, I don't have the money right now or the experience needed to rehab it correctly. I have thought about wholesaling the deal but I have never done that before. The seller wants 100k for it but I am really not sure what an accurate ARV would be and if that is a good deal or not taking into account the rehab cost. My conservative guesstimate for rents once finished would be $500/mo each apartment, 1200/mo for larger commercial space and 800/mo for smaller commercial space, so $3000/mo gross rents. Taxes are approx $2400/year and I'm not sure what insurance would run on a building like that. Does anyone have any ideas for me or do you know if this is in fact a good deal? Thank you so much for your help, BP!! Jackie Botham, GR, MI

Julie Haveman · Answer

I think $500 for rent seems low. Rentals in this area are going way up and going fast. We are renting 2 bedroom duplex for $900 per side, so with updates I think you could be $650-$700 range very easily.

Justin Workman · Answer

lets start by looking at the numbers. Your projected rents are 3000 per month or 36k per year in gros rents. Subtract out all of your expences, taxes, insurance, vacancy, maintance, lawn care snow removal ... roughly 50% of your income is the rule of thunb but run the numbers. It leaves you with a net of 18k per year. With the repairs mentioned i think your rehab budget is way to small. I would gues you would be closer to 100k posibly, because you are spliting the utilities and updating you are also going to have to build firewalls to seperate each unit per code. It depends on what you do. Lets say you buy it for 100k put 100k into it on the rehab and rents and expences net you 18k per year. 18000/200000 = .09 or a 9 cap. Not the best deal for the risk and work required. If you only put 50k into it, its a 12 cap which is beter, but again its a lot of risk. Also consider comercial space normaly has longer vacancies between tenets, and the property taxes will uncap once you buy it and could raise your tax bill significantly. Keep digging into the numbers, and be conservative on your estimate, make sure you cover everything.

Account Closed · Answer

No, if you have $200,000 invested and an $18,000 NOI that you can sell for only $180,000 then you only have one cap rate. You HAVE overspent on improvements.

Justin Workman · Answer

Yes if you have 200 invested and they only invest 180 for the same NOI the cap rates would be different. definition of cap rate noi (net operating income)/asset value. How fast will your money return to you assuming no leverage.

Account Closed · Answer

They can purchase for $100,000 and add $100,000 for a rehab and end up with $18,000 NOI but if the market will only pay $180,000 then their cap rate is 10%. Your 9% is not a cap rate.

Bill Gulley · Answer

Then use seller financing to close your "wholesale" deal and sell to your buyer with the understanding that your seller gets his note paid off in minutes after that loan is made. That or use transactional funding to close, do not assign contracts! If you're an agent, just list it at a flat fee.IMO, a mixed use property is not for new investors, there is much more to commercial leasing than residential and it usually doesn't mix well in small properties. Good luck :)

Jacqueline Coombs · Answer

Thank you, everyone! I really appreciate all of the helpful responses. I am thinking I may try to wholesale this deal if I can and grow my capital a bit more before I take on such a huge project.

Justin Workman · Answer

In this case i am using it as a return on the investment with out leverage. Which it is. The market only sets cape rates by driving up or down purchase prices, rental rates, and expences. Which change the rate of return. This is the unleveraged rate of return, which assumes its a cash deal, same thing as a cape rate. Baised on your assumptions above if you can only get 500 for the apartments and 800 for the comercial, i would probably do comercial, but it depends on the area, demand, and outlook of that neighborhood. Where is it heading, is it moving towards a walkable community where retial is desirable, or is it a place where it dosent fit the surroundings and would better serve the area as apartments. All things to decide before you jump in, because the numbers will be different.

Account Closed · Answer

The cap rate is set by the market. The amount of repairs only changes the value NOT the cap rate.

Jacqueline Coombs · Answer

Thanks for your reply, Justin. Do you think it makes more sense to turn it into a 4 unit instead of commercial downstairs? The utilities are already separate and in good shape but you are right about it being a huge rehab and probably costing way more. The property does not have a yard so the only outdoor expense would be plowing the parking spots in winter. The taxable value is at 40 right now so with a PP near 100k, taxes wouldn't go up too much. I can do most of the demo work myself. I have not made an offer but I may be able to get it at a better price.