First Commercial Real Estate Investment

[Ra B.]

Hey All BP Forum People,

Happy New Year! 

I have been listening to the podcasts and educating myself. Now time to put all that into practice. 

I have located a commercial office building in a Minneapolis suburb. Asking price is $4.5M at $186/sq ft. Nets $307K (NNN lease) in rent. By using the Property Cashflow Analyzer, I get only 6.45% CAP rate and 7% Cash on Cash. My criteria is 16% cash-on-cash and 9% cap for such investment. So thinking about offering $3.4 M.

Is this a good deal? What are the risks for such building. Its a 30 year old building with 90% occupancy (around 10 commercial tenants like dentist, software companies etc.) with leases ranging from 2019-2023. 

Thoughts?

Rabi

[Andy Schornack]

I would advise not doing an office building as your first deal unless you have a built in tenant (i.e. your own business taking some or a lot of the space). The risk in office leases is tenant improvement allowances and broker commissions that are needed when the property turns over. Your lease outlook is fairly short based on the comments so expect more cash liquidity needed in near term as leases are renewed and/or turned over.

@Michael Schmalzer commented on the cap rate. Certainly tighter but little was provided on the sub-market, location.  I am less concerned about the tenant mix.