All Forum Posts by: Greg L.

Again, thanks for the comments @Joel Owens and @Damon DiPlacido.  You've both given me something to consider.  Very illuminating.  

Thanks to all for the thoughtful responses.  Extremely helpful! 

I'm in the process of purchasing a six unit mixed use building that has 3 commercial spots.  I expect the tenants to be the smaller businesses like insurance agents, delis, telephone/ipad repair shops and etc.  I also expect that that I'll have gross leases with these guys.  In this situation, who does the fit out and what determines who does it?  I'd prefer to have the tenant handle that.  Demising walls are up and major systems are in place, so we're talking about internal walls.  

Thanks for comments everyone. Very helpful. All utilities are separated and all units are separately metered. I spoke with a couple of leasing agents today to get their insight on market conditions as well as to understand their compensation. They need to see the place, but the feeling is that I'll be dealing with gross leases in this area. I have another mixed used building that's a fourplex and that's the case there as well. That fourplex is located in commercial/residential area similar to this building and no one is doing NNN. The types of businesses in that area is similar to what exists in the area for the new building. My analysis doesn't factor in any fit out costs. The spaces are demised already and two have HVAC in place. One space is electric and I'll need to have air conditioning installed in that particular space; that's one of the reasons I insisted on no money down so I can reserve capital for anything that pops up that I didn't anticipate. My thought is to make the tenants responsible for fit out costs.

I currently own a 9 unit multi-family and a mixed use fourplex both of which has commercial financing, so I'm familiar with the typical financing arrangements and valuation. I'm in negotiations to purchase a 6 unit mixed use building with 3 residential units and three commercial spaces. The apartments and the commercial areas are newly updated. The seller divided three commercial units of a much larger original space thinking that smaller spaces would be easier to rent and there are a few additional items needed to finish off the commercial area. Some of these items will be completed by the seller and I'll need to complete some after I close. Two of the commercial spaces are ready to rent however. The immediate area is densely populated with many other mixed use buildings and there are low number of vacancies though out the immediate area. I believe the commercial spaces would rent fairly quickly. Likely tenants would be places like Telephone Stores, Delis, Insurance agents and various mom and pop type operations. Surrounding neighborhood is a C class area with some gentrification occurring in spots. Residential rents are below market by about 20% and all tenants have been there for 5 years or longer. If I'm able to bring the residential rents to market and get the commercial portion rented, NOI would be $ 40,000 on a sale price of $ 280k or a cap of about 14% (caps in this area range from 7%-9%). However, I'd have to get to that point as the commercial is completely vacant. Cash burn is about 6000 to 8000 annually until at least one commercial unit is rented. I can get 80% financing from my bank and the seller is willing to hold 20%. Here are my questions:

1) What do you think of this deal?

2) I read a string here where someone had to get a commercial inspector for a 10 unit mixed use property which cost significantly more than a residential home inspector.  For my fourplex mixed use building, the bank accepted a regular residential home inspector.  Their position may be different here.  Regardless of their position, would it be worth the cost for me to engage a commercial inspector?

3) For a property this small,  it is typical to have a gross lease or a  net lease?  Obviously, if I could lay off some of the operating expenses, my numbers would look better. 

I invest in an area where it seems that cap rates are compressing.  There are many commercial properties selling for cap rates around 5-6% which will simply not cash flow with debt.  Typically, banks appraise these at 9% and most were selling at that prior to the past year.  What are the implications of this for future rent and appreciation?  Do you view cap rate compression as a bell weather for higher rents and thus even higher appreciation in the near term?

Sounds like the no visitor rule is one that works then and that's what I'll do.  I really don't want unknown people coming in and out of the place.  I plan on installing surveillance cameras in the common areas to monitor this and the place generally.    I have the skills to screen and assess tenants and I could go either way.  I'm figuring if I go with the parolees, there will be three sets of eyes on them; mine, the agency and their parole officer.  Plus, I get the automatic money.  Ideally, I'd prefer working tenants like tradespeople or folks temporarily in the area.  How do you normally market for folks?

I posted here a few months ago about a rooming house I purchased.  I recently completed the repairs needed to get a certificate of occupancy and it's now ready to rent.  My place has 6 rooms and a two bedroom apartment that can be used by an on site manager.    I was recently approached by a faith based non profit interested in renting space to place parolees.  This agency provides counseling and support services to these people. Most of these guys were convicted of drug offenses or simple assault.  The agency would lease the rooms directly from me and sublet the rooms to the tenants.    I can say who I don't accept and would have final approval on who they place in there.  For example, I wouldn't want any sex offenders or violent criminals.  The building is located in a C type area; not quite a war zone, but a mostly a pool of tenants who are the working class/working poor.  

Also, I'm thinking of the various house rules I'd like to have in place.  My concerns are any associations these guys may have and I'm thinking of a rule where there would be no visitors allowed.  I know most parolees are under tight control anyway, but I really don't want folks coming in and out of the building visiting these guys.  I don't know if that would occur anyway, but just would like to pre-empt any potential issues.

Any thoughts on this and working with the agency?

I'm here in the Lehigh Valley and have been actively looking at Easton and am about the close on a multi right on the Wilson border and am pursuing a short sell in South Easton. There are a lot of bank owned SFH's throughout Easton and there's plenty of opportunity depending on how much you want to manage. I like South Easton due to it's proximity to route 78. You may want to take a look at Bethlehem as well, but pricing there is not as good as in Easton IMO.

 Roy, 

Noted on the distinction between the rental period and the duration of the tenancy.  Tenancies over 29 days here in PA may result in the tenant inheriting some additional rights and per my research, avoiding that means they have to vacate for at least 48 hours before the duration reaches 29 days otherwise those additional rights accrue.  That's really not practical IMO, so I'm just inclined to operate under landlord tenant rules with any duration exceeding 29 days.  If I have to go to court on that basis and the magistrate says landlord tenant doesn't apply, then my default position  is lockout under the Innskeeper rules.  Unfortunately, there's not much case law in this area in PA where longer term rooming house tenancies are concerned.  Here's a writeup in the issues we have to deal with here.  Of course, these fine distinctions are unknown to tenants, so the flip side is operate under Innskeeper rules at the outset unless challenged:

http://www.shumakerwilliams.com/overstaying-their-welcome-the-difficulty-evicting-long-term-guests/