Happy Friday BP Forum!
I have a few questions about a deal I am trying to close on in SE Michigan, 2 commercial properties in the same commercial complex. This complex has about 50 units in total, mainly mom/pop shops and small business owners (lawn care, window makers, carpenters, small time mechanics, THC growers, etc). I am able to get seller financing with a 5 year balloon, 6% interest rate, and 40K down for the 2 properties
Property 1: $215,000, 2300sq/ft, $2100 rent. Assuming 7.5% vacancy, $175/month in replacement reserve and repairs, I will have about a 4% CoC return return.
Property 2: $110,000, 1500sq/ft, $1100 rent. Assuming 7.5% vacancy, $75/month in replacement reserve and repairs, I will have about a 6% CoC return
There are other properties in the complex that are renting for 10%-30% more, but they have been listed for 3+ months (concerning a bit, but it is commercial) and are nicer inside. The current seller has never had an issue finding tenants in his 30 years of owning, but would like to get out of them now because of his old age. He has had a real estate agent post them for him (both for rent and for sale) and there have been a few interests but nothing concrete. We are under the impression that it is due to the current economy, but there is no way to tell and this could just be speculation. It is also worth noting that 2 of the 1500sqft properties just sold for $135k (with a nicer interior), so from a value / comps prospective these seem to be in a good spot, there are almost no comps available.
My questions are this:
1. The property taxes are currently based on figures that have been very slowly adjusted over 30 years since he has owned the properties. Since this is a land contract with seller financing, I am under the impression the title goes into escrow, and the county is never update since the property is not technically 'sold' so the property taxes will not update until the balloon is up and I have to pay all of the note off. Is this true? This would make the CoC return favorable with his current tax basis.
2. Once the note is off and the property taxes are updated, this will cut into my cash flow and put me at about a 0% CoC return. I am hoping I will be able to put sweat equity into the property and raise rents, but there is never a guarantee. Is this a foolish thought process on my part? I do not want to be forcing a deal. But I am also trying to factor other aspects in like easy tenants appreciation, tax savings, loan paydown, etc.
3. Once the balloon is up in 5 years, I will have about $60k in equity across the $325k loan. That is 18.5%, and as I understand most commercial loans require 20%-30% down, meaning I will have to come up with $5k-$37k for the downpayment. Is it realistic to find 6% interest rates for commercial properties come this time (i know, impossible to predict the future), or will the numbers not work in the future and am I shooting myself in the foot? What can I expect to see in a commercial mortgage loan for investment properties?
4. I will be doing this deal with my father 50/50. I am not worried about legal fallout and disagreements, but is there any advantage / disadvantage that is glaring in regards to financing and this land contractor of having it in an LLC vs sole ownership?
Both of the properties being offered by the seller are below average condition compared to the other units so there is opportunity for value to be added for increase in rent, but the success of him finding consistent tenants has been the fact that these properties are 4 basic walls of commercial space, with bare bones office space that attract tenants because of cheaper rent. The things that attract me to this deal are seller financing, below market purchase price, and commercial real estate in this complex is essentially paint the floors and walls with minimal hassle, but I do not want to be forcing a deal.
Any input is appreciated on this deal, the future mortgages / loans available, or anything else. Thank you in advance!
