There is a commercial property in a desirable part of town that may be available and I have some money sitting in a bank making very little interest. Property can be leased triple net meaning the tenant would be responsible for maintenance, utilities, property tax, basically everything. At the cost I'd have to pay it'd return about 8% per year for the first 3-5 years at which time I could modestly increase rent.
Would this be considered a poor, fair, or good investment?

These questions come to mind:
If it's such a great deal why is it for sale? What condition is the building in? How long has it set empty?

Sorry, I can't answer your question.

I don't know that market, but I'd think 8% is a decent return. However, you need to factor in more than just your purchase price and the income. For example, downtime/vacancy. Capital expenses that wouldn't be your tenant's responsibility. Unforeseen M&R that may not be part of the NNN expenses you could pass through (foundation issues for example, sewer lines, roof). Marketing. Legal fees/professional services. Cash reserves.

How long do you anticipate it'd take to fully lease the building? Would you be looking for one tenant? Would you have to put money into it to deliver the space in the right condition for whatever tenant's use you find? What about Tenant Improvement allowances?

quote:

Originally posted by ffips:
These questions come to mind:
If it's such a great deal why is it for sale? What condition is the building in? How long has it set empty?

Sorry, I can't answer your question.

And make sure you understand the zoning? Is this zoned for office? Retail?

What is the current vacancy and expected vacancy rate? How long are the current tenant leases?

I only know a little about RE investing, if you have the time to learn and the risk tolerance to dive in it could work out well or at least lead to a learning experience that leads to bigger profits down the road.

For me, it would be a hard pass unless all, or almost all the units were leased and they could show me a decently long history of leases to know how often it is vacant and how long it takes to find a new tenant.

Used to listen to a guy on the radio named Bruce Williams. Dude had done it all. Pretty sure his rule of thumb for real estate was 1% of market value for the monthly rent. So closer to 12% annually.
Question also reminds me of our friend JALLEN. He was the go to guy for this kind of question. Miss his wisdom.

Back when I was learning about it, I was always told you wanted a cap rate of at least 10X. So if the net income is $40k/year, pay no more than $400k for the property.

Thanks for all the good questions, I'll try and answer some.

First I'm not sure it IS a great deal, but if I think so I may have an inside track
The brick veneer building was constructed in 1993 by a bank for a satellite location with a drive though behind, and has been leased to them since. Building is in good condition but will need new flooring and paint inside which will be the new tenant's responsibility. It's never sat empty, current tenant now has a newer and larger building within 2 miles.

I believe I can lease it within 2-4 months and I would probably need to spend $20-30,000 for a new roof and minor exterior work. Also maybe $20,000 on new HVAC whenever the current stuff becomes unreliable

Zoning is B-1 (business) and I would lease it to one tenant, with any allowances to be added to the rent.

Currently on original lease from 1993 which was for 10 years and are finishing up the third 5 year option.

What is the commercial vacancy rate in the 10-mile radius surrounding this building?

quote:

Originally posted by Powers77:
Used to listen to a guy on the radio named Bruce Williams. Dude had done it all. Pretty sure his rule of thumb for real estate was 1% of market value for the monthly rent. So closer to 12% annually.
Question also reminds me of our friend JALLEN. He was the go to guy for this kind of question. Miss his wisdom.

Yes, this *used to be* the rule of thumb. However, with the rampant money printing and crushing of the interest rate that the Federal Reserve and our government (as well as other governments and Central Banks) have achieved, there are absolute boatloads of money out there chasing a return. 6-8% is a lot more typical these days. I don’t know many folks who invest in commercial property that wouldn’t be delighted with an 8% cap rate these days.

That said, with any property there are a lot of variables, many of which have been mentioned above.

Only being a 1 tenant building adds to the risk. Your vacancy rate will always be either zero or 100%. Of course for planning you can use an average but in terms of actually getting paid, it's all or nothing.

A bigger, more expensive building also limits the number of businesses in the market for the space. Eliminating pretty much all typical strip mall type businesses with smaller footprints.

OTOH, if it is a hot location with lots of upside at an attractive price...

Personally, I'd decide the lowest rate of return I'd be willing to accept the risk for to arrive at a purchase price based on the net income, then subtract from that the roof and 2-4 months holding costs and offer that much. That is assuming an inspection won't turn up anymore surprises and I'm confident I can lease it in the 2-4 months and the area will remain strong. I would do that knowing odds are they won't take my offer and will sell it to a seasoned commercial RE pro instead. That's fine, I need more upside than them to counter everything I don't know about commercial RE investing!

You can do as well investing in a REIT that has much less risk (more geographic market diversity). Of course, there are a lot of REITS out there and you have to do your homework. The REIT is liquid as it can be sold in the stock market whereas your building has no liquidity. Just my 2 cents.

I keep waiting for JALLEN to pop in and give you the skinny....

In my opinion, you have been given some good advice and some bad advice in this thread. If you aren't sure yet of the difference, I would suggest learning more about CRE before venturing in. You can also work with a knowledgable broker to help answer your questions, the answers to which will likely be unique to your location.

Also in my opinion, a single single-tenant building is one of the riskier investments you can make in CRE. You'll want to be extra diligent in your research to make sure it meets your criteria.

Also, it is rare that CRE does not involve some leverage. 40-50% loan to value would generally be considered conservative.

For what it's worth, my banker said single family homes are less risky than commercial property, so I have a rental house instead of a commercial property. YMMV

quote:

Originally posted by ridewv:
Property can be leased triple net meaning the tenant would be responsible for maintenance, utilities, property tax, basically everything.

The new tax laws impact this, and why there is some hyperbole involved, this article offers a decent explanation:
https://www.forbes.com/sites/a...dlords/#1e9b7c02d754

Yes.... I thought of Jallen when posting this, what a wealth of knowledge!



This would yield only 3/4% market value per month.

As far as near by commercial vacancy rate? Pretty low other than the one landlord who charges the top rent and even he only has one property available. This is within a 1/2 mile limit as beyond that it becomes a different market. But even within 1 mile it might be 3%, 2-4 out of 100.

I should add that I own adjacent property on one side which has been under lease for 8 years. It's done well for me but the numbers on the one I'm now considering aren't nearly as good.

Analyze carefully the long term viability of the property in the market. When tenants are gone and the property has lost value for any number of reasons, you are in a death spiral. good returns are great as long as they are not being offset by depreciation / loss of value

quote:

Originally posted by nasig:
Analyze carefully the long term viability of the property in the market. When tenants are gone and the property has lost value for any number of reasons, you are in a death spiral. good returns are great as long as they are not being offset by depreciation / loss of value

So far rents have been slowly but steadily increasing. I believe the trend'll continue a while longer as it's right near a college campus but I do realize things can change..... for the worse, or better I can't for sure predict.

I have been actively involved in acquisitions for 3 public REITs. Given some high dividends available, you could achieve better than 8% with increased liquidity with some public companies.

Otherwise, some thoughts:

You’ve mentioned Absolute NNN, which considerably reduces your risk, IF the tenant is financially strong. Remember however, the stronger the tenant, the lower return you should expect. Depending on the type of industry your tenant is in, the return may be anywhere from 14% (nursing homes) to 5-6% (typical commercial business average). Ask commercial realtors what cap rate tenant’s expect in the proposed tenant’s line of business.

Since you’ll have a single tenant, the risk is really re-leasing should your original tenant default. Be sure to mitigate this risk with a cash (or letter of credit) security deposit, equal to 3-6 months rent. That will provide some cushion to find a replacement tenant, and potentially cover some tenant improvements required by new tenant. I would also seek a personal Guaranty of the Tenant’s principals if the tenant is a non-public company.

Be sure your real estate attorney (a Landlord’s specialist in tenant’s business) drafts a quality lease that permits property inspection, regular financial reporting on the company, and lien rights upon default (among many other covenants).

Obviously, before any of the above, you’ll need to thoroughly do your due diligence on the building itself for suitability, condition, zoning, environmental, etc.

Feel free to email other questions you may have. Stay safe!
Steve

quote:

Originally posted by Sailor1911:
You can do as well investing in a REIT that has much less risk (more geographic market diversity). Of course, there are a lot of REITS out there and you have to do your homework. The REIT is liquid as it can be sold in the stock market whereas your building has no liquidity. Just my 2 cents.

+100

JALLEN was a big proponent of Realty Income. Stock ticker symbol 'O'.

https://www.realtyincome.com/Home/default.aspx

https://www.fool.com/investing...-be-in-10-years.aspx


At his recommendation I bought quite a bit and it has done well.

Diversification. Professional management. Liquidity. Attractive income stream - dividends paid MONTHLY current rate of around 4% yield.

No way I would tie into ONE property with all the attendant hassles unless I had a crazy good deal / inside track.

Good luck -

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