Convert a dead ground floor bay, or hold it and wait for a commercial tenant

Your problem isn't the bay, it's month 60. You're pricing a five year balloon on a building where the exit is a small town bank that has to find a comp. Ask around now, before you sign, what those four lenders will actually do with mixed-use at that size. If the answer is "we'd want 30% down and a 15 year am" then your $50k today becomes $110k in five years and the whole thing changes shape.

@luis_carrera has the math right and it's worse than it looks. I own a four over two in a town about that size. The retail vacancy assumption in these markets isn't 12 months, it's open-ended. There is no queue. The tenants who want 2,400 sf downtown already have a building, and the ones who want 800 sf can't heat yours.

Underwrite the bay at zero income and permanent. If the deal only works with a commercial tenant you don't have and can't name, it doesn't work.

$85k on 2,400 sf is $35 a foot. That number pays for framing, drywall and finishes in an already conditioned shell. It does not pay for what's actually there, which is one open commercial space with no plumbing stacks where kitchens and baths are wanted, no separate meters, and a slab that will need trenching. Add the fire separation between the new units and the agency next door, second means of egress out of each unit, and whatever the mechanical layout has to become when one rooftop unit becomes four systems. Budget $120k to $160k and get a real set of drawings before believing either end of that. Also, a contractor based in the next town over turns his drive time into every punch list.

The seller note deserves a close read before anything else here. Two things matter most: whether it can be prepaid without penalty, and whether it allows a construction loan to sit in front of it. If the seller won't subordinate, a $120k conversion has to come from the buyer's own capital or it doesn't happen at all. That single clause decides which path is even available.

What's your total cash in on day one? $50k down plus closing, plus the roof at some point, plus whatever the insurance carrier makes you do to bind. I ask because when I priced my first one I had the down payment covered and nothing else, and the first $9k surprise nearly ended it.

A common version of this stalls on water. Converting storefront bays into apartments usually needs a separate service line for the residential use plus a backflow preventer if the building runs on one meter, and that work can run into five figures before any framing starts. Call the water department before calling an architect.

An estoppel from the existing commercial tenant, signed before closing, is worth insisting on. It should confirm in writing the rent, the term, the deposit held, and that there are no side agreements about free rent or the landlord covering the sign. Seller reported commercial rent on a small building is wrong more often than it is right, and a gross lease at 650 for 1,200 square feet often means the buyer ends up paying the tenant's heat. Also worth checking is whether that lease survives a sale and whether it is assignable, since in some states an unrecorded lease over a certain term carries its own notice requirements to a purchaser. An attorney should review the actual lease itself, not a summary of it.

If a conversion trips a sprinkler requirement, the number that kills you usually isn't the heads, it's the service off the main and whether the town has the pressure to feed it without a pump and a room to put the pump in. I've seen that be $60k in an old brick building on a 4 inch main.

Everything above is real, but options are being priced before it is clear which options exist. The order to run it in: 1. Written determination from the building official. This proposes a change of occupancy on that 2,400 sf from a commercial classification to residential. That is the trigger for the entire code conversation, and it decides sprinklers, egress, separation between the units and the agency, and whether energy code applies to the shell. Code adoption and how strictly a change of occupancy is enforced vary by state and by jurisdiction, so the only answer that counts is the one from the person who will sign the permit, in writing, against the drawing they looked at. 2. Insurance quote conditioned on the finished configuration. Ask the same carrier what the premium looks like if the ground floor is 1,200 sf of office and two apartments rather than 1,200 of office and 2,400 vacant. A vacant commercial bay is doing a lot of work in that $6,800. That delta is real money in NOI either way. 3. A refinance conversation now, on both versions of the building. Take the rent roll as it sits and the pro forma rent roll after conversion to lenders in that market and ask what each one looks like at year five. A building that is 80 percent residential by income is a different loan product than one that is 33 percent commercial by area, and that answer is worth hearing before spending $6k on plans. None of that costs much. All of it changes the deal. If the code letter comes back requiring sprinklers and a second stair, the conversion becomes a $200k project on a $215k building and the answer resolves itself.

Running @mikeoconnell7's second version: five residential units at $1,950 plus $1,400 new, so $3,350, plus the agency's $650. Call it $48,000 gross. Insurance drops, say, to $4,500 if the vacancy is the driver. Expenses maybe $22,000 all in. NOI around $26,000 against $15,350 of debt service, so 1.69x, and that is before paying for the conversion. Add $140k of conversion debt at, say, 8 percent over 15 years and that is another $16,000 a year, bringing it back to 0.83x. It only pencils if a chunk of that $140k is cash rather than borrowed. So what is the actual cash position here, @laurenkim53?

Seller notes on small buildings almost always have a due-on-transfer clause, and roughly half also bar any additional encumbrance without written consent. It's common to also find a clause requiring the seller's approval of any lease over five years, usually written in to protect a specific relationship with a tenant and then forgotten. Read the whole note and the deed of trust or mortgage that secures it, not just the term sheet the agent typed up.

One thing on ground floor apartments in small mixed use buildings: the first floor units rent for less than the second, turn faster, and generate every single break-in and package complaint. Storefront glass makes it worse. On a conversion, budget for real windows and a separate residential entry that does not share the commercial vestibule, or that door gets re-keyed twice a year.

A manager in a market like this will charge a minimum fee, not 8 percent, on a building with five residential doors and one commercial tenant. A typical range is 150 to 200 a door with a floor of about 700 a month for the building, and the commercial tenant gets billed separately or not handled at all. An 8 percent assumption here would land near 208 a month, which is worth repricing against the actual minimum.

What happens after buying and doing nothing for a year? With two years left on the agency lease, carrying it flat with the bay dark buys a year of watching the town, watching the roof, and building an insurance history under new ownership before committing $140k. That's not free, but it's cheaper than being wrong fast.

Per door that's $43k for three apartments plus a leased office and a shell, and that's not the problem. The roof is. A 15 year old membrane over both halves with a $40k replacement quote means reserving $8k a year against it, or negotiating it into the price now, and a seller carrying paper is exactly the seller who'd rather knock the price down than fix the roof.

Adding to what @devon_pierce said. On a two story brick corner from that era, a roof quote is usually low because it doesn't include parapet work. Get the roofer back and ask specifically about the parapet caps and the through wall flashing, and have him show where the water is going now. On a building with commercial below, a leak at the parapet shows up as a wet wall in a tenant space and a lease dispute, not just a ceiling stain.

Buy it if the numbers work with the bay dark, at a price and terms that make it work on that basis alone. Everything else is upside that might or might not show up. Right now @luis_carrera's math has this slightly negative on that basis, so the price or the note has to move.

Corner lot downtown in a county seat is the part of this that doesn't decay. Buildings get expensive, the corner stays a corner. That's a fine reason to be patient and a terrible reason to overpay by $30k today, because the patience only pays if you can carry it while you wait. What's your holding period actually look like, ten years or thirty?