Convert the dead hardware store bay, or wait for a 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.

@windlass 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 you actually have, which is one open commercial space with no plumbing stacks where you want kitchens and baths, no separate meters, and a slab you'll be 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. I'd budget $120k to $160k and I'd want a real set of drawings before I believed either end of that.

Also your contractor is in the next town over. Ask him what his drive time does to a punch list.

I'd want to see the actual seller note before anything else. Two things I'd read for: whether you can prepay without penalty, and whether the note lets you put a construction loan in front of it. If the seller won't subordinate, the $120k conversion has to come from your pocket or it doesn't happen at all. That single clause decides which of your two paths 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.

Doing a version of this right now. Two storefront bays into apartments, and the thing that stalled me for five months was water. One 1.5 inch service, one meter, and the town wanted a separate service line for the residential use plus a backflow preventer. That was $18k in the street before I framed a wall. Call the water department before you call an architect.

Get an estoppel from the insurance agency signed before closing. You want them to confirm in writing the rent, the term, the deposit held, and that there are no side agreements about free rent or the landlord paying for the sign. Seller-reported commercial rent on a small building is wrong more often than it's right, and a gross lease at $650 for 1,200 sf means you're paying their heat.

Also check whether that lease survives a sale and whether it's assignable, because in some states an unrecorded lease over a certain term has its own rules on notice to a purchaser. Your attorney should look at the actual lease, not a summary.

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 you're pricing options before you know which options exist. The order I'd run it in:

1. Written determination from the building official. You're proposing 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's what 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'll sign your permit, in writing, with the drawing they looked at.

1. 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 your NOI either way.

1. 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 the lenders in that market and ask what each one looks like at year five. A building that's 80% residential by income is a different loan product than one that's 33% commercial by area, and you should hear their answer before you spend $6k on plans.

None of that costs much. All of it changes the deal. If the code letter comes back with sprinklers and a second stair, your conversion is a $200k project on a $215k building and the answer resolves itself.

Running @lantern'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's before you've paid for the conversion. Now add $140k of conversion debt at, whatever, 8% over 15 and you're adding $16,000 a year and you're back to 0.83x. It only pencils if a chunk of that $140k is cash you're not borrowing. So what's the actual cash position, @hollow?

Seller notes on small buildings almost always have a due-on-transfer and half of them have a clause barring any additional encumbrance without written consent. I've read three in the last year and two of them also required the seller's approval of any lease over five years, which the seller had put in to protect a relationship with a tenant and then forgot about. Read the whole note and the deed of trust or mortgage that secures it, not the term sheet the agent typed up.

One thing on the ground floor apartments. In my small 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. If you convert, budget for real windows and a separate residential entry that doesn't share the commercial vestibule, or you'll be re-keying that door twice a year.

Manager here will charge you a minimum fee, not 8%, on a building with five residential doors and one commercial tenant. Around here that's $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. Your 8% assumption is $208 a month. Reprice it.

What happens if you buy it and do nothing for a year? You said the agency lease has two years left. If you can carry it flat with the bay dark, you get a year of watching the town, watching the roof, and getting the insurance history under your own name before you commit $140k. That's not free, but it's cheaper than being wrong fast.

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

Adding to what @bramble said. On a two-story brick corner from that era the 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 ask him to show you 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 it works with the bay dark, at the price and terms that make it work that way. Everything else is upside you might get. Right now @windlass has you 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?