One storefront, two apartments, and everything that wasn't on my spreadsheet

I spent about a year on this forum working out what a first deal actually costs, so here are my real numbers now that six months have gone by.

Small brick building on a secondary commercial street, two one-bedrooms upstairs at $1,150 each, one ground floor bay of about 1,100 square feet leased to a takeout place at $1,550. Purchase $312,000. Down payment $62,400, closing costs $9,800.

Things that were not on my sheet:

The appraisal was $3,100 because the ground floor made it a commercial appraisal. I had budgeted $600 because I had only ever priced a house.

Insurance quoted at $4,900, not the $3,200 I penciled, because of the cooking use downstairs. Two carriers would not quote it at all.

The lease said the landlord maintains the HVAC serving the retail space. It was 19 years old. The tenant asked for two months of abatement in exchange for me replacing it, which cost me $6,800 in equipment and $3,100 in rent.

So year one cash flow was about $430 a month instead of the $600 I modeled. Taxes $4,400, insurance $4,900, water and trash $1,700, reserves $3,600, debt service around $1,800 a month at my quoted rate at the time.

The thing I would keep is that I asked for the retail lease and read all fourteen pages before I made the offer. That is where the HVAC clause was. I still got surprised by the cost, and I would have been blindsided if I had not read it at all.

Answer

2chriswalton8CC1CPRO8

The two lines that moved on you, insurance and the HVAC responsibility, are the same two lines I have watched decide whether small mixed-use deals hold together when other people's money is in them. Both are knowable before you go hard on a contract, and neither requires a lender or an inspector to find.

Ask the seller for the current policy declarations page and the last two years of loss runs. The loss runs tell you what has actually gone wrong in the building, which is a better read on the ground floor tenant than anything they will tell you in person.

On the lease, read the maintenance and repair section against the age of every piece of equipment serving the retail space before you set your price. @tally found the clause and still ate $9,900 because the age of the unit was a separate fact. Those two facts belong side by side in the underwriting.

One more thing worth asking the seller: whether the retail rent has ever been abated or deferred, and whether anything was agreed by side letter rather than in the lease. Side letters travel with the tenant even when they do not travel with the file, and how enforceable one is against a new owner depends on your state, so a real estate attorney in your state should read anything you find.

8 replies

2bmoreno23AB1B

The appraisal difference is the sort of thing I would have found out by getting a bill I could not pay. Thank you for putting the actual dollar figure on it. Did your lender tell you it would be a commercial appraisal, or did you find out when the invoice came?

3devon_pierce Get yoursPRO5

Two carriers refusing to quote at all is the detail I am writing down. I have four mixed-use buildings on my list and two of them have restaurant tenants on the ground floor. If insurance is a gate rather than a line item, that changes which ones I chase first. Did the broker tell you what specifically they objected to, the deep fryer, the hood, the age of the suppression system?

3joe_delgado5AP4CPRO6

$430 a month on $72,000 in is thin, and I say that as someone who works thin on purpose. What saves it is that you now own the rent roll on a street rather than a house. If the takeout renews at market in three years you probably get a step up that the residential units will never give you in one jump. What is the current rent per foot versus what the vacant space on that block is asking?

0luis_carrera Get yours

I have been on the analysis side of exactly this shape of building for eight months. Reading a real closing statement with the wrong numbers on it helps me more than another spreadsheet does.

1samantha_ruizAU4APRO6

One thing to set up now while you only have three tenants. Get the retail on its own utility meters if it is not already, and if it is not, price what submetering costs before the next renewal. Water on a food tenant sharing a meter with two apartments is how a $1,700 line becomes a $4,000 line, and you will not notice for a year because it creeps. I learned that on a five over one where the ground floor was a laundromat, which was entirely my own fault for not asking.

1gregpowell66AG4BPRO8

The 19 year old rooftop unit was going to fail regardless, so you paid for it a year early and bought two years of goodwill with the tenant. On the equipment side I would look at the roof itself next, since a package unit replacement usually means someone was walking around up there. Ask the installer what he saw. That is free information and the roof is the line that would actually hurt you at this deal size.

1raj_mehta14CapitalPRO6

I follow most of this except the abatement. When you gave two months of free rent, does the lender care? I am reading about how debt gets sized and I cannot tell whether a lender looks at the lease rent or the rent you actually collected that year.