A $780k office building on a corner. Passive hold, or a job?

The $95k roof is the number they let you see. On a 1970s two story with 14,000 feet of floor plate, once the roofer is up there you find parapet flashing, a couple of rusted drains, and rooftop HVAC units sitting on curbs that also need work. I've had that exact sequence turn a 90 into a 160.

Also ask what the tenants' ceilings look like. Water has been getting in somewhere for a while if the roof is at the end of its life, and stained tile is cheap while wet insulation and a mold remediation scope is not.

I wouldn't call any of that a reason to pass. I'd call it a reason to make the offer contingent on your own roof and mechanical inspections rather than the seller's quote.

Checking your math because that's all I'm good for right now. $61,000 rent on 5,200 feet is about $11.70 a foot gross. Your operating costs are $48,000 across the whole 14,000 feet, so $3.43 a foot on the building. The vacant 8,800 feet costs you roughly $30,000 a year in taxes, insurance and base utilities and pays you nothing.

So really you're paying $780k plus $95k of roof to buy $13k of net income and a $30k annual drag on empty space. That's a 1.5 percent yield on cost before you spend a dollar on leasing.

Which is fine if you're honest that you're buying the dirt and the rent just offsets carry. It's not fine if anyone calls it an income deal.

One thing I'd check, and it varies by state, is whether recorded sale prices are even public where you are. About a dozen states don't publish them, so you may not be able to see what the building traded for last time without asking the broker directly.

I want income without drama, so I'll say the unpopular part. This isn't passive. A 40 percent occupied older office building with two leases rolling inside 26 months is a leasing project with a land option attached.

Passive would be paying someone else to own that risk. You'd be the one taking calls about the boiler.

Before price, I'd want the actual leases and estoppel certificates from both tenants. An estoppel is a signed statement from the tenant confirming the rent, the term, what deposits they've paid, and that the landlord doesn't owe them anything. Sellers of small office buildings are often carrying side deals nobody wrote down, free parking, a rent abatement from a bad year, a verbal renewal promise.

Also ask both tenants directly what they intend to do at expiration. @verity is right that this is a leasing project, and the first thing to know about a leasing project is whether you're starting from 5,200 feet or from zero.

Who's collecting the rent and changing the light bulbs in your version of this? At 5,200 leased feet there isn't enough income to pay a management company anything a management company would want, so the answer is you or a friend with a truck.

That's the part I'd price before the roof.

1970s office, so two things from the trades side.

First, find out how the building is heated and cooled and how many zones. If it's individual rooftop units per suite you're in decent shape, you replace them one at a time as they die, maybe $12k to $18k each installed depending on tonnage and crane access. If it's one central system with pneumatic controls, every future tenant negotiation includes after-hours HVAC and you cannot easily give a small tenant their own thermostat.

Second, that vintage means suspect materials. Nine by nine floor tile, the mastic under it, pipe insulation in the boiler room. Get a survey before anyone opens a wall, because abatement rules and who can legally do the work vary by state and you don't want to learn that mid-demolition.

@harrow is right about the roof drains too. On flat roofs of that era the drain bowls are usually the actual leak.