Last week I closed on a 68,400 square foot commercial property with a grocery store, restaurant, coffee shop, and office space in it. I bought the property for $2.1 million and a partner went in on it with me 50/50. We financed 75 percent of it with a local bank, so we each had to bring a tad under $300,000 to buy it.
I have had a goal to buy a 50,000 square foot or larger building for quite some time and finally did it! The property brings in about $20,000 a month in gross rent. The tenants are all on NNN leases so they pay all of the expenses except for the vacant spaces portion. There is about 9,000 square feet of vacant space which we could rent to make even more money.
Why was this a good deal?
It is hard to evaluate large deals like this but I think we got a smoking deal.
The replacement cost on their property is over $7 million.
It has 4 acres of land on the busiest street in town, which is worth close to the purchase price.
It sold for a 9.5 CAP rate when similar properties are selling for a 7 CAP (the lower the CAP the more expensive).
We will make about 12 percent cash on cash returns on our money as it sits. We will make much more if we rent the vacant space or manage the property better (I think we can do both).
One reason the property was cheap, was because the grocery store pays very low rent rates. They pay about $2.70 a square foot a year, when market rent is more than double that. This entices the grocery store to stay in the building and if they ever leave, we should be able to rent the space for more money, making the property more valuable.
I have also decided to start my own real estate brokerage in one of the vacant spaces. I will save a ton of money having my own office, and I will be able to design my own space.
Here are a few more interesting things about the purchase.
We got a loan with a local bank for 75 % of the purchase price. The rate is 4.6 % for a 5 year ARM, and 10 year balloon.
The inspection on this property was almost $4,000.
The appraisal on the property was $4,000.
Insurance is $13,700 a year, but the tenants pay most of that.
Property taxes are over $50,000 a year, but again the tenants pay most of those.
You can see the full article I wrote on my site with many more numbers below
https://investfourmore.com/2018/02/05/commercial-rental-property-21-bought-2-1-million-68000-sqft/
Congratulations on meeting your goal and getting such a great deal on this property!
Thank you! It has been exciting for sure.
I'm a multi family real estate investor, but this post made me think of two advantages commercial real estate has over multi family.
Being able to buy the property at a lower percentage of the replacement cost.
More influence in the community.
You also can make the tenants pay most of the expenses, unlike multifamily. You have larger tenants as well which means less management, but more risk if one moves.
Hell, I would have sold you my commercial property in FL for 40k, and you could have saved some bucks. LOL :-)
Not sure it brings in quite the same income, lol
Right now it's just an empty fat liability burning a hole in my pocket. lol
Sounds like you will do ok. I think that risk reward ratio would not be enough for me but I think it's pretty good for the real estate market. Is it a business loan from the bank?
It is a real estate loan from the bank.
Could you have gotten a business loan if you made a llc or business?
I have a couple S corps and 18 LLCs for my rentals. A real estate loan is usually better with longer terms and lower interest than a business loan.
Yeah unless you're super big. Maybe in another 10 years you could sell some bonds?
Hopefully the housing bubble doesn't crash cause property values will drop tremendously!
I think his main risk is if an Aldi's moves in next door and the economy crashes. His cap rate helps support his property value.
What is an Aldi's?
I think it is the cheapest grocery store in the USA. I think it does have one new competitor though. Their prices are very cheap. It looks like they are in Kansas and not Colorado. I imagine they will be in Colorado though in the next few years.
It depends on where you live, the local economy, what type of property, etc. There are many factors to consider. https://investfourmore.com/2017/06/05/will-another-housing-market-crash/
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