OK – close your eyes (actually, keep them open so you can keep reading!) and imagine the complexity of analyzing cashflows and proformas for a real-estate deal north of $2.5 million …
Well, that may be how OTHERS analyze a deal, but not me … all of my deals are done on the backs of envelopes … well one clean sheet of paper. I have this one right in front of me, in my own scrawly handwriting.
On the strength of it, I have authorized my Realtor to make a written offer, with a $200k ‘earnest money’ deposit on the $2.7 Mill. office/warehouse. Sure, the proformas will come later, but I’ll get him to prepare those for the bank … while I’m at the beach or off skiing someplace!
Here’s what the piece of paper says:
$2.7 Million (incl. $100k broker commission)
$5k Building / Environmental inspections
$15k Closing Costs (legals, bank fees, appraisals, etc.)
Of these, the $5k for the inspections is my only financial risk, as I need to undertake these during ‘due diligence’ (we’ll talk about this in a future post if the deal gets that far).
$2.7 Million Purchase Price (incl. broker’s commission)
$ 2 Million to be financed
Note: this is approx. 75% of purchase price to be financed; this is high for commercial which can be as low as 60% being the maximum that the bank will fund.
$700k – so this leaves me 25% of the purchase price, or $700k, to find as a deposit.
Note: I’m sure that the owner’s won’t ‘carry back’ a note on this one, as the whole purpose of the sale is to raise cash to keep their business afloat or growing.
So, that’s the purchase / financing side of the equation, now let’s see if it can make me any money …
$175k – Rent for Tenant 1 @ $8 / sq. foot
Note: the current owners will lease 2/3 of the property for the above fee (probably 5 years, with a 3% yearly increase)
$80k – Rent for Tenant 2 @ $8 / sq. foot (we need to find this smaller tenant)
Note: the property is street front with car park, so we feel is should be easy to find a second tenant in the $6 – $10 / sq. foot price range
$255k TOTAL INCOME
Note: the GREAT thing about commercial properties is that most expenses (and in a ‘triple net property, all expenses – unfortunately, this is NOT one of those) are handled by the tenant, leaving me just …
$7k Building Insurance
$10k Management Fees
Note: Rental management fees can vary from 4% – 6% of the rent if you don’t want to deal with the tenants yourself; keep in mind that commercial property is very different to residential and you won’t have as many issues dealing directly with commercial tenants – they are responsible for all repairs & maintenance … but, if the roof springs a leak, you’ll be expected to act quick! I will use an agent ( my friend).
$130k – Bank Interest @ 6.5%
Note: this is the ‘biggie’ and I haven’t spoken to any banks, yet; obviously, that’s my next port of call but my Realtor friend tells me that I shouldn’t have any problem getting funding fixed for 7 years (or a 25 year P&I loan with a 7 year balloon) around these rates. Variable can be as low as 4%, but I prefer to ‘fix my costs’.
$192k TOTAL EXPENSES
In the final part [AJC: when I return from my ‘winter break’ on Jan 5], I’ll summarize this all for you and explain why I like the deal so much …
So, what are the proformas?
Man, that’s a big down payment and a short mortgage term. I’ve being doing some research here trying to figure out what percentage of down payment i’ll need to save up to make my first commercial RE purchase and the length of term, etc.. and the word around seems to be 20% down and a 10 year term.
I wonder if it varies with the price range or location?
@ Diane – proforma = financial statements for the property in question; the reason why they are often called ‘proformas’ is because sellers often quote estimated rents and costs rather than actuals (obviously, they inflate the former and under-estimate the latter to encourage the sale) …. always produce your own figures and check all receipts etc. during ‘due diligence’.
@ Scott – I won’t know what to expect in the USA until my offer is accepted and actually go for financing, but the range can be abywhere from 20% to 40% depending upon the type of property, the borrower, and the lender’s practices … so, it usually pays to shop around. The length of the loan matters less to me than how long I can fix (or balloon) the rate.
Great, can’t wait to see ho wall this plays out.
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