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 …