ROI on Commercial Real Estate

[ferrarispider95]

Since chiefsplanet is the #1 information resource for anything including health, banking, and real estate...I thought would pose this question. :)


When buying commercial property that will be rented what is the rule of thumb on how many years it will take to pay itself off.

I am looking at buying another building for $75k, it has 3 renters that pay $1000 a month (total rent for 3) and large garage area that I going to use for my storage.

Is this a good investment?

[el borracho]

You need to consider how much of your money you have to put in to acquire the property and contrast that with how much cash the property will generate each month. You also should estimate (based on current appreciation rates) how much you can expect your property value to increase and how soon until you can get your money back out of the property to invest in another property (or whatever).

Some exaggerated examples to clarify:

If you put $1 down to acquire the property and it generates $600/ month you have an excellent ROI.

If you put $15,000 down to acuire the property and it generates only $100/ month your ROI is not nearly as good unless you can reasonably expect the property to increase quickly in value (if the property is in an area with a phenomenal appreciation rate) and you expect to sell the property in the near future.

[HMc]

I wouldn't call 16% an awesome ROI, unless the property value is going to rise nicely.

[Phobia]

You also have to consider what that storage is worth to you. If you didn't have it, would you be paying something out of your pocket to store shit elsewhere?

[Fat Elvis]

A lot of it depends the location of the property, the condition it is in (does it need a lot of work?), and the stability of the tenants. Is it a property that could easily be resold?

[Iowanian]

What condition is the building in? What repairs will it need now? In 5/10 years? How is it zoned? Is the area declining or being built up? Does your building suit the needs of ancillary business to a major business in the area(more important in industrial zoning). Is the location a desired destination for cusomers?

In short..Is it going to cost you more money in the near future, if so will you be able to up the rent, do the renters have long term leases? Is the area declining at putting you at risk for an empty building?

[MahiMike]

$1000/mo on $75K sounds pretty good. I have rental houses and the old rule of thumb was 1% ($75K = $750/mo). With Real estate skyrocketing, it's more like 1.5% ($150K = $1000/mo).

Of course like someone else already said, you don't want to plunk down $75K - just 20% of it. Financing $60K at 7% for 20 years comes to $465/mo less taxes and insurance. Figuring $200 for this comes to $665/mo leaving you with $350/mo net.

Another rule of thumb for me is I need to net $200/mo or more. Throw in your storage area (which I also do with my places for my boat, junk, etc) and it looks like a sweet deal!

Good luck.

[Fat Elvis]

Just out of curiousity, where do you find commercial real estate for sale?

[SBK]

Just out of curiousity, where do you find commercial real estate for sale?

www.loopnet.com (http://www.loopnet.com)

[SBK]

Since chiefsplanet is the #1 information resource for anything including health, banking, and real estate...I thought would pose this question. :)


When buying commercial property that will be rented what is the rule of thumb on how many years it will take to pay itself off.

I am looking at buying another building for $75k, it has 3 renters that pay $1000 a month (total rent for 3) and large garage area that I going to use for my storage.

Is this a good investment?

What about deferred maintenance, taxes, operation/management expenses, insurance? What tax benefits will you receive on depreciation, interest? All crap you have to know to make a sound decision, and without any of that, none of our advice matters really.

For me to by commercial, I want a 30% cash on cash return, with prices so high it takes me quite a long time to find something worth buying. Most crap is going for like 2-5% cash on cash return, which sucks.

[ferrarispider95]

It is a downtown commercial area, in a smaller town with aprx. 22k - 25k population. Renters have been long term for atleast 7+ years.

It looks like it would essentially pay for itself. It is about 5000 sqft and about 2500sq ft would be my storage space. It would be nice to have somewhere to store my boat and vette. We had planned on building a 40 x 60 ft metal building on my land, but this might be a better deal.

I am having my dad take a look at the structure of it next week and will go from there.

Thanks for advice,

[Skip Towne]

I, too, have used the 1% rule in the past. I wish I had done more commercial real estate when I was young. Iowanian checks the same sort of things I do particularly the physical condition of the property and the liklihood the property will stay rentable for at least 10 years. Do a cheap one (like the $75,000 one you found) and run it for a year. Then do another cheap one ($100,000 or less). After running these two successfully for two years it will get so you can just call the banker and tell him you've found another one and all you'll have to do is go in to sign the papers. As you get bigger, you can buy more expensive properties. The trick to getting started is finding good, sound cheap properties and you've already done that. I would look at duplexes as well. It's hard to go wrong with a duplex that is in good shape..

[Amnorix]

Jeesus... Everytime you guys talk about real estate I just shake my head.

General rule of thumb around here for investment property for residential real estate is $100K per Unit. So in other words, generally a triple decker would be a very good buy at $300K.

Rental rates are higher too, of course, but ...

$75K wouldn't buy a fugging doghouse around here... :shake: