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REAL ESTATE Way into the future... owner oc commercial

hawaiiloans

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Oct 6, 2007
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Finally decided to jump in and post. I usually lurk a lot of forums but I really enjoy this forum.

I have a question regarding owner occupied commercial property. Would this be a great idea, or something I should avoid doing?

This is way into the future, but I was wondering, once I have enough money for a down payment for an apartment building, should I move out into a unit, and use the other units to break even, or possibly cashflow? Should I be leveraged as much as possible? I'm still living at home and I decided if I'm going to move out I'm only going to rent for a year, and then look into multifamilies. As a mortgage broker I know commercial property is more based on the property then your personal financials.

I appreciate all feedback. :banana::banana::banana:
 

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MJ DeMarco

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AJGlobal owns a building and I think its split into 3 build outs. He rents two spaces to commercial tenants and the other to his own business. Its a great arrangement and highly recommended as you build equity in your own building.

This is similar to owning a du-plex, living in one side, and renting the other.
 

Adam

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Aug 12, 2007
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You can look at it from a number of different angles...

If you are buying a multi-fam building to live in, yes, it can be a great way to keep your personal expenses down while building a portfolio. The number one reason people DON'T get into RE is because their personal expenses are too high and buying a building would expose them to too much risk. If you can keep your personal expenses low AND are willing to live in the building, you can easily solve this problem.

Unlike residential or multi-fam, in the commercial world, "owner-occupied" doesn't mean that the owner lives there, but occupies the space for their business. This can get tricky. I know of many companies that have sunk because they choose to own thier own space before they were ready. The high overhead and the long-term commitment can kill a growing business. Owning RE for your business is a great way to increase your financial position on paper, but it can expose you to unneeded liability as well.

Look at it this way, if your business is about to fail and you could simply increase your monthly cash position by moving out of a space that is too large, is it easier to break a lease or walk away from a mortgage? Ideally, you shouldn't do either, but the immediate reprocussions of walking away from your mortgage are much more severe.

In AJGlobal's case, he is probably in a position that he can afford to take on the risk and his company has historical cash-flow. If his company was still in its growth stages, it would probably not make sense to buy.

Owner-occupied real estate is tough because, for MOST companies, it doesn't make sense to invest in real estate when the return can be greater by investing in the company itself. Look at Best Buy, Walgreens, CVS, Target, Macy's, etc... They all rent. Why? Because single tenant property is tough to get rid of once you are done with it. Many times, when Target moves out of a space, they simply don't want to deal with the hassel of an empty building. Imagine how financially stressful this would be as a small business owner. Most of these types of buildings are owned by large management companies that have relationships with many "credit tenants."

Investing in real estate is great, but you have to a have full understanding of why you are doing it. Some properties create net-worth, others create monthly cash-flow and others simply provide for the needs of a business and may be nothing more than a liability. In an owner-occupied situation, it all depends on the CURRENT needs and FUTURE goals of an organization that will determine whether it makes sense to buy or lease.
 
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hawaiiloans

hawaiiloans

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It's a great thing I got into wealth building early in life. I"m still young and live at home, so my expenses are very low. I purposely kept them low because I wanted to save up for a property.

I really like multi's, so I was looking to purchase a 10+ unit and rent out the rest of the units, while occupying one. I figure the down payment would be what I would pay for a decent condo so I might as well use it for more property. While I build up equity, I could sell it down the road, or maximize rental income and use it to fund more real estate.

Now the only problem is coming up with some money, as well as finding a deal. I don't know how different the market is out in Hawaii but I'll keep my eyes open.

My goal is to buy and hold, and avoid selling unless needed. I figure my first building will be sold to create a bigger down payment for another property in the future.
 

Yankees338

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Jul 24, 2007
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Good question here. I think it depends on the size of the building. If you're first getting started and just trying to get into a home of your own, I think it'd be a great idea to purchase a smaller multifamily (2-4 units) and occupy one of the units yourself while renting out the others. That would enable you to qualify for a loan for a personal residence and get the benefit of the lower interest rate.

However, it sounds like you're talking about something that would be financed commercially and contain more units. In this case, I would recommend running the numbers for the specific property. Consider both sides of it. If you choose to occupy a unit, I don't think it'd get you a better interest rate with a commercial property, but I'm definitely not the person to ask about that. Something you should also consider, though, is that if you do choose to live on-site, you could be frequently bothered with tenants' problems. This may become a bit of a nuisance. On the other hand, it would also make management easier and enable you to better oversee the site.

If you're just considering the financials of it, the main thing I would do would be to figure out what type of unit you would need if you rented, and what type you would be living in at your own property. Consider what you'd be paying somebody else if you rented their apartment as opposed to how much you're losing out on by not having that extra unit of your own to rent. If the amount you'd be paying for a rental is less than what you could get for a property of your own and the management issues aren't of much concern to you, then I think it'd make the most sense to rent a separate property. There are also the advantages of living in a rented space that you own.

Just some things to consider. +++ Speed for the good thread. No more parking for you!
 

AJGlobal

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Aug 14, 2007
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Finally decided to jump in and post. I usually lurk a lot of forums but I really enjoy this forum.

I have a question regarding owner occupied commercial property. Would this be a great idea, or something I should avoid doing?

This is way into the future, but I was wondering, once I have enough money for a down payment for an apartment building, should I move out into a unit, and use the other units to break even, or possibly cashflow? Should I be leveraged as much as possible? I'm still living at home and I decided if I'm going to move out I'm only going to rent for a year, and then look into multifamilies. As a mortgage broker I know commercial property is more based on the property then your personal financials.

I appreciate all feedback. :banana::banana::banana:
Mike is correct but I split mine in half and rent out the other half. I have a 5000 Sq. ft. Industrial condo suite that I bought as a shell 3 1/2 years ago. I built it out to my specs and I have had the luxury of having someone pay for half of my investment the entire time I've been in there while running my business out of the other half.

Adam is also correct in that if I had to, my bussiness could sustain making the enitre payment on the building should the half I rent out become vacant. The way things are going up here where I am its getting pretty expensive to buy empty wherehouse shells so rentals are doing well. My tenants lease is up in April. I'd like to actually sell him the building, move out, grab half my equity and put it in my pocket and then do the same thing over again with the other half of my equity on another building.
 
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hawaiiloans

hawaiiloans

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Oct 6, 2007
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Good question here. I think it depends on the size of the building. If you're first getting started and just trying to get into a home of your own, I think it'd be a great idea to purchase a smaller multifamily (2-4 units) and occupy one of the units yourself while renting out the others. That would enable you to qualify for a loan for a personal residence and get the benefit of the lower interest rate.

However, it sounds like you're talking about something that would be financed commercially and contain more units. In this case, I would recommend running the numbers for the specific property. Consider both sides of it. If you choose to occupy a unit, I don't think it'd get you a better interest rate with a commercial property, but I'm definitely not the person to ask about that. Something you should also consider, though, is that if you do choose to live on-site, you could be frequently bothered with tenants' problems. This may become a bit of a nuisance. On the other hand, it would also make management easier and enable you to better oversee the site.

If you're just considering the financials of it, the main thing I would do would be to figure out what type of unit you would need if you rented, and what type you would be living in at your own property. Consider what you'd be paying somebody else if you rented their apartment as opposed to how much you're losing out on by not having that extra unit of your own to rent. If the amount you'd be paying for a rental is less than what you could get for a property of your own and the management issues aren't of much concern to you, then I think it'd make the most sense to rent a separate property. There are also the advantages of living in a rented space that you own.

Just some things to consider. +++ Speed for the good thread. No more parking for you!
I was thinking of multi's but the qualification lies more on the personal borrower then the property itself. No love for loan officers trying to buy houses. :tdown:

I'll put up a potential deal and I'll break down the numbers to see what would make sense. I'm thinking if I can buy a 10 unit and rent out 9, with vacancy, expenses, and debt coverage I'll have enough cashflow to cover 1 unit with 100% vacancy (which would be my unit). If I break even or pay a couple hundred a month I'll still have the benefit of living in it.

I thought of this idea because residential would be a liability with 1 unit, and for real estate it's always a good idea to think outside the box. Or more like outside our comfort zones.

The only problem however is the down payment. I could partner up with somebody who can front the down payment in exchange for future equity or earnings, but I have no idea how to put that plan together.
 
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hawaiiloans

hawaiiloans

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Oct 6, 2007
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Bear with me on this post. I've never analyzed commercial property before. Feel free to correct me if I sound like an idiot, but don't be too harsh :smx4:

I've searched for a suitable building on Loopnet. I was looking for a 10 unit, and under $2m. I came across this property:

http://www.loopnet.com/xNet/MainSite/Listing/Profile/Profile.aspx?LID=15273393&StepID=101&RecentlyViewed=true&ItemIndex=8&PgCxtDir=Down

Assuming all the numbers are correct for the sake of this post, lets say the prices are:

Asking: $1.78m
Gross income: $128,400
Maintenance: $35,950 (subtracted the two numbers, not actual amount)
NOI: $92,450

I wanted this to be a 10 unit so I can just take out 10% profits for my unit, but anyway: With a 14.29% vacancy, which is not much considering I haven't made any vacany reserves for the other 6 units. That leaves out a $13,211.11 profit for the unit, bringing down our NOI to $79,238.89.

From here I can see this property is overpriced. I only have about $80k to cover the mortgage, which at 80%LTV @ 8.25% interest, 25yr ammortization will be $11,227.53/mo, and that's not including taxes and insurance. The monthly income will be $6,603.24, which means I'll be paying $4,624.29 to occupy this building.

Would the solution be to lower the price on the building? What else can I do to make a profit, or even just be $500/mo in the hole (it's what I'd pay to live at the building), aside from putting more money down then 20%? As you may know by my username I'm in Hawaii so prices are a bit crazy, but with any deal numbers are scaled.

My short term plans are to occupy this building, providing a place to live, also favorable rates from the bank, and provide a break even balance sheet for 5 years.

I have no plans of selling the property. I'd like to use it to generate a monthly income, and eventually be as hands off as possible. If favorable rates and terms come into play I will refinance, but never cash out due to a higher mortgage balance unless I find other properties worth putting money into.
 

Yankees338

Bronze Contributor
Jul 24, 2007
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Bear with me on this post. I've never analyzed commercial property before. Feel free to correct me if I sound like an idiot, but don't be too harsh :smx4:

I've searched for a suitable building on Loopnet. I was looking for a 10 unit, and under $2m. I came across this property:

http://www.loopnet.com/xNet/MainSite/Listing/Profile/Profile.aspx?LID=15273393&StepID=101&RecentlyViewed=true&ItemIndex=8&PgCxtDir=Down

Assuming all the numbers are correct for the sake of this post, lets say the prices are:

Asking: $1.78m
Gross income: $128,400
Maintenance: $35,950 (subtracted the two numbers, not actual amount)
NOI: $92,450

I wanted this to be a 10 unit so I can just take out 10% profits for my unit, but anyway: With a 14.29% vacancy, which is not much considering I haven't made any vacany reserves for the other 6 units. That leaves out a $13,211.11 profit for the unit, bringing down our NOI to $79,238.89.

From here I can see this property is overpriced. I only have about $80k to cover the mortgage, which at 80%LTV @ 8.25% interest, 25yr ammortization will be $11,227.53/mo, and that's not including taxes and insurance. The monthly income will be $6,603.24, which means I'll be paying $4,624.29 to occupy this building.

Would the solution be to lower the price on the building? What else can I do to make a profit, or even just be $500/mo in the hole (it's what I'd pay to live at the building), aside from putting more money down then 20%? As you may know by my username I'm in Hawaii so prices are a bit crazy, but with any deal numbers are scaled.

My short term plans are to occupy this building, providing a place to live, also favorable rates from the bank, and provide a break even balance sheet for 5 years.

I have no plans of selling the property. I'd like to use it to generate a monthly income, and eventually be as hands off as possible. If favorable rates and terms come into play I will refinance, but never cash out due to a higher mortgage balance unless I find other properties worth putting money into.
First of all, congrats on taking action...well done!

Onto the deal itself:
  • Even if you don't plan to have someone manage this for you, many investors recommend that you factor in the costs in case you decide to move away or decide to become hands-off.
  • If you're serious about this property, you'll want to get a proforma or another in-depth breakdown of financials to match them up with numbers that seem accurate.
  • I don't know much about your market, but most people advise against properties where you don't cashflow. An investment should be making you money, not losing.
I assume you've shopped around. How does this deal compare to others you've seen?

Good luck! Keep us posted.
 
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hawaiiloans

hawaiiloans

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Read Millionaire Fastlane
Oct 6, 2007
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Crap I hate writing a long entry and then accidently clicking back into another page....

This is only one building I've done an analysis on, and just wanted to see what the numbers will be like.

How much would management cost? Would this be a fixed rate, or a % of rent?

The numbers on this particular property weren't too great, they only had the NOI and expenses (which are probably cooked up a bit). I've read some RE forums and people say to use 40-50% of your gross income.

I don't hear of too many people buying cashflowing property in Hawaii. The only way to stretch the cash for this property is to offer a lower price.

Another question: Let's say I've put together a very great deal. How do I propose it to investors, and how would the partnership work? Would I share a part of the equity, or put together an I/O payment for a term of X years? What would be considered a "great" deal? I appreciate all your help.
 

Yankees338

Bronze Contributor
Jul 24, 2007
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Crap I hate writing a long entry and then accidently clicking back into another page....

This is only one building I've done an analysis on, and just wanted to see what the numbers will be like.

How much would management cost? Would this be a fixed rate, or a % of rent?

The numbers on this particular property weren't too great, they only had the NOI and expenses (which are probably cooked up a bit). I've read some RE forums and people say to use 40-50% of your gross income.

I don't hear of too many people buying cashflowing property in Hawaii. The only way to stretch the cash for this property is to offer a lower price.

Another question: Let's say I've put together a very great deal. How do I propose it to investors, and how would the partnership work? Would I share a part of the equity, or put together an I/O payment for a term of X years? What would be considered a "great" deal? I appreciate all your help.
Unfortunately, the only question I may be able to help with is the bolded one above...about 8-10% of rents COLLECTED seem to be around average for management from what I've heard.
 

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