Thinking of investing in commercial rental property, I've never even bought my own house before!?

Question

I've found a rental property with 2, 3 bedroom apartments and a storefront...if i could pay for it in cash, 115,000.

So if i made 1500. a month in rent, assuming I could rent it all out and had to pay 8000 in taxes, 1800. in insurance, property management...and I don't know what other bills there would be....would it be a good investment? and who should i ask for advice?

Thanks for any suggestions!

Answer 1

That depends on:

1. How good your assumptions are versus real operating results

2. Your investment goals and objectives.

Start with #1.  Without being able to verify or challenge the numbers you supplied, let's look at "what other bills there would be".  First, are all 4 units currently rented, or would you need to incur marketing costs?  There's very few properties that are 100% leased to tenants that pay 100% on time 100% of the time.  

As I read it, you are projecting annual cash flow of 8,200.  If you average 10% vacancy a year, that drops to 6200.  Does your property management number simply include maintenance, or does it include normal repairs to the property?  While your storefront lease could typically require the tenant to pay their share of taxes, repairs, and maintenance, the apartments wouldn't.  What about utilities?  Same question.  In addition to normal repairs, are you going to set aside any funds for major replacements, like when a refrigerator, air conditioner, furnace, or roof needs replacement?  What happens when taxes or insurance goes up next year faster than rent?  You may want to consult with commercial property managers or appraisers in your area to help you fine tune your budget.

If you achieve the 8200 every year, you're looking at a 7% return on your 115,000 investment before tax.  With the benefit of depreciation sheltering at least some of that income, the return could be higher.  At 6200 it's 5%.  Is this return worth the risk and work you will put into this investment or are you better off buying a certificate of deposit and sleeping at night?  Perhaps a more important question is why are you attracted to this investment in the first place?  How does it align with your investing goals and objectives?

Don't get me wrong, real estate can be very rewarding and many of us have made a great living at it.  But it's not a good investment for passive investors, those who don't like to take risk, and certainly not for those who don't have the ability to put in more cash when the rent isn't coming in and the insurance or tax bill is due, or when the furnace goes out in the middle of winter.  If this 115,000 is essentially your life savings, think hard and think twice.  Real estate deals often look bigger coming than going.