Update - Purchasing My First Mixed-Use Property

Update - Purchasing My First Mixed-Use Property

This is the second post in my series about the purchase of my new 5-unit mixed-use property. If you missed the first part, check it out on my August Investing Update.

I'm really excited to get my first commercial space - It's 4 units residential and 1 unit commercial.

But, not a whole lot has happened since my last update, but I'll go into a bit more detail on some things.

Purchasing My First Mixed-Use Property

So I mentioned before that I thought the property would appraise for a minimum of $140,000. It's a little hard to peg down what an appraiser will estimate for a small property because they may use cap-rates, comparable sales, or a combination of both. The reality is that other 5 unit properties in the area are easily selling for $200-250. Just a few miles away they are easily selling over 300k.

But I believe the rent income is amazingly low for this property, leading to a low value. So...I'm not that worried about whatever the price is, once I stabilize the property, it'll be worth a lot more. 

Let's take a step back and look at how I found the property.

Finding my mixed-use property

Finding the deal actually wasn't that hard - it was sitting under my nose the whole time. I originally looked past this one when screening because of the particular street it's on. I basically never buy property on main street, and this one is on main street.

But someone pointed it out to me and said I need to look at it, so I took another look and noticed it's on "North Main st." which is an offshoot near the center of town, but without all the traffic.

So the key takeaway is that once you make a pass through an area and come up with nothing, it's ok to broaden your criteria to look at more deals.

The purpose of screening is to reduce the work-load. You don't have time to look at 100 properties, but screening can turn that to 10 properties to look at. If you look at all 10, it's ok to broaden that criteria and look at the next 10.

Negotiating a deal on mixed-use property

It was listed at $160,000. At this price and what I think it will be worth, it's already a great deal. I also estimated that it needed $10,000 of work.

In order to get it for 150, I offered 140k figuring I could split the difference during negotiations.

Well, I was surprised when they accepted my offer as written.

It was a weird feeling having my offer accepted with no counter-offer. On one hand it made me happy to get the place for less than what I planned. On the other hand, I wished I had started lower!

Either way, it made me wonder if there are some hidden problems. 

Time for the home Inspection

So I did an unconventional home-inspection. Most home inspections are pretty useless, so I brought in my plumber, my electrician, and myself (I'm a licensed construction supervisor). There are always things to repair, so most of the issues weren't a big deal...except one thing:

There was around $10,000 in work required that I didn't anticipate!

Basically, the property needs its electrical service upgraded to a much higher amperage (not a big deal), and one panel was located inside the bathroom and needed to be moved. Since it needs to be moved more than 6', it triggers a requirement to have all arc-fault breakers installed. Since the wiring is too old to work with the new breakers, one entire apartment needs to be rewired. Since I needed to rewire the apartment, it makes sense to renovate it at the same time.

So, being conservative, I added $15k to my expenses to arrive at 25k.

So going back to my original goal to get the property for $160k after all work was done, I originally wanted to get it for 150 + 10 in renovations. Now I needed to get it for about $135 + 25 to get to 160. My new goal was to negotiate off another $5k.

So I went back to renegotiate after the inspection and asked for $12k off due to the major changes. They came back and said they'd go for $8,000 but I'd be responsible for smoke certificates (probably around $1500 for that if you did it as a standalone project, but I was already going to do so much electrical work that it easily fits in to my budget).

I agreed to the new price of $132,000, giving me room for $28,000 in renovations. I still expect the property to be worth over $250k, so I'll still add a conservative 100k to my net-worth as well as rent income.

What's next for this investment...

Well, right now it's just a waiting game since the bank is dragging its feet. It's the second or third time now they have been slow getting some things processed, and they don't seem to be on top of things like they used to. It's actually getting to the point that I'm considering finding some more banks to work with.

If everything goes smoothly, I'll close in early September.

Written by Eric Bowlin
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