Our clients had recently liquidated some properties and were looking for a place to put their capital. We originally looked for multifamily properties, but with the inventory so low, good deals were hard to find. An opportunity for an off-market office building came up, and my clients decided to expand their horizons and move into the commercial world.
New Format for Deal Analyses
This deal analysis is part of a new series we’re launching on YouTube called Drinks and Deep Dives with Chris Lopez. In it we cover
- Networking and learning with local experts
- Market updates
- Deal analyses
You can find the podcast for this market update within that podcast episode called New Show! Drinks and Deep Dives: Market Update, Multi Family and Office Deal Analyses. Tune in Wednesdays at noon MT to join me live for the next one.
- Listen to the podcast “New Show! Drinks and Deep Dives: Market Update, Multi Family and Office Deal Analyses” on the Colorado Springs Real Estate Investing Podcast
- Watch the YouTube video (at the bottom.)
- Read the blog post. Note, the blog is an executive summary. Get the in-depth breakdown from the podcast or video.
Investment Property Details
This is an eight unit commercial office building located in Colorado Springs.
Appealing Features of the Property
The building is in a great location and is well-maintained. Every unit has its own exterior entrance and is separately metered, which cuts down on a lot of maintenance issues. There are already long-term tenants in place in every unit.
Property Contract Details
Overall, the inspection went really well. There were a few minor plumbing issues, but they were easy to fix since the building has a crawlspace that runs under every unit and provides easy access to the plumbing. There were a couple of older air conditioning and heating units that will eventually need to be replaced, and we were able to negotiate a $10K seller credit to go towards their replacement. In all, I expect our clients will need to pay around $5K in repairs.
A few of the leases were set to term out, and part of the negotiations included making sure the leases were extended. Both my clients and the lender felt more comfortable knowing that all of the tenants were in place.
Property Financing Details
Plan v Reality
In the current Colorado Springs market, commercial rents are generally between $12-$14 per square foot. In this building, most of the units are going for $12.75-$13.50 per square foot. These rates are a little below market value, but this is typical for long term tenants since the owner wants to keep them in place.
There’s a good mix of tenants: medical offices, real estate, insurance brokers, and a telecom company. The tenants have done a lot of improvements to their units over the years to make them work for their businesses. This provides good tenant security, since they will be less likely to move if they know they’ll have to build out an office suite in a new building.
In current market conditions, the lowest down payment for a commercial property is around 35%. Since my clients had extra cash, they decided it made sense for them to put down $35%. Their interest rate was good for the market: 3.75%, 30 year term with 7 years fixed and then a floating Adjustable Rate Mortgage (ARM).
Property Operating Expenses
All units are metered separately and tenants are billed back for their utilities. For the buyer, there are essentially no utilities outside of trash and landscaping/snow removal.
First Year Returns
Exit Strategy/ Long Term Plan
It’s hard to find deals this strong in the multifamily space in the current market, so it made sense for my clients to make the jump into commercial real estate with this property. At the end of the day, they are real estate investors, so they are going to hold onto this property for a few years and reevaluate at that time.
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