Rental Property 17 has been Purchased

InvestFourMore Real-Time Stats (as of 9/21/17)
17 flips currently in progress. 134 flips completed. 16 rentals properties.
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Today, after close to 2 years since the last one, I bought another rental property! This property is nothing like my other rentals and may not count as a rental to many of you, but it does to me. The property is a small commercial shop that I can use for storing building supplies and other miscellaneous items I am using for my flipping business. Even though I am not renting out the property, I can have my company pay me rent for using the property. I am also looking at buying some much larger commercial properties. If I buy another property, I would most likely rent this property out to someone else. I also sold two of my rental properties last year, but since I numbered my rentals 1 through 16, I thought I would call this property number 17, even though I do not own 17 rentals.

How did I find this property and what did I pay for it?

commercial shopI have been looking to buy commercial property for quite some time. The problem is there are very few commercial properties available with shop and storage space. I ran out of space in my garage for my cars and have no room for building supplies. Since we flip anywhere from 10 to 20 houses at one time, we often buy materials in bulk from Home Depot to get a better deal. When we buy in bulk, we need somewhere to put everything! I have two large storage units where we store most of our supplies in, but those are mostly full…and expensive.

I have been looking at very large commercial properties, but a friend of mine asked me to help him sell this smaller unit. I told him I might be interested in buying it, and we worked out a deal where he did not have to pay any real estate commissions. As a result, I got a good price. The unit is close to 1,000 square feet, with heat, electric, water, and a small bathroom. There is an HOA that maintains the exterior of the property and pays for water and trash. I bought the property for $72,500, which I think is a decent deal. It is tough to value a property like this because there are literally no similar properties for sale in the entire town.

Commercial versus residential real estate.

What will this property rent for, and will it make a good rental?

The property was rented out for $650 per month before I bought it. I think it may have been slightly under rented, and it would rent for $700 to $800 a month if I were to try to rent it now. The nice thing about commercial properties is that I do not have the expenses I would have on a residential unit, and there is very little maintenance. If I were to rent a house, I would need to make sure it was in good shape with nice paint, carpet, bathrooms, and kitchens. When you are renting commercial shop space, you need to make sure the place is secure and clean. The HOA maintains the exterior so I do not have to worry about maintaining yards, paint, the parking lot, or the roof. If the tenant stops paying rent, I can lock them out and take their stuff. I do not have to go through an eviction like I would with a residential rental.

One of the downsides to commercial properties is the loans are different from residential. While I can get a 30-year loan from my portfolio lender on my residential properties, I could only get a 15-year loan on this property. My payment will be much higher than on my other properties, but it was tough to find a lender who would do a commercial loan for such a small amount. My payment is about $395 a month without taxes and insurance. Insurance was tougher to get on this property as well because I am only insuring the inside of the property, and most insurance companies did not want anything to do with it. My insurance is about $1,000 a year, but I am insuring some of the items I am storing in the unit. My taxes are $990 per year. If I were to rent out this unit, I could get the tenant to pay the taxes and the insurance depending on the type of lease. I recommend giving One Sure Insurance a try, in my experience it has fulfilled my expectations quite a bit.

Here is what the cash flow looks like:

  • Principle and Interest: $395
  • Monthly Taxes: $82.50
  • Monthly Insurance: $83
  • Maintenance Costs: $50
  • Vacancy Costs: $50
  • HOA: $57

This gives me a total monthly cash flow of $32.50.

Update: I just found insurance that costs only $336 per year

Based on how I would normally figure a residential unit cash flow, I would not make much money at all if I were to rent it out. However, with this property, I could ask the tenant to pay taxes, insurance, and even maintenance costs, and still rent it out for close to $750 per month. That would increase my cash flow to $250 per month. I am also using a 15 year loan, which decreases my cash flow by $127 each month compared to a 30-year loan.

These numbers came from my rental property cash flow calculator.

How can I make this a better rental property?

commercial shop interiorThis unit has extremely tall ceilings, but you can’t really use that space. My plan to is to build a 2nd story in the unit for extra storage. This would give me more space, and if I were to rent it out, it adds square footage, resulting in more money. If the total square footage was 1,300 instead of 900, it would rent for $900 to $1,000 a month (this is assuming a lower rental rate since part of the square footage would be 2nd-floor storage).

By making some improvements, and because of the way commercial leases work, I would make close to as much as I make on my residential units.

How to buy real estate below market value.

What are my future plans with rental properties?

I still have my plan to purchase 100 rental properties, but I have had to change it frequently over the years. I did not expect the median prices in my market to jump from $110,000 to over $260,000 in a few years. The price increases have been great for the properties I own, but I cannot find rentals that cash flow anymore because rents have not kept up with prices. I looked at Florida for rentals and found some great markets, but I decided not to pull the trigger there since I have been super busy with flipping and have commercial-property opportunities in Colorado.

Besides this property, I have two other commercial properties under contract. I have had a commercial property under contract for months that has been delayed by IRS tax liens. The property is under contract for $110,000, has over 3,000 square feet, and can be used for retail or storage. The other property is a little bigger and a little more expensive. I am not quite ready to talk about that one yet since it is a huge project, and I have a long way to go before I get everything put together on it. I will have more information on that property soon.

Conclusion

This is not the typical rental property I have bought in the past, but I think it is a good investment. I need the space for building supplies, and I am tired of paying for storage-unit fees. I also need the space for one or two of my cars since my garage at home is full! I also think I got a decent price on this unit and could rent it out for a profit even with the 15 year mortgage in place. There is even opportunity to add value by adding a second story. Hopefully, I will buy some much more lucrative properties later in the year that will be much more exciting to talk about!

porsche 928 snow

My Porsche in the snow because I have no room.

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6 Comments

  1. Chad Carson May 10, 2017
    • Mark Ferguson May 11, 2017
  2. Steffi May 2, 2017
    • Mark Ferguson May 2, 2017
  3. Nabeel Haider May 1, 2017
    • Mark Ferguson May 2, 2017

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