My First Commercial Investment: 6 Unit Industrial Warehouse Analysis

In today's challenging real estate market, investors are always on the prowl for an investment property with positive cashflow, upside potential and/or value add: myself included. My investing experience has been primarily in the residential space, so dabbling into commercial properties was a bit daunting. Thankfully, I found a great team of like-minded investors that found an undervalued industrial warehouse building with below market rents. After the acquisition earlier this year, we raised each units' rents from $0.79/sq. ft. to around $1.05 - $1.25 /sq. ft. per unit, which increased our annual net operating income.

With residential properties, the value of the property is determined based on sales comparisons near the subject home (sales approach). However, for commercial properties-- the value of the property is based on the income that it generates (income approach). For investors, we use a market 'Capitalization Rate' (Cap Rate) and divide that number by the commercial property's 'Net Operating Income' (NOI) to get the market value.

Deal Analysis:

Acquisition price - $1,125,000

Down payment - 30%

First loan - 70%

Price per unit - $187,500

NOI at purchase - $59,830

Purchase Cap Rate - 5.31%

Market Cap Rate - 4.58%

After Acquisition:

Improved NOI - $73,611

Market Cap Rate - 4.58%

New Appraised Value - $1,607,227

When a lender evaluates a commercial deal, it wants to make sure you are able to cover your debt service (a.k.a. loan payment). Lenders use a ratio called the 'Debt Service Coverage Ratio' (DSCR) to ensure that borrowers are able to cover their debt service. Most lenders want this number to be higher than 1.25. Our DSCR was 1.46 in the above mentioned deal.

Special shout out to our general partners: Aaron, Geoff, and Jim for finding this deal. Looking forward to the next one!