evaluating a prospective real estate investment

[invest]

Hi, I am thinking of investing as a minority (15%) owner in a commercial real estate property. There is already a tenant who has signed a 10 year lease, and we are expecting to make back our principal in approximately 10 years. It is not a triple-net lease. I am comfortable with my prospective real estate partners, the legal terms of the partnership and the actual property. Is this a good investment?

investment: $100K cash
net income: $823/month (net of maintenance, taxes and insurance) with 2%/year increase

[Kamban]

The details you have provided are a bit incomplete.

What is purchase price of the property? Is there a bank loan? variable or fixed rate. What is the non bank percentage of the total loan? Is the $100K investment of all partners or yours and does it mean property is worth $660,000?

Without knowing details one cannot provide any advice on whether it is good or bad.

[invest]

Purchase price is approximately $700K, and I would contribute $100K. No bank loan.

[Kamban]

Maybe I am reading it wrong but on an investment of $700K you are getting only $823 in month post tax and insurance? Are you expecting the property values to soar? Or did you mean $8230 per month rent? or is your 15% getting you $823 per month?

 

If it is the latter then in 10 years you will recoup your original investment but have you got an idea how much the property will be valued then and what major repairs it might need.

[invest]

On my investment of $100K (15% of the total property value), I would be receiving net income of $823/month (post tax and insurance).

 

No major repairs forecasted. I don't know how the property will be valued in 10 years.

[jfoxcpacfp]

invest wrote:

Hi, I am thinking of investing as a minority (15%) owner in a commercial real estate property. There is already a tenant who has signed a 10 year lease, and we are expecting to make back our principal in approximately 10 years. It is not a triple-net lease. I am comfortable with my prospective real estate partners, the legal terms of the partnership and the actual property. Is this a good investment?

investment: $100K cash
net income: $823/month (net of maintenance, taxes and insurance) with 2%/year increase

Click to expand...

It depends upon the terms of the agreement. Based on the above facts, you are cash-flowing around 10%/year if the property stays fully occupied, but you don't have that guarantee. You also have no guarantee on the cost of maintenance. Is the property situated in an area where RE prices are set to grow? That will add to your eventual ROI when you sell it. How will you handle any repairs on the property? What if you want to sell your share? What about other costs (administrative & legal for example)?

[Craigy]

$823 net of expenses is a 9-10% return.  Not bad.  However you're taking on a lot of risk.

If it was a triple net lease then it would mitigate some of the risk.

Can you afford to have the tenant go out of business?

Other than return, be sure you are comfortable with the deal, and hire an attorney to review all paperwork.  As a minority owner, you'll likely be along for the ride and powerless if you want to make any changes in the future, or even to get out and get your money back.

[invest]

Thanks for your replies. Since the tenant (which is the medical practice at which I am an independent contractor) has signed a 10 year lease, I am confident in the income from the property over the next 10 years. After that, we'll either sell it, or renew the lease to the practice. I've pretty much made up my decision to buy in.

Now I am trying to figure out the best way to buy in.  I am in the 33% tax bracket and am mid-career. I have a self-directed Roth IRA and a solo 401k at Fidelity. Can I use the money in these accounts for the real estate purchase, and have the rental income go to those accounts?

[jfoxcpacfp]

invest wrote:

Now I am trying to figure out the best way to buy in.  I am in the 33% tax bracket and am mid-career. I have a self-directed Roth IRA and a solo 401k at Fidelity. Can I use the money in these accounts for the real estate purchase, and have the rental income go to those accounts?

Click to expand...

Possibly, but you need to talk to your custodian about the details. Actually, I would be afraid of this one since this could be construed as renting from yourself (called "self dealing"). If found to be doing this, you would blow the tax-protected status of the account (all of it, not just the building).

[invest]

Thanks for all your responses. I've learned a bit more about self-directed IRA's and will be starting a new thread to ask for advice on that specific issue.