I want to invest in Commercial real estate, but no one else thinks I should. I feel this is an opportunity, but everyone else thinks I am a sucker.
Wall of text: I like to think I've had a knack for spotting trends before they are fully blown up. I've managed to make myself comfortable through my own business. I am not rich, but I don't worry about buying name brand food at the grocery store and can afford vegetables daily (isn't that a sad state of things when being able to afford healthy food is a sign of wealth?). 

Where I am located has been hit extra hard by the economy. The area isn't doing too well now, but I feel a rebound coming within 2-3 years. You can see the effort happening by the community which most times pays off. When people invest in their businesses, their homes, the community thrives. 

While shopping around for an office to rent (our current location is two small) I stumbled upon a huge 10,000 sq foot building (concrete walls) that has two floors, but the second floor is in poor condition so isn't counted against the sq footage. The first floor is immaculate. The area is around all of the city buildings/warehouses and in a industrial zone. I need 5,000 sq feet and the building designed for two tenants. 

The owner bought the property last year for an amazing price (350k) but its been empty since. It came up that he would be willing to sell for double the price he paid. IMHO, this is still an amazing price at double, because from the feedback we received from contractors the cost of building a similar building is around 1.4 million. Everything else in the area that is similar is occupied/not for sale. 

I need half of the building, (5,000) sq feet and the building is divided that way.  We would need to rent out the other half, but even if we couldn't my companies rent would cover the majority of the mortgage expense (80 percent).

The naysayers state- 

* You're paying for someone else's mistake. (Most of them showed interest until I revealed how much the original owner paid for the building)
* What if you can't pay the rent? ( A large possibility, but if my business goes under there's always more money opening a banana stand. Just think of all the bananas you can fit in that space!)
* The economy is shit and not going up. (In the long run very rarely do things crash and burn. If there's interest, hard work and a desire to keep a dream alive, anything can rebound.)
* The building is empty for a year which means he can't rent it out. (The agent and landlord for the property are both.... lazy and difficult. I also feel the rent is too high. I would be cutting it by 10-20 cents a sq foot.)
* It's a lot of money. (It really is.)

It is a lot of money. I can't deny that. It's a huge risk, but isn't everything? I see this as an investment in me. By purchasing a building for my company (which I hope will thrive for many, many years to come), I am cutting out that middle man who I pay rent to. I am not going to make any money, but I am not going to lose anything either. The only way I would not be able to pay the monthly payments on the building is if my company went under, which would be a whole other ball game. We have a pretty solid footing in the community and we have been here for a long time. I may have to pay higher rent until we find a tenant, but the finance payments are pretty much the asking price of the rent. 

I've invested in land, but this is my first physical building investment besides my own home. It is daunting but not overwhelming. 

Can you guys help me consider things that maybe I haven't thought of? The cost of ownership for commercial real estate I haven't considered? What do the numbers sound like to you?

The finance proposal numbers were - 30 percent down, 10 year term/ 30 year ammortized at 5.09 percent and 20 year term at 20 year ammortized at 5.29 percent. 

I also had the option for owner financing, but I thought it might be better to go with a bank. 
[{"id": "ck4pfe5", "text": "Where are you ??", "replies": [], "depth": 1}, {"id": "ck4pvw9", "text": "This is what I do for a living if you want to bounce some numbers off me. ", "replies": [], "depth": 1}, {"id": "ck4rj7i", "text": "Operating expenses.\nCapital improvements for rehabbing/replacing building systems (roof, envelope, hvac, code compliance, electric, plumbing, paving, etc). \nNon-reimbursable operating expenses (legal fees, marketing, etc).\nOpEx of the unleaded portion.\nLeasing costs (tenant improvements, leasing commissions), which can easily total $30/sf for office space.\n\nYou're already talking about saddling your business with the \"extra rent\" until you find another tenant. Is the business buying the building? If so, is that the main function of your business or are you dividing your investment goals? If the business is not the buyer, is that an ethical choice to tie your investment to the business's cash flow?\n\nThis is a solid no go to me. Stick to your guns, buy residential if you want to invest in opportunistic real estate unless you have patience, expertise, and deep pockets. Even then, start with long term leaded NNN single tenant. It's a \"safe\" way to get your feet wet.\n\n", "replies": [], "depth": 1}, {"id": "ck4vkqf", "text": "Are you joking? Why had the building been vacant for that long?  How would double what he paid be a rational offer for an empty building?   It sounds like a money pit.", "replies": [{"id": "ck4zv54", "text": "Who cares what the last guy paid? Would it make any difference to your opinion if he had paid $3m and was losing his shirt now?\n\nAll that matters is whether or not the place is worth the asking price right now. ", "replies": [{"id": "ck5051e", "text": "I always care what was paid.  It gives me a basis to judge markets and appreciation.  If a seller paid $100,000 for something, I can safely infer that he was the highest offer at the time for that property / item.  If *only* two years have passed, I had better have outstanding information to go off of to offer 200% his purchase price.  I have to assume that, inflation aside, the value of a property that's sat dormant for years hasn't gone up that much.  \n\nRemember - the profit or loss of a deal is established on the offering price.  Unless you can see how that price is justified, you're getting hosed.  That dollar value might make sense if he had long term tenants in the facility and the building was cash flowing, but he doesn't.  What makes you so sure the property is worth that much?", "replies": [{"id": "ck50oii", "text": "&gt; What makes you so sure the property is worth that much?\n\nNothing at all. I'm not saying it is or isn't because OP didn't provide enough information. I'm just saying that you can't draw any conclusions about value based on what someone else paid for it in the past. ", "replies": [{"id": "ck50vo2", "text": "You CAN draw some conclusions based on historical sales.  That's why we look at historical sales data.  It's not a be all end all, but it is one factor to consider when evaluating whether a price is reasonable.", "replies": [{"id": "ck512ws", "text": "I guess I should have been more specific. I agree with you that comps are relevant in some markets like residential. It's when you get to this type of commercial property that the income or replacement cost approach is much more relevant. ", "replies": [{"id": "ck8i572", "text": "Agreed.  I'd probably look at comps on this monster just to have some extra verification that my number made sense but there is going to be a hell of a lot of more pertinent information captured in other methods.  Specifically in the income method.", "replies": [], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "ck4ye4o", "text": "what is market rent for that type of building? \n\nis rent NNN, full service, or modified gross?\n\ndo you have any idea what operating expenses are on a SF basis?", "replies": [{"id": "ck6urud", "text": "50-55 cents a square foot. NNN. No I do not. ", "replies": [{"id": "ck8ih7e", "text": "I assume you are talking monthly?  (usually rates are quoted on an annual basis).  Operating expenses should be pretty easy to figure out.  Take the taxes and get an insurance estimate on it, which will be the bulk of it if you are doing NNN.  Are the spaces all separately metered I assume?  For the cam just make some reasonable estimates on how much you think landscaping, snow removal, etc will be.  Taxes are usually the big item in the op exp's.  If the upstairs is trashed, and assuming no structural/roof/etc issues you are probably still looking somewhere around $30 / SF to refinish it, so figure you are dumping 300k into that before you can rent it.  Upper floors also don't typically rent for as much as walk in lower offices.  You also said this was in an industrial area.  At least in my experience office spaces in those areas are the toughest to rent.  A one year vacancy for an office building in an area like that, which also sounds like it needs a lot of work, isn't a lot at all.  I wouldn't be foolish and think you are going to find a quick tenant.  I usually tell office clients to look 6 months out or more and just negotiations can take months sometimes.  It sounds like you will also have a lengthy construction period.  \n\nHow is everything else?  HVAC/Roof/Parking Lots etc can cost a shit ton of replace.  \n\nI don't really have enough info here, and to be blunt the fact that you haven't provided it makes it sound like you need some help to make this decision.  You should talk to a CRE broker near you and get their opinion here.    \n\nI'm also slightly nervous that you are saying ~$7 a SF for office space is the market rent.  I am not sure where this is located but I have to assume that is bottom of the barrel office space.  The problem you have at 5k~ and 10k~ sf spaces when leasing at that price point is the companies that need that much space usually don't like to be in subpar locations mixed with industrial tenants.  That is why they are cheap (ie less demand).\n\nHope that helps, if you want to post more info a lot of us have offered to look at it.  If something seems like a deal that is too good to be true it probably is though.  You should be working up a income statement and capping off the NOI (with your business paying market rent) and the other spaces at their market rents (and assuming you fix up the spaces to a rent able level).  Back out the costs to get there, the lost rent from vacancy while doing construction/leasing, commissions, TI allowances, etc, etc, etc.  Add in what it is worth to you to deal with all that shit.  That is basically what you should pay.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "ck4zdrn", "text": "One point right away, cost does NOT equal value.  It costs millions of dollars to build a new commercial building.  Some commercial buildings sell for pennies on the dollar.  It's all about location.", "replies": [{"id": "ck6unvp", "text": "Noted. Thank you for the input. ", "replies": [], "depth": 2}], "depth": 1}, {"id": "ck4zyyt", "text": "To answer fully we would need to know the coat of fixing up the unused space and the expected rental income from it. \n\nYou might also look into whether there is some zoning, environmental, structural or legal issue that prevents the upper floor from being rented. \n\nIf you move forward with this purchase you should consider an SBA loan. One of them, I think it's the 403, gives great terms for owner-occupied commercial property. ", "replies": [{"id": "ck6utdi", "text": "Thanks for the info. ", "replies": [{"id": "ck7dgar", "text": "It's actually an SBA 504 program that /u/walterwhitemanwhite was talking about. Basically it's a government backed loan where the owner will be occupying all or some of the property being purchased. Under an SBA 504 loan, you would put 10% down, over the course of 20 years at a rate of 4-5%. **Whatever you decide to do, buy or wait, I HIGHLY recommend going with a 504 loan as the benefits are unmatched and ANY bank worth their salt will do these in a heartbeat** since the government backs the 'riskiest' 50% of the loan.\n\nNow as far as the specific property, I wouldn't recommend buying it. For one, it's all about users. If you don't have an additional user, then you are paying the entire mortgage yourself until that user comes along. And it's not like the current owners aren't trying to find tenants. If no tenants want to move in under the current owners, there's a more than likely chance they don't want to move in with ANY owners. The property sounds like it has problems, and you'd probably benefit by waiting it out. Look for aucitons. Look for similar properties that come up for sale. And revisit this property in the future, as i'd imagine it will still be unleased a year, two, or more from now when the owners are desperate to get out from under it. Take your time and make sure it's the right fit, and that you have a plan to get other users when the time is right.", "replies": [{"id": "ck7kruh", "text": "Thank you!", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "ck5hsj8", "text": "CRE Banker here. Based on you brief description, it doesn't sound like this will cash-flow even after you take occupancy of half the building. From a lender's perspective, this property will need to cover all it's expenses as well as debt service. In fact, valuation will most likely use a similar calculation in the income valuation method. You can try to get creative and up the price if your lease to provide sufficient coverage, but any lender worth a damn should be leaning on lease comps instead of the actual lease rate on owner occupied property. I'm saying all this to help you understand that valuation of CRE is typically governed by the leases in place and the income streams they generate as opposed to the cost of construction or what similar size/type properties trade for. ", "replies": [], "depth": 1}, {"id": "cke29h6", "text": "You provided a lot of information. You also received some very good advice in my opinion, and some not so good. So here is a very short lesson.\n1. consider getting a better understanding of how to value commercial real estate like you are describing. There are three major points to consider; the income approach, the comparable sales approach and the cost new less depreciation approach. It will be very helpful for you to gather significant amounts of information about what similar properties in similar neighborhoods actually sold for in the past six to 12 months. You can use the subject property itself as it's own best comparable, but you need multiple sales.\n2. You also need to repeat number one above with office rentals in the same similar neighborhoods. \n3. Understanding the real estate market overall is vitally important. It is good to have a \"sense of what will happen\" but it is better when you have facts to confirm your hunches. Questions like; How many similar properties sold in the past three years? Which way is the cost per square foot trending? What is the annual sales rate in the neighborhood (number of properties that succeeded in selling vs. properties still on the market or pulled off the market)?\n4. The fact you will be owner-occupant is a very significant factor. Your risk goes down dramatically because if your business continues to be successful, you would never be in the spot as the current owner. \n5. Go to a commercial real estate site like Loopnet or CoStar and you can pay (not a great deal of money) to find a lot of this information. Or find a good commercial real estate agent who may get all the information we are discussing without a charge if you agree to use them to buy the building you are looking at. Who knows, the agent may have one down the street that is nicer for $325K.\n6. There are many other factors to consider for you, like parking availability which is very important to figure out with an office building. Unfortunately, I am running out of allotted time to keep working with you here.\n7. You also need to locate an experienced general contractor to give you a better sense of what it will cost to rehab the second floor and whether or not the roof is in good condition? Is there an elevator to the second floor, or room for one? This is enough to get you started. You are right, you do need help so you are doing the right thing reaching out.  It doesn't have to be a huge risk if you have solid information and talk to people who can actually help you. Ask me if you have questions. \n    ", "replies": [], "depth": 1}]