Help with analyzing a deal
I’m moving into a new space and looking to purchase a commercial strip with 3 tenants- one of whom is Pizza Hut. The other two are locally owned companies. All NNN leases.

Cap rate listed at 7.8 or something like that. 

It’s $765k

Rents equal about $56k per year. CAM is $20,800. Expenses of $21k. 

What do I need to be looking for?
[{"id": "font55v", "text": "All depends on what you are looking for.\n\nAre you looking for long term hold, or some short of short term play? What will you debt/equity ratio be? What\u2019s an acceptable return for you?", "replies": [{"id": "fonutrb", "text": "Long term hold for sure. \n\nHmmm- don\u2019t know. I\u2019ll have to look at the numbers. I think I\u2019ll put down as little as possible to get in and then pay down with the rents. I don\u2019t really need the money to live on.\n\nI\u2019m guessing about $100k down. \n\nIf I could truly make the $50k per year in it that they say is the net income, that would be great. \n\nAs a professional commercial investor/owner are there any rules of thumb I should he looking for?\n\nFor example, I do a lot of residential and I use the 1% rule a lot.", "replies": [{"id": "fonz3wd", "text": "&gt;For example, I do a lot of residential and I use the 1% rule a lot.\n\nTo accomplish what?", "replies": [{"id": "fonzt5t", "text": "As a baseline to determine is an investment is worth looking getting into. Depending on how close it is, the growth in the area, age and condition, I can make a solid investment decision.", "replies": [{"id": "foo1dhr", "text": "So you think 1% is more profitable than .5%?  And 4% is even more profitable than 1%?  Why?", "replies": [{"id": "foo4rpq", "text": "No I\u2019m basically asking if there is something else that I\u2019m missing? Like is there a cost or fee that maybe I haven\u2019t factored in or something else that I haven\u2019t considered.  \n\nPlus it\u2019s a much higher risk that I\u2019m used to.\n\nHow do you usually analyze a property like this to see if it\u2019s something you\u2019d personally get into?", "replies": [{"id": "foo5e1u", "text": "What I am telling you is that you are using 2 metrics incorrectly.\nBoth cap rates and Price To Rent ratios are merely valuation tools.  Neither tells you if a property is profitable.\nYou've probably been lucky thinking the 1% rule accomplishes something it does not because we have been in a 10 year up market.  When things turn around you will likely see where it failed you.", "replies": [{"id": "foo72ta", "text": "Oh I\u2019m picking up what you\u2019re puttin down now.", "replies": [], "depth": 8}], "depth": 7}, {"id": "fooamdd", "text": "Fees, mortgage broker, appraisal, phase 1, closing costs (very state dependent)... yes around $20k on this deal.  It\u2019s standard to add a 3-4% fee on the gross for management.  Appraiser will likely add 5-10% vacancy factor to your NOI.", "replies": [], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}, {"id": "fooa926", "text": "Commercial generally requires 20-25% down.  Feel free to PM.  I\u2019ve owned a dozen multi tenant buildings.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "fonw50a", "text": "Check who is guaranteeing each of the leases.", "replies": [{"id": "foo0gd4", "text": "Will do.", "replies": [], "depth": 2}], "depth": 1}, {"id": "fonyezw", "text": "NOI should be $59,670 with a 765k acquisition price and 7.8 cap\n\nWhat is your trade area market cap? How realistic are the rents if you need to backfill? What are the economic drivers in the area? Is the real estate sound? Deferred maintenance?\n\nThere\u2019s a lot that goes into it. Where are you looking to invest?", "replies": [{"id": "foo0cb1", "text": "Correction: 7.06 cap\nPrice reduced to $750k\n\nSolid growth area. Top 5 fastest growing cities in the region. \n\nDon\u2019t know the trade area market cap. Don\u2019t know what backfilling is. But the rents seems reasonable based on the suite spaces. I\u2019ll do a market analysis to verify. Newer building in pretty good shape. I\u2019m going to visit each of the businesses to see the condition once I can get in. \n\nI just want to get the building and have it. I\u2019m thinking $100k down. I only have $80k liquid right now, but I\u2019m sure I could find the rest.", "replies": [{"id": "foo0yjl", "text": "What bank is going to give you 13% ltv? I think you\u2019re going to need to put down a lot more cash.\n\nBackfilling is filling up a space when one of the tenants vacate. How long are the in place leases?", "replies": [{"id": "fophu6z", "text": "not to be that guy, but you meant 87% ltv lol", "replies": [{"id": "foqdhrv", "text": "Yeah", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}, {"id": "foo1ih7", "text": "Trade area market cap is critical to understand as that tells you whether you\u2019re over/underpaying. Ask the broker for sales comparables. \n\nBackfilling is the re-leasing of space that\u2019s vacated by an in-place tenant. You should have an understanding of what market lease rates are today and how those compare to what the tenants are currently paying. You should also understand the average lease-up timing. Basically what you\u2019re doing is quantifying the risk to your cash flow if a tenant leaves - how much rent could you get from a replacement, and how long would it take to find a new tenant.", "replies": [], "depth": 3}, {"id": "foo2q0l", "text": "&gt;Cap rate listed at 7.8 or something like that.  \n&gt;  \n&gt;It\u2019s $765k    **Correction: 7.06 cap Price reduced to $750k**\n\nThe lower the value, the higher the cap rate.  Price and cap rate will NOT go down together.  Someone is scamming you.", "replies": [{"id": "foo6w6c", "text": "Th cap rate was 7.06 already. I got the numbers wrong initially. The price did go down to $750k though.", "replies": [{"id": "foo8ulv", "text": "Well, the ASKING cap rate was 7.06% and the asking price was $750,000.\nWhat if the MARKET cap rate was 10%?  Market cap rate come from CLOSED sales and reflect what actual buyers and sellers HAVE traded NOI for.  \n\nSo if you have $52,950 NOI and everyone else if paying $10 per dollar of NOI (10%cap rate) then you should only pay $529,500, not $750,000!  See, direct capitalization used cap rate comps from closed sales to value NOI, V=I/r", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}, {"id": "foo4fn7", "text": "You probably need closer to 35-40% down - and that\u2019s before COVID. \n\nBanks have gotten a lot tighter in lending practices in the last 6 weeks.", "replies": [], "depth": 3}, {"id": "fop53ix", "text": "You can check out CBRE cap rate survey, or other investor survey/brokers to find market area cap rates, and find out if your prospective investment is in line with market. These are readily available for most major markets.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "foog2hc", "text": "Is this in Cincinnati? There's a building just like this for sale", "replies": [], "depth": 1}, {"id": "foom55e", "text": "100k is unlikely to be sufficient as a down payment. On passive rental properties, you would typically be looking at 25% down, if not more considering the current lending environment. Loans with 10-20% down typically are only for SBA loans and you have to owner occupy more than half of the building to be eligible for an SBA loan on a rental property.", "replies": [], "depth": 1}, {"id": "foop59n", "text": "LTV on retail (especially in the current environment) is sub 65%. If you can even get a loan.", "replies": [], "depth": 1}, {"id": "foov9dl", "text": "Comb through those leases with a fine tooth comb. Also get a lawyer to review that as well as the Purchase and sale agreement.", "replies": [], "depth": 1}, {"id": "foovwb8", "text": "Before getting into the numbers, few high level info I would want to know- corporate guarantees on the lease, how sticky are the tenants, how long have they been there, when are the leases rolling, termination options?, what were the TI/LC's given to these tenants?, rents above or below market?, any new supply in the area.", "replies": [], "depth": 1}, {"id": "fop5iva", "text": "Are there any co-tenancy clauses?  Any termination rights? How does the rent step-up? Do you receive percentage rent?  Do you have access to their financials?  How durable is the cash flow from the tenants other than pizza hut?  How much time is remaining until the maturity of each lease?  Do the tenants have renewal rights? Are the rents in-line with market?  What is the vacancy rate for these this type of space?  Do the tenants have a reason that they have to operate at their location?  How much in sales do the tenants generate annually psf?  How do the tenants\u2019 sales compare to their competitors?", "replies": [{"id": "fopagmv", "text": "I\u2019ve read all the comments and this one is very valuable. Buying retail at the top of the cycle is very dangerous and historically has the most fluctuation in value from peak to trough. Best hedge js betting against the location and quality of the asset you\u2019re buying (ie. is it built well, will tenants WANT to be there). There are costs of vacancies like tenant improvement allowances and leasing commissions. You can google each of them but they\u2019re big below the line (non operating) expenses that you WILL incur. I don\u2019t know when but you will I promise. \n\nNext thing is do not buy this property with max leverage. Calculate your DSCR (NOI/Debt Service) with 3 tenants, 2 tenants and 1 tenant. Every investor should run sensitivities to a new acquisition. Even in a multitenant NNN, you still have to pay taxes and insure the building. If one tenant leaves, the city will not forgive that pro rata amount of taxes so make sure your level of debt can be serviced in a partially occupied scenario. If you have above a 1.3 dscr in a 66% occupied scenario using a 10% expense ratio on EGI, you may be good. You\u2019ll most likely have to sign recourse (a personal guaranty) for your loan so if you default they\u2019ll have the ability to come after you and your personal assets. \n\nNext are expenses. There is no industry standard definition of NNN. Additionally each N does not stand for any one single expense. The theory is that the investment is an income pass through but unless a lease is \u201cabsolute NNN\u201d, there will always be some landlord responsibilities. They may be passive or low key but they do have a cost. Read the leases, research, read books, talk to other investors and you\u2019ll find out over time and actual ownership what your year and P&amp;L will look like. Examples are like structural/cap Ex repairs and management fees. Also, brokerages are always marketing, make sure you do your DD and don\u2019t take their statement of NNN as gospel. Note, some leases are direct payments and some are reimbursements where the tenant pays you after you pay the expense. This may make a diff for you. \n\nTo directly answer your question: sales broker commissions, attorney fees, mortgage broker fees, lender fees, title insurance appraisal, phase I, lender attorney fees, and engineering report are some fees you\u2019ll incur. \n\nProp level expenses (some are not retail) to include in your DSCR are an artificial vacancy allowance, property payroll and benefits/management fee (3%-5%), property insurance (business loss and liability policies), CAM, utilities (heat, electric, water), trash removal and landscaping, TI/LC expenses (investors underwriting this as a reserve until the inevitable expense is incurred so they\u2019re prepared for it. A prudent investor will prepare for this), repairs and maintenance, cap Ex/structural repairs, administrative &amp; professional fees (bookkeeping, accounting, and attorneys).", "replies": [], "depth": 2}], "depth": 1}, {"id": "fopa59m", "text": "Also why does he have $21K in expenses on a NNN lease?", "replies": [{"id": "fophbt0", "text": "This is a good question. Maybe put aside for future capital improvements/repairs, Professional fees like an accountant, and income taxes?", "replies": [], "depth": 2}, {"id": "fopi3rh", "text": "Insurance, utilities, lawn care, maintenance, management fee, trash, and taxes they say.", "replies": [{"id": "foq4ykv", "text": "I don\u2019t say this to be mean or condescending but are you sure you know what a NNN is and that this is a NNN deal?", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "fopmdf9", "text": "Where is the property located? General area is helpful. \n\nUnless you\u2019re in an extremely hot market (California, Chicago, NYC, Miami), you\u2019re overpaying for simple retail space. Two mom &amp; pop tenants and a franchisee? \n\nThe cap rate should go up by 200 bps. Factor in your vacancy rate of 12-15% (people will argue, but they\u2019re using pre-pandemic mentality), and I think you\u2019re way over your skis. \n\nIs there a shadow anchor? Are you next to or in front of a Target/Walmart/primary dominant grocer? What is the traffic out in front?\n\nI watched \u201cThe Big Short\u201d again tonight. It\u2019ll really make you think. If you\u2019ve seen it, watch it again. If you haven\u2019t seen it, watch it. Great piece!\n\nWe have an unemployment rate that hasn\u2019t been this high since 1934. The tsunami alarms are sounding and everyone is tuning them out.\n\nRemember two points Warren Buffett has stuck to... first, when you\u2019ve been playing poker for 15 minutes and haven\u2019t figured out who the patsy is, you\u2019re the patsy. Don\u2019t be the patsy on this one. And, second, he would much rather buy a great company at a good price than a good company at a great price. \n\nIf you\u2019re looking to watch your money turn in the short term, buy MRO stock and let it do its thing over the next few months. It\u2019ll double by the end of the year. The commercial real estate market will correct hard in the next six months. Don\u2019t be a bag holder. One has immediate liquidity and is going up, the other has almost no liquidity and is going down. You pick. \n\nIf you have any questions, send me a message. I\u2019ve done a lot of acquisitions from Main Street to Wall Street, and I\u2019m happy to share my experience.", "replies": [], "depth": 1}]