How exciting!
I don’t know about the loan but your concept is very appealing! I will be back to see what others may think.

Hi Connie:

Commercial real estate, especially retail, is completely different than residential. The business model is a rental model, not an ownership model. This model has evolved because it is beneficial to both the property owner and the business owner.

In housing, people that own are generally in stable situations. They don’t expect their space needs to change much, and they have jobs or other sources of steady income that they rely on to make the mortgage payments.

In commercial real estate that caters to small retail businesses, the exact opposite is true. Space needs will change dramatically over just a couple of years. If the business is successful, it will grow. A larger or better located space will be needed. If the business is not successful, it will be sold or closed. Either way, the original business owner will no longer need the space.

Buying also sucks up working capital because the costs of ownership are higher. The lack of working capital is one of the biggest reasons small businesses fail. Leasing gives the tenant maximum flexibility.

As the lessor or lender, you need to be paid for the space and/or the use of your money. You rely first on the income of the business to pay you, but you also rely on the business owner.

The business income is dependent on the operating skill of the tenant or borrower and the vicissitudes of the economy and the business environment. A bank or a commercial landlord will want to see a business history in the form of financial statements before lending money or leasing space to the business owner. Because so many small businesses fail, the bank or landlord will require the business owner to guarantee the lease or take the mortgage in the owner’s name. Otherwise, the risk of not being paid is too high.

In the case of a resale shop, not much is needed in tenant improvements. For other businesses, a landlord will usually require the tenant to install and pay for improvements specific to the business. Since most small businesses fail, the landlord does not want to pay for tenant specific improvements that will not be amortized over the tenant’s occupancy. Again, the risk of not being paid is too high.

It sounds like this building is located on a busier street where several small businesses have taken over houses. It’s a developing commercial area and buying and fixing up this property for use by a small business is an excellent idea. From the pictures, it looks like you can put in some off-street parking. I would guess that not much is needed in the way of city or county approvals to change the use of this property from residential to commercial.

However, I would not buy this property with the idea of selling it to a business owner. I would buy it as a rental and remodel it so that it would appeal to a variety of the businesses that operate in this area or in similar areas. Maybe it could be an insurance agent’s or an accountant’s office as well as a retail space.

If I thought the resale business could support the market rent for the space, I would offer the space to the shop owner. If, over time, the business was successful and she still wanted to purchase the building, I would consider selling her the building. If not, I would have a commercial rental property in a developing commercial area with multiple uses.

If there are a lot of resale/antique shops in the area and not a lot of other businesses, then the “highest and best use” of the property is as a resale/antique shop. You have an ideal quaint building and an ideal corner location with street exposure and off-street parking. If you “pretty up” the exterior yourself, you will command some of the highest rent in the neighborhood.

If other businesses are moving into the area, then you have a “transitional neighborhood.” If you do the same work, you will attract a variety of businesses wanting the image and the exposure your property offers. You can then pick the business that will pay the highest rent.

Do a little homework on the rents in the area and in competing areas nearby. If the project pencils out, go for it. You will gain a lot of experience in managing retail tenants and dealing with commercial leases. Next thing you know, the commercial-industrial real estate market will crash and you will be buying shopping centers and office buildings for pennies on the dollar from this cycle’s version of the RTC!

Howdy, Connie.

Before you go down the route of owner financing, I have a couple of thoughts/suggestions. First, it sounds like your return here is mostly on the resale price, so I wouldn’t lock in long-term financing without a balloon payment term. For a 5% down payment, I would tend to want to go the lease-option route rather than an owner financed sale. The same essential terms would work. $3000 (option fee instead of down payment), rent at your $550 level, with the option to buy at 2 or 3 years out at $60,000, providing your tenant-purchaser time to fix whatever is preventing financing (or time for banks to decide they’re in the business of lending again).

The lease-option vs. owner financing really provides your tenant-buyer with the same deal, but provides a couple of distinct advantages for you: (1) expedited eviction vs. foreclosure (depends on state law when/if this would be required here), should things not go swimmingly, (2) tax deferral on the option fee, (3) opportunity to do a tax-deferred exchange on the sale (vs. installment sale treatment by owner-financed sale).

Depends on goals of course. But my read is that you’re in “growth mode” not income mode. So, you don’t want to have your dough tied up for the long haul, but rather take profits in the intermediate to buy more property. Just another option.