I Stole This Commercial Building Because No One Else Wanted It -Action Economics

Last month I closed on a 7 unit, 7,000 square foot commercial building for $36,100. That’s right. I paid less than half what 2 bedroom 1 bath houses in rough shape are selling for in the same neighborhood. This is $5,157 per unit. If I subtract my expected value of $5,000 each for the 2 side lots it came with and $3,000 for the misc. materials and items left behind then I paid just $3,300 per unit. How did I get such a great deal?

The Building:

This building was originally built by Pearson Construction around 1960 for Gillespie’s Pharmacy. The building was donated to the Mercy Hospital system in 1975 by Myron Wolcott. The property held doctors offices until 1989 when the building was sold. Following the sale most of the units stayed as commercial units. Most recently 3 of the commercial units were barber shops while the upper 3 units and 1 lower unit were residential. This building is brick construction with concrete floors. It is a trilevel construction made with an “L” shape. This thing was built to last. The upper level has 3 units, the lower level has 3 units, and the main level has 1 unit. 2 of the 3 units on the upper and lower levels have 2 doors, which could allow them to be split further into more units total. Currently the electrical is split with each unit having its own electric, so if we split any of the units up I would need to include electric in the rent and cover the bill.

An interesting bit of history: The earliest mortgage I could find for this property was taken out in September of 1964 for $99,000 which would be equivalent to $1,000,000 today.

The top and bottom levels have roughly 3,000 square feet each, while the main level has roughly 1,000 square feet, for 7,000 total square feet. Of course a good chunk of this is the hallways, which make up roughly 300 square feet for the upper and lower levels. 7,000 sq. feet is also an exterior measurement, so accounting for the exterior walls leaves us around 6,000 square feet of rentable space.

New construction costs at $200 per square foot would cost over $1.4 million to build a building like this. The $200 per square foot is also for a stick built house, so this would probably be closer to $300 per sq. ft, or $2.1 Million. Whirlpool recently spent $23 million to build an 80 unit apartment building, meaning an 8 unit would be around $2.3 million.

There is a 900 square foot basement below the main floor unit. The building has a small janitors closet, a small room for the electric coming from the street, and a small room that gives access to the roof via permanent ladder and a hatch. The basement has the potential to be rented as storage, but not for renting out residentially or to a business. This is because there are no egress windows and only 1 method of entry/exit. There is no easy or economical way to provide a 2nd exit.

The building also comes with 2 additional lots that are fully paved. One is adjacent to the building and 1 is across the street. I am currently planning to list the lot across the street for sale. The property across the street floods. After acquiring the property I spent a day trying to fix the flooding issue. I brought a submersible pump over and spent hours pumping out the water on the lot, then shoveling out mud to get to the drain. The drain and surrounding area was clogged with over a hundred gallons of mud. I dug out the drain to the actual drainage pipe that takes water to the road. the next time it rains I will follow up to see how this drain performs.

The Listing:

This property first caught my eye over 6 months ago. I frequently look at the MLS for all real estate types including vacant land, residential, multifamily, and commercial. This property was listed at $99,900 as a commercial property. This was outside of our normal investment area by a few blocks and we have been cash constrained since really the Spring of 2022. This property had been listed for several months already and I theorized that the sellers may take 70K to 80K for it. But it didn’t matter because we weren’t in a financial position to buy it and it was an adventure we also didn’t have the time and life energy for.

The first question is why did no one buy it over the last year?

The building has multiple tenants paying well below market rate. Having existing tenants who are paying 1990s rental rates can be a large struggle to deal with. As an example the residential units are paying $400, with water, sewer, trash, and heat included. These are large 2 bedroom apartments that are around 800 sq. ft each. At Briarwood Apartments current rent for 2 bedroom 700 square foot apartments starts at $929 per month and don’t include heat. Adjusting for location and condition, the rent for these apartments should be at least $850 each.
The building is not profitable. The property taxes on this building are high. Like really high. It is assessed at being worth over $280,000 and Benton Harbor city has the highest taxes in the county. Right now IF all the current tenants pay their rent the property is losing around $600 a month.
The building has a flat roof and multiple roof leaks: Roof leaks are scary.
The neighborhood is neglected: This property is near the former Mercy Hospital building that was torn down roughly a decade ago. Most of the buildings around it are boarded up. There is a boarded up restaurant across the street and 2 former Dentist/Dr. Offices boarded up next to this property.
Unlikely to be able to get a loan: With the roof leaks it is unlikely that a lender would issue a loan for this property, reducing the buyers pool to cash only. This could also be an issue for the seller. Most commercial loans are 5 to 7 years in length with a balloon due at the end. The idea is the seller would then refinance. Multiple issues here. The possibility of not being able to get a loan at all due to condition and income is a big one, banks have gotten A LOT tighter on commercial real estate. The next issue is that interest rates have increased dramatically. When the sellers bought this property commercial loans could be had for around 4%, interest rates have doubled since then.
The listing only shows up for commercial: If you google the address you get the listing from when the building was last sold in 2018 (for $125,000). You do not get the new listing. It doesn’t show up on Zillow or Redfin. The only way to find it is to search the actual Michigan MLS for commercial listings. This is something very few people do. There are FAR fewer buyers for commercial property.
The listing has very few pictures. The images don’t tell you which units they are for, and they only cover common areas and 2 of the 7 units.
The building is mixed use: This building has commercial and residential spaces. Most residential people want to stay in that game, while most commercial people want to stay in that game. There are also fewer insurance companies willing to work with mixed use buildings.

The Price Drop:

In Mid July I was looking through the MLS commercial listings and saw that the price dropped from $99,900 to $59,900. The description was also changed to make it sound like fewer of the units were rented out.

We sold our flip house in February and since then we have been aggressively paying down our heloc. We have a single family house in our neighborhood under contract for $96,000 (more on that soon!) and had around $50,000 in total capacity left to invest, which put this into the realm of possibility.

The Showing:

I waited until Mrs. C. was back from summer camp (BTW this is like the 3rd time something awesome that I want to see has popped up while she has been at summer camp) and we scheduled to see the property on Monday morning. When we went to see the property we gained a lot of information. I purposefully waited 2 days after initially asking the listing agent some questions on the property prior to scheduling a showing. The listing agent was unavailable to show the property and we had our normal residential Realtor show us the building.

The building maintenance guy does not have the keys to 1 of the 4 vacant units. He also claimed to have never been on the roof, which was strange since he is the “maintenance guy” and the roof has known leaks.
We did not have access to the 3 of 7 units that were rented, Effectively we were blind on 57% of the building.
There is a substantial roof leak over at least 2 of the units and in the common hallway.
Although the listing agent told us 4 of the units are vacant, 2 of those 4 were still occupied by a tenant who was in the process of moving out, and the other 2 were filled with stuff like they were still occupied.
The building has a basement which goes under 1 of the units, covering another 900 sq. ft of space.
The basement is FULL of stuff. It looks like the previous maintenance guy was living there. The basement is separated into 3 rooms with 1 set up like a living room. There is also a small area that was once set up as a shower stall.
The single family house next door has been using the vacant parking lot that comes with this building as theirs: It has multiple vehicles, a picnic table, and a basketball hoop on it. It also is flooded with about 1/2 of the lot being under water.
Fluorescent lighting is everywhere: Each 2X4 fixture houses 4 bulbs at 40W each, making for a 160W light source. There are far more lights than are needed in each room, with 10 X 10 bedrooms having 3 of these lights. Flipping on a light switch then uses 480W of electricity, whereas a normal bedroom uses maybe 30W of electricity with the light on. All of these need swapped to LED and many fixtures removed entirely.

What Does Mrs. C. Think:

Mrs C. HATES this property.

We are actively trying to get out of Benton Harbor City as investors because of the way landlords are treated by the city. We had a property we paid $35,000 for that the city assessed as being worth $85,000. They rejected our appeal so now rather than paying roughly $92 per month based on the actual market value of the property we are charged $226 per month. This is effectively $134 a month extra in rent our tenants will ultimately be paying. In addition city officials continue to speak negatively about landlords and investors.

Mrs. C. is also right to think it is possible and probably that even with a much lower purchase price the city will not lower the tax assessments on this property. If that is the case I would appeal to the Michigan State Tax Tribunal.

This property is in our initial exclusion area: We invest in the Benton Harbor area, however most of our investments are in the surrounding Benton Township and not within city limits. There are some areas of Benton Harbor that feel less safe than others, and this is part of that area. She would not feel comfortable being at this location alone, which is certainly fair.

She also is frustrated that this takes away from a break that we planned to have. I have repeatedly stated that the goal was no more rehabs, then we got a property down the road from us under contract that needs a rehab and now I wanted to buy this property which also needs a ton of work. She is in the right to be frustrated. Between these 2 properties we will have easily over 1,000 rehab hours.

The Offer:

So Mrs. C. hates this building, we are limited on cash, and the out of state sellers have been trying to unload this property for the better part of a year. We also don’t need this property. We aren’t planning on living in it ourselves and our lives will be just fine if we don’t get it. The roof leaks and current tenants are both causes of concern.

Originally we had discussed either offering a seller finance deal or trying to go after a commercial loan. After viewing the property we decided that a commercial loan was unlikely and that we were not going to pay list price for the property, even if seller financed. The main appeal of a seller finance offer on a low dollar property to a seller is that they get a higher price. This left us with going for a cash offer to get the best deal we can get. I figured that it is likely they have had no offers on this property.

I offered $36,100 for the property, just over 60% of the list price. This is $5,127 per unit, not including the basement or side lots. Our terms were perfect for an out of state investor. Taking the property “as is” nothing needs removed from basement, no repairs, no evictions, quick close, all cash.

We submitted our offer at around 900 PM on Monday and then on Tuesday at 915 AM Mrs. C. got the call that the sellers were accepting our offer with the one counter that they can not provide the 2 years of financial documents requested in the offer. This was a non issue and we said that is fine. This of course made me think that I could have got the building for less. They accepted our first offer, likely shortly after receiving it. Perhaps had I offered $25,000 they would have countered at $29,000. We will never know. I fully understand the need to be DONE with a property, even at a loss. I sold a paid off house for effectively $1,700 in 2010.

Then at 430 PM we received a call from our agent saying that the reason we haven’t seen the Dotloop form come back is because the seller is waiting on another offer. This to me was crazy. They verbally accepted our offer. I went all day thinking we had this building. I honestly don’t think they had another offer coming in. It reminded me of when we bought our first home in 2006. It was a bank foreclosure that had been on the market for over 400 days and then the Realtor called us and said they needed our highest and best because another offer came in. We upped our offer by around $6,500, however I am confident that offer did not exist. It’s possible with this one that the listing agent had other parties that had been interested and pushed them to submit an offer because they had received ours.

At around 8PM the sellers ultimately decided to accept our offer at the $36,100 and signed the contract. We closed on the building 7 business days later.

This Deal In Perspective:

This is what recent sales in the same neighborhood of Benton Harbor have been going for:

668 E. Empire

This 2 bedroom 1 bath sold for $39,900 in December of 2023. This is 4 parcels away from this property. All the rooms need repainted, as drywall patching was done, but not painted. The sellers installed new carpet, which will be a pain to paint around. The bathroom is in rough shape, as is the kitchen.

950 Union St:

This 2 bedroom 2 bath home less than 1/4 mile down the road sold for $50,000 10 days before we went under contract. This home is in rough repair and is full of stuff. It is also closer to 1,000 square feet from the 1,332 listed.

778 LaSalle:

This Duplex just listed for $75,000, over twice what I paid for this property. This property has a major safety concern with the stairs to the upper unit and the back exterior of the property is in rough shape. Still, this Duplex will likely sell for list price or above.

To be fair, these single family house properties are not losing money at the rate this property is. The property taxes and insurance and much less for these homes. As is, this property has $1,150 in current monthly income and around $1,600 in monthly expenses.

More Pictures:

My Plan:

Initial Action Items:

Repair the roof: I identified 2 major sources of water intrusion at the showing and will repair those immediately. Then I will stay at the building during a rain storm and see what other leaks if any I can find to repair.
Talk to remaining tenants: I need to meet with the remaining 3 tenants and fix neglected issues. My first priority is to ensure that there are smoke alarms, carbon monoxide detectors and fire extinguishers in each unit. Then I need to to work on a plan on getting the rents up to market rate. This will likely be done with a series on increases over time that start probably 90 to 120 days out.
Repair the last residential unit upstairs: This is the closest unit to be ready and will be the highest revenue generator.
Clean up common areas: The common areas of the hallway and small lobby need a serious deep clean. We will also replace ceiling tiles (once roof leak is no more), and replace 4′ fluorescent lights with LEDs.
Flip each vacant unit after that: We then have 3 other vacant units to flip around to either commercial or residential use.
Outside curb appeal: I want to clean up the weeds in the parking lot, sealcoat the parking lot, edge the tree lawns, and plant some shrubs. We may also stain the bricks at some point.
Explore selling the side lot: We will look into selling the side lot to see if there is any interest at a price that makes sense to get rid of it. Otherwise I will search for a good economic use for it.
Clean out the basement and rent for storage. We may start this process early on, but I will likely be more focused on getting the primary units rented out before working substantially on the basement. We may also turn some of the lower units into climate controlled storage units.

Overall Goals:

I think over the next 24 months I can get this property to where total gross rents hit $5,000 per month. With rough expenses of $1,500 per month this would be $3,500 in profit, or $42,000 per year. Getting there would mean all 7 units rented at an average rate of $657 per month and the basement storage rented at $400 per month. This seems doable.

Could I be overly optimistic about what I can do with this property? Absolutely. Of course that’s what I was told with our last apartment building. I was told that I overpaid and there is no way it would be successful with short term rentals. When we bought the property in 2022 its rent rolls were $36,000 per year. For 2023 the property brought in $68,000. This was with 2 of the units being long term rentals and 1 of the short term rentals only being live for half the year. One of our long term tenants moved out in May of this year and we just finished converting that unit to an STR. For 2025 I am projecting we will be closer to $80,000 in total revenue for that property.

Major advantages that this property has over the other apartment building that we have:

Solid construction: This property was designed to be stronger. Concrete floors and brick walls reduce the damage tenants can do. They also help acoustically for tenant separation.

Designed as multi-unit: Our other building was originally a farm house and then it was cut up into 4 apartments, then into 6. Most of the units are smaller, with 3 being studio apartments. The utilities are also much better, as each unit has its own electric meter here.

The math works on LTRs: The math on this property works better on LTRs for residential because the units are larger. In the future we may explore the possibility of STRs for this property, but for now the location is not one where I feel it would do well as an STR.

Section 8:

This property could potentially do well as Section 8 rentals. Section 8 is the program where essentially the federal government pays the rent for low income tenants. The program does not distinguish between single family homes and apartments for rental rates, which increases the positive economics of apartment buildings. Currently the gross rent for a 2 Bedroom is $1,171 and for a 3 bedroom is $1,364 in our area. With the size of these apartments it may be possible to reconfigure them to a 3 bedroom and keep the same number of units. The $1,364 gross rent is before utility deductions. Since we are providing water, sewer, trash, heat, and hot water that doesn’t get deducted. Most of the water, sewer bill is a flat charge, so it is much more economical to have a 7 unit building and provide water and sewer than to provide water and sewer for 7 single family homes. As an example a single family home that uses 2 units of water might have a water/sewer bill of around $80. An apartment using 12 units of water will have a bill of around $160. After subtracting for the other utilities a 3 bedroom apartment could net around $1,200 per month. So in theory if I had 6 of the 7 units turned into 3 bedroom S8 rentals the rent from them would be $7,200, then I would rent the main commercial space at $1,000 per month, plus $400 per month for the storage in the basement. This adds up to $8,600 per month in total revenue.

To get to this point we would have to do a lot of work. I believe all the residential units are set up as 2 bedrooms, so I would need to reconfigure each unit. The building, like all other large buildings will be an iterative process. We will continually learn and change to optimize this property for making it as profitable as possible. It is also possible that the lower three units would not be approved for residential use based on the windows being too high up. Egress windows need to be 44″ from the floor or less, and I believe these windows are higher up than that. In theory it would be possible to install egress windows for two these units as there is enough space to do so.

X Factor:

The largest development in Benton Harbor since Whirlpool added its new $68 million office building in 2012 is coming to the lot 300 feet south of this property. At the site of the old Mercy Hospital building “Project T” is scheduled to bring over $33 million of investment to the neighborhood. Several duplexes and an apartment building with commercial space is planned to be built on the site. This level of investment can serve an an anchor to the neighborhood and help make it a more desirable location.

Financing:

Initially we are putting this purchase on our Heloc, which is at 8.75% interest, making for a $263 interest only payment. Repairs will be largely financed out of our positive cash flow from rental activities. This property will likely produce positive net income enough to pay back its purchase price within 24 months. My goal for financing would be to delay getting a commercial loan until sometime in 2026. By then interest rates should be down substantially and the property will be fully rented out and stabilized. If the property is producing positive net income of $48,000 per year, and the appraiser subtracts a stupid amount for maintenance, we will end up at around $36,000 of NOI for the loan purposes. At the 8.9% cap rate that was used by the last appraiser on our other apartment building, this would give the building a value of $405,000. Taking a loan at 60% LTV would give me a loan of $243,000. Assuming I can stabilize this building for $40,000, then paying myself back for the purchase and rehab would leave around $167,000 of additional cash proceeds from this loan.

I would then use the proceeds to pay off some smaller loans we have and to pay off the other apartment building which hits a balloon in March of 2027. It is much better to have the same amount of debt on 1 property than to have it on 4 properties. This would also save around $5,000 in closing costs from getting another commercial loan for that apartment building.

A $243,000 15 year loan at 5% would be 1,921 per month. Keep in mind this would be to cover this building and its renovation, as well as our other apartment building which is currently $935/mo, and 2 other single family homes that are $552 and $207. This would only be a net new payment of $227 per month, which is still less than the interest only payment we are making now.

Ancillary Income:

There may be some additional ways to earn more money from this property.

Storage units: If I do not sell the side lot across the street, that could become the primary parking lot (that lot is zoned residential), and then the other parking lot that is adjacent to the building and zoned commercial could be a location for exterior storage units. I could install roughly 10 10X20 units. At $100/mo this would be $1,000 in added revenue.

Mini Mailbox store: Currently in the common hallway area there is a large mailbox that USPS delivers mail to for the tenants. The building has 7 units and this box has 12 spaces. In theory I could replace this with a larger bank and rent out the boxes like PO boxes. 5″ X 5″ PO boxes cost $20/mo from the post office and you can’t use PO boxes for a lot of things. I could get a bank of 48 mailboxes, with 8 reserved for the property and 40 rented out at $15/mo to bring in an extra $600 per month in revenue.

Laundry: One of the units I plan to turn into storage units has a small front room with it’s own door that I could turn into a laundry area with 2 sets of machines. It would be highly likely that the tenants in the building would prefer to use these over a laundry mat. I could get coin machines, however these are typically more expensive than normal machines. Another option would be to allow the tenants to opt into using the laundry area for a fixed monthly fee. How much does a family of 4 without a washer and dryer spend at a laundromat each week? Easily $30 per week, plus they have to haul their clothes across town and wait for hours. If instead I install 2 stackable machines that I pay $2,000 total for, and I charge $20 per week per unit to have access and I have 3 paying units, this is $240 per month in income, with a pay back of about 8 months.

Studio Space: Rather than renting the basement out as storage, I could turn it into a rentable podcast studio space. I spent a few thousand dollars getting the acoustics maximized and installing a nice desk, a couple chairs and a changeable backdrop screen, and then I could rent out the space to content creators to record podcasts. Would a rental rate of $25/hr 2 hour minimum be feasible? Could I book 10 hours per week? If so then the space would generate $1,000 per month over the $400 per month I was planning to get for storage.

Advertising: On the north side of the building facing a busy road the building has a large brick wall that could be used for advertising. I could install a 16′ X 16′ tarp billboard on the building. Something like this should be able to bring in another $100 to 200 a month.

Electricity: A 4,500 square foot flat roof is a great opportunity for adding solar panels. By grid tieing solar panels to our electrical system I can save on the overall electric costs of the building. This opens the opportunity to include electricity in the tenants rent, at least for the S8 tenants and pocket some higher income, essentially becoming the utility. We could in theory install around 300 panels.

I can buy 30 packs of used 305W panels for $1,300 locally. If I wanted to cover half the roof I would buy 5 lots would get me 150 panels for $6,500 making for a 45KW solar system, operating at 80% efficiency due to age would give us a true 36KW system. This would produce around 36,000KW of electricity in a year or 3,000KW per month. At 13 cents per KWH this would generate almost $400 per month in power.

Community Center: If rather than renting out the front space to a single tenant, we create daily slots for community groups for that space, An added storage area in the unit of something like 20 cubic feet per group would allow a lot of utility. We would have several sets of folding tables and chairs and some other common use items in the space. The space could be used for gym classes like yoga and karate, for church groups, for scouts or other groups, for educational classes, or other events. Perhaps a group that rents 3 hours once every week would pay something like $300/mo ($25/hr). 10 of these clients (2 time spaces per day for 5 days per week) would get the rent up to $3,000 per mo. That would be a conservative measurement, as we could conceivably rent the space for 4 3 hour chunks per day 7 days per week. If we did this we would certainly want to keep the lot across the street for parking.

Conclusion:

This property will take a while to stabilize. I will need to spend tens of thousands of dollars to fix this property to where it needs to be, as well as spend hundreds of hours on it. There is no certainty that my efforts will work. I may struggle to get commercial tenants or storage renters, or even residential tenants. It is possible that it may take 3 or 4 years instead of 2 years to fully stabilize the property.

I strongly believe that over the long term, this will be a positive asset for our family. I plan on being around another 50 years and the cash flow this building will generate in that time will certainly be significant. The longer time horizon we have on investments the more likely they are to work out. I plan to write several detailed articles on individual units and projects for this property going forward.

What do you think of this 7 unit property I bought?