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5 Key Areas Of Managing Commercial Properties
Contrary to common perception, the costs of managing commercial properties can actually be lower than managing residential properties. It can still be quite a hassle though. So if you can afford it, consider hiring a management company to help you. Otherwise, treat managing the property as training to get a hands-on understanding before you truly go big time with commercial investments. These are the 5 key areas of managing commercial properties. Get accustomed to them and you will be a long way ahead of the competition.
A rookie mistake commonly made by new property owners is to sign up the first tenant that makes an offer. Even if a tenant is meeting your asking rental or even miraculously exceeds it, you have to conduct due diligence on the tenant. However, the speed in which you agree to lease out your property hugely depends on the volume of demand. When there is a huge demand, it can pay off by taking your time on evaluating tenants instead of renting out immediately to tenants you do not prefer.
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A property being leased to a well established international brand is a better bet than a new company that was just incorporated a month ago. Not that new companies are not reliable. But an established company will more likely to pay on time and also become a long term tenant. New companies that grow quickly will also be looking to move to bigger premises before you even know it. But alas, big brands are more likely to negotiate than less established companies. Taking that into consideration, I would choose a long term customer at a discount over an unproven organization for a tenant any day.
As retail businesses have a high turnover rate, renting out to unestablished retailers is risky. In these cases, it does not hurt to ask for personal guarantees from the business owners that ensure that the rentals are paid even if the retailer goes under. If the new tenants you are considering are moving from an existing location, take a look at their current premises. How they take care of the place is an indication of how they will take care of yours.
As both you and the tenant is bound by the lease agreement, you will have to spell out everything clearly in your document. Get a lawyer to help you if required. The good thing about commercial tenancies compared to residential tenancies is that you are less likely to be the victim of over-expectations. Residential tenants tend to have certain expectations on landlords on implied responsibilities. Whereas commercial tenants tend to give more respect to terms and stipulations mentioned in the tenancy agreement. This also means that you have to elaborate when drafting your contract.
Managing your commercial property is a balancing act. On one hand you want to be friendly. On the other hand, you want to be firm so that shrewd tenants do not take advantage of your happy-go-lucky attitude. This is where being fair in your actions will be accepted by tenants even if they are unhappy with you. How your actions will be perceived as being fair is whether they are specified in your contract. This why paying a lawyer to draft your contracts is well worth the money. Another point to note is to not get too familiar with your tenants. When you get too close, tenants may delay payments by putting you at the back of the payment queue especially when they run into trouble. You want to be the first, not the last when they settle their monthly obligations.
A useful clause to embed into your contracts is charging an interest on late payments. Enforcing them will clearly signal to your tenants that you mean business and that whatever family stories you share with each other does not mean anything when it comes to your due rentals. If you have sympathy to tenants for their failure, who is going to compensate you for your rental loss? By allowing tenants to delay payments, you are effectively being Santa Claus and taking on their losses for them.
The best part about being a landlord is that you get to revise your rentals with increments. Commercial rentals almost always go up. If a business fails, tenants will leave voluntarily. You will then get to find new tenants and charge them market price. And when businesses succeed, tenants will be more receptive to rental increments as the premises could be a reason for the success. This is especially true for retail businesses.
Even when a commercial tenants signs up a lease with you for 10 years, landlords often include a clause inside the contract that subjects the parties to rent reviews ever 2 to 3 years. You can judge whether the market is going up or down by reviewing rental rates of locations nearby and what new tenants are willing to pay.
When a tenant refuses to pay your huge upward revisions, an arbitrator could be appointed to mitigate the case. These actions and processes must of course be clearly spelled out in the lease.
A big part of whether you start off with a profitable property or a loss making one is how you manage the costs of renovations. Investors who have been around for a while will have a ready list of dependable contractors at a good price. If you do not have a ready list, go out and meet up with as many contractors as possible. The key to choosing them is not solely on price. Whether you are able to effectively communicate with each other is very important. Look for the ones that provide good value instead of those that have the cheapest price.
The most common reason for friction between relationships with your contractor is miscommunication. To prevent this, you have to be very clear on your expectations and avoid flipping your words and agreements. If you have to, write everything down in an agreement. For example, you may want to stipulate explicitly what happens when renovation exceeds budget, when completion takes longer than agreed upon, etc. Payments are usually staggered to phases of completion. You can offer a bonus to contractors when phases are completed much earlier than what is agreed on. This gives them motivation and an incentive to give your project more priority and allocate more resources to it.
This is not as challenging as you may think. Commercial tenants usually make their payments by automatic bank transfer. You will also be making your mortgage repayments by automatic bank transfers. The same goes with insurance premiums. The only thing that you have to manually keep track of are expenses. But that can be easily managed by using a corporate card tagged to your account when paying for expenses. This means that your bank statement alone is about 90% of your book keeping done. You will then get an accountant to do the proper filings for you.
What it adds up
In summary, the bigger your tenant is, the less likely that they will bother you as their focus is on generating revenue. They may even go about everything themselves without ever bothering you. Be fair and enforce your lease when you need to. Spending too much time penny pinching is not efficient.