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3 Indisputable Advantages Of Investing In Commercial Properties
There are typically 2 groups of property hunters. Those who dabble in residential properties and those who are commercial property seekers. Most often, investors who have a hand in commercial investments tend to have residential assets in their portfolio as well. While residential property investors will insist that that is the way to go, commercial players will feel that they are on a totally different playing field altogether. Here are some of the key advantages of investing in commercial properties over residential properties.
Duration of lease
It goes without saying that every agreement to sign up a lease between landlord and tenant will be enforced by a tenancy agreement. Tenancy agreements for residential properties often go on a month-by-month basis. Sometimes 6 month to 1 year. And if you are a lucky landlord, you find a tenant willing to sign up to 2 years. This is because residential tenants are more likely to relocate due to job requirements, job changes, upgrade to a better apartment, or even buy their own homes.
Commercial leases are usually more longer term agreements spanning 2 years or more. The most likely scenario for a rolling month-by-month lease is when the current tenancy period has expired and the landlord and tenant has yet to agree on a new agreement. This in itself can be a game changer when comparing between commercial and residential investments. Shorter leases means more renewals and new tenants. When you have a long term tenant, it give you peace of mind and the stability to plan for the future with the certainty of rental cash flow.
You might ask why a tenant will want to sign up such a long lease. This is because businesses generate an income from operating on the premises. The importance of a long term lease to a business is even greater if they are a retail business. Regular customers who are used to the current location will be lost if the business relocates. Therefore it could come as a surprise to you that a business is more inclined towards to a long term lease.
A key reason for a business to push for a long term lease could be because they are spending a considerable amount of money for renovation and beefing up the place with system equipments. No businessman would spend huge sums for refurbishing if there he can only be sure of using the premises for 6 months. Another reason could be that the business owners are looking at selling the business. It would be easier to sell the business when a prospecting buyer know that the premises are secured. Imagine how it might look if a retail shop with 6 months remaining on the lease tries to sell itself. Buyers will only feel comfortable when the remaining lease is substantial.
Commercial tenants generate their income from your property
While it might seem blatantly obvious that commercial tenants will practice more prudence as they generate their income from using your property, it also has a big effect on how much they take charge of running it.
When a residential tenant finds a problem with a residential property, he will inform the landlord and wait for whatever amount of time required until the problem is fixed. Residential tenants tend to have all the time in the world to wait for landlords to solve problems. However, commercial tenants tend to take charge and rectify any issues on the property as quickly as possible as their business could be dependent on the property aesthetics and functionality. For example, a retailer can be totally handicapped if there is a sudden wiring issue that disables their ability to accept electronic payments. While the operations of a logistics organization will be frozen if there are problems with a major ramp. As businesses may be dependent on specific issues to operate effectively, they have a tendency to fix whatever they have to themselves to ensure their operations continue running smoothly.
Another advantage of commercial tenants is that they always look for ways to improve upon the property. This could be in the sense of better interior design for retailers or better systems for logistics operators. These enhancements help them generate more revenue. A shrewd businessman who knows what he is doing will not even bat an eyelid to make improvements on the property to increase his revenue and bottom line. These improvements help to enhance the value of your property while you do not have to spend a dime.
Stable rental collections
Residential tenants tend to sign up for an apartment themselves as individuals. They then either make their rental payments in the form of cash, cheque or GIRO if you are lucky. For cash and cheque payments, you will often have to meet tenants in person to collect the money. As everyone have their work commitments, it is not always easy to find a convenient time to meet up. A company meeting here and a personal commitment there can delay the rent collection for days or weeks. Let’s not even talk about bounced cheques.
If you have experience being a landlord for sometime, I’m sure you will agree that smoothest of days can sometimes conjure up the damndest of incidents that prevents you from collecting a payments from a tenant. Whether these are deliberate excuses or legitimate reasons from tenants depends on your judgement. More often than not, you are expected to practice empathy from the tenant’s sudden predicaments. Not everyone who falls behind on payments are bad tenants.
Commercial tenants play a different ballgame. Firstly, they almost always sign up the lease under the company’s name. They already know that rental is a fixed costs that has to be paid timely for the business to function efficiently. This means that they have already budgeted for your rentals before committing to a lease.
Secondly, for monthly fixed commitments, companies usually do not want to have the hassle of paying by cash or cheque. GIRO is the preferred mode of payment. And they have an accountant to ensure payments are tracked and paid. This means no funny situations can stop you from getting your rentals by a specific date unless the bank’s clearing system shuts down.