Investing in Commercial Real Estate
When investing in commercial rental property, careful consideration is required as it is an important decision. If the investment turns out to be a bad investment, it may end up costing you thousands of dollars. There is much more capital required to purchase commercial rental property as opposed to investing in residential single family homes. This requires extensive research, things to consider are things such as; location, size of the rental property, and type of rental property.
One of the first decisions is the type of commercial property you would like to invest in. Most people don't realize how many types of commercial property are out there. Commercial property consists of multi family buildings, retail, office, hotel, industrial, and healthcare. Each type of commercial property has its own unique advantages and disadvantages, so it is very important to consider the type of property wisely based on your research.
The next important decision is to choose a strategic location. There are different factors to consider when choosing the location of your commercial property depending on the type of property. For example, is the multi family unit near a grocery store, shopping, schools and easy access to public transportation? Another factor to consider is the projected growth of the area the property is located in, for example, is the investment property located in or near an area where there is planned growth or is the growth of the area stagnant? These are very important factors to consider when determining the location to considering purchasing in. If you buy commercial real estate in a central area that is soon to develop, your property is more than likely going to increase in value and have great business potential due to a high volume of traffic and visibility.
What verbiage should be included in a commercial lease agreement? The lease agreement should be very specific and detailed, this will help prevent future conflicts with tenants. The items that should be included in a lease include items such as the exact dimensions of the rental space, the responsibilities of both tenant and landlord, types of businesses allowed and not allowed as well as allocation of maintenance expenses. For example, in a six unit strip mall, if there is already a submarine sandwich shop, it may be a wise idea to not allow another submarine sandwich shop to be opened, or, if you do not want an adult book store, bar or liquor store allowed you must be specific in these terms.
Specify what type of lease it is, a triple net lease or a full service lease. A triple net lease states that the maintenance, insurance, and property taxes of the building are handled by the tenant and the third parties only. A full service lease is just the opposite, stating the landlord is responsible for managing the building expenses. With in a full service lease, you can have a net lease which states the services of the landlord are billed directly to the tenant, or a gross lease which states the charges are included in the base rent and escalation increases. As a landlord or investor, one of the main advantages of renting a commercial property is the escalation clause. This clause states that rent due can increase if certain costs increase. Be sure to state the conditions for which the rent will go up. Such conditions may include cost of living and inflation.
There is a certain amount of strategy involved in the rental market, especially for commercial properties. Your income as a property manager is dependent upon the tenant's income from their business so when investing in commercial rental property it is wise to research hot spot locations to maximize the business potential is paramount. The better location, the better your return on investment.
With proper research, you should be able to find the best type of rental property for your needs.
