Beginner’s Guide to Commercial Property for First-Time Landlords
Contrary to popular belief, investing in commercial real estate is not reserved for millionaires. The availability of commercial property for first-time landlords has been exponentially increasing over the past few years. While you definitely won’t be able to invest in things such as office blocks, whole factories, and shopping malls without millions in your bank account, there are plenty of opportunities for first-timers with lower budgets. These include smaller shops and office spaces to low-cost industrial units. This guide should give you all the necessary information to become a commercial landlord properly.
The benefits of investing in commercial property for first-time landlords
Investing in commercial real estate is a high-risk great, reward deal. While it does take a lot upfront, you can quickly start seeing the benefits through higher rental income and better capital appreciation. Let’s list a few of the main benefits of owning and renting out commercial real estate and then go into detail for each one:
- Commercial bring higher returns than residential real estate,
- It gives you a steady and long-term income stream,
- Owning this type of real estate will help you diversify your investment portfolio,
- It’s great for long-term capital growth.
Higher returns
In most cases, rental income will be much higher for commercial landlords than for residential. The biggest reason for this is that most commercial properties are valued much higher than residential ones. Commercial real estate investments can be tax efficient if you’re investing your pension.
The most apparent reason there is so much attraction to investing in commercial property for first-time landlords is that it brings a much more significant ROI than residential.
Long-term income
Another great advantage is that your income stream will be secure for the long term. In general, residential property leases will last about six months before having to be renewed. A residential landlord is only assured for six months on average. On the other hand, commercial properties most commonly last for much longer. A commercial landlord typically has a secured income stream for at least three years. However, it’s standard for that to go up to 10 years. As long as there is no breach of contract from either party, this can give you a lot of financial security.
Reducing your investment risk
Since this will help you diversify your investment portfolio, you’ll be able to spread its risk. If all of your investments are fixated on one area, you could become vulnerable to market volatility. By having your investments spread out in several markets, you can be more secure with your finances.
Additionally, commercial properties can give you peace of mind in renting and selling. When renting out a commercial space, you can be sure that there will always be a new business that will gladly replace the one that left. If you are a residential landlord and have to sell your rental property, You don’t know how long it will take to find a buyer. However, the risk of reselling is a bit milder when it comes to commercial properties. Just like there will always be someone interested in renting, there will always be an investor who will take the property off your hands.
Capital growth
That is a long-term benefit. Generally, if you plan on holding on to the commercial property you invested in for a while, you can expect an excellent capital return on that investment. Think of it like this – in the short term, you’ll greatly benefit from high rental income, but in the long term, you also have excellent capital growth.
The negative sides of becoming a first-time landlord for commercial properties
Like anything in life, there will be downsides to commercial property for first-time landlords. Knowing what they are is the first step to figuring out how you’ll handle them. Here are the main drawbacks of this type of investment:
- It’s not a get-rich-quick scheme – While commercial real estate investing is great for capital growth, it’ll only come if you hold onto the property for a long time;
- Void periods – Void periods are times when you don’t have any tenants but still have to pay for all the necessary costs. On the one hand, void periods for commercial real estate are shorter on average since more and more businesses are opening every day. But, when they do happen, they can be a lot more expensive than residential property void periods;
- Maintenance – Depending on the terms of the lease, you may end up with reasonably high ongoing maintenance costs;
- Property management – If you hire a third party to manage your property, you’ll also have those additional costs;
- Stricter eviction policy – Evicting a tenant from a commercial property before the end of the lease term can be difficult if you don’t have an excellent
Investing in commercial real estate for rent is a long con rather than a get-rich-quick scheme.
What you need to research before investing
Investing in commercial property for first-time landlords is a serious thing. You must ensure you’re going into it with all the necessary information. Here are the two most important things to consider before deciding which property you’ll be investing in:
- Industry focus – There are many sectors to choose from when investing. You may want to focus on retail spaces or offices. Maybe even industrial premises. When you’re making this choice, make sure to research the local market and see which sectors are doing well and which aren’t;
- Location – Finding a good location is significant. For example, if you’re set on investing in a retail or hospitality property, you’ll probably benefit most from buying a property in a touristy area. But if you’re looking for an office space to rent, you’ll need it to be well-connected by public transportation.
What are your responsibilities as a commercial landlord?
The responsibilities of a commercial landlord fall into one of two categories: your legal obligations and the responsibilities specified in the lease terms. Remember that all legal responsibilities you have will always override the ones agreed upon in the lease.
Your legal obligations will most likely include the following:
- Gas safety,
- Energy performance,
- Electrical safety,
- Fire safety,
- Health and safety requirements in communal areas,
- Asbestos management.
As the landlord of a commercial property, you have two primary obligations. The responsibilities agreed upon in terms of the lease and general statutory obligations in law.
Regarding general maintenance, responsibilities will usually depend on the actual terms of the lease agreement. However, in most cases, you, as the landlord, will be responsible for the following:
- Maintenance of the property structure,
- Maintenance of communal areas,
- Upkeep of fixtures and fittings in communal areas.
Additionally, you and your tenant may agree on various special terms. For example, suppose a business is from one area in Florida, and your property is in another. In that case, you may end up coming to an agreement where it becomes your responsibility to hire help from a local team and get their things professionally moved to your property.
To conclude
Remember that this guide to commercial property for first-time landlords is only the tip of the iceberg. There is a lot more research and prep to be done, but we hope that this article has at least set you in the right direction. You have to deeply figure out your finances, remember to be personable yet professional with potential tenants, and don’t forget to keep up with business trends. For example, you could offer virtual tours to future tenants. Take your time, be wise, and get ready to see the fortune rolling in.
https://unsplash.com/photos/nC6CyrVBtkU – featured image
https://unsplash.com/photos/pypeCEaJeZY – picture 1
https://unsplash.com/photos/zni0zgb3bkQ – picture 2
https://unsplash.com/photos/doplSDELX7E – picture 3
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