The main goal of making an investment for most first-time commercial landlords is to grow equity and generate a relatively passive income. The good news is that this is very much possible, but it definitely won’t happen overnight. Quite the opposite, becoming a successful commercial landlord requires a lot of thoughtful planning and hard work. But don’t worry – we’re here to make things easier for you. We fully understand how starting this adventure without previous experience can be intimidating and scary. That’s why we’ve consulted a commercial real estate expert and prepared tips for first-time commercial landlords.
Expert tips and advice for first-time commercial landlords
Owning and managing commercial real estate is a task that requires a substantial financial and time commitment. The process of serving tenants, increasing the value of a building, minimizing risks, and achieving long-term success as an investor and landlord is not a quick process. All of this makes choosing your investment property seem easy, but there are some things to consider before you dive in further.
Therefore, taking the necessary precautions to secure your success rather than relying on a trial-and-error method will cost you both time and money. To help you do this, here are our seven expert tips for first-time commercial landlords.
#1 Treat your investment in commercial real estate as a business
Commercial property ownership and management is a part-time job for many first-time landlords. However, this doesn’t indicate that it should be run as a part-time operation. Investing in commercial real estate necessitates time and consideration; because it’s a business, you need to treat it as such.
First thing first, you should consult with your accountants, solicitors, and other experts to ensure that your company has been adequately set up. For instance, failure to select the correct business category could have severe consequences for tax time or if something goes wrong. It would be best if you also had a clear understanding of what your insurance policy covers in case you ever get into a situation where you need to avoid a legal fight.
#2 Create a detailed business plan
Creating a thorough and realistic business plan is among the most important tips for first-time commercial landlords. It goes without saying that the financial aspect of your goal is the one you should focus on the most. In order to ensure you profit from your investment, you first need to set a realistic budget.
Make sure your budget includes all possible expenses you expect – from property purchases to ongoing maintenance to emergency repairs and insurance. It’s highly possible you’ll have to rely on the assistance you can trust and hire experts through this process. For example, let’s say you purchased a commercial property in Maryland and need to organize a long-distance relocation for your belongings. So hiring movers is another expense you need to keep in mind. Perhaps you’ll also need to rent storage when you get there, which is another cost to factor in.
#3 Make sure to prevent subletting
Subletting the property without permission is one of the biggest concerns most landlords have. Therefore, it’s essential to protect yourself and prevent this from happening. The best way to do this is to include an assignment and subletting clause. So before your tenant moves into a property, they’ll have to sign a lease agreement that expressly prohibits subletting at any time during their occupancy.
#4 Consider adding a break clause
Because of the unstable nature of the market, many companies are hesitant to enter into long-term lease agreements on commercial property. In most cases, they want to be given the assurance that they can be released from the agreement if their business projections prove to be inaccurate and their circumstances change. It goes without saying that break clauses are not ideal for landlords. However, you can be profitable in the long term if you take certain precautions, such as factoring in the possibility of lost rental income.
#5 Screen potential tenants
It’s always wise to be selective and careful when choosing who to do business with. This is even more important if you are a complete beginner. The team from Verified Movers advises doing a thorough research and background checks before hiring movers, but you can apply this advice to choosing tenants for your commercial property, too. After all, as a landlord, whether a commercial or a private one, the only outcome that matters is whether or not you receive your rent at the end of the month. That is to say, you want to ensure that any possible tenants can pay and do not have a background with which you would be uncomfortable dealing.
Commercial tenants are almost as crucial to research as residential tenants. Because commercial assets entail more risk of financial harm and physical damage, the stakes are even higher. Therefore, make sure to request references from former landlords if at all possible. You can always look into their business history or trade credit if you want more assurance. You can also investigate the history of shareholders and directors if your renter is a limited liability business.
#6 Don’t skip on adding the use clause
During the screening process for your potential renter, you should be sure to take into account the business they intend to run. If you and your renter agree about how the property will be used, then your tenant will not be able to change the kind of business they run suddenly. This will preserve your asset from unexpected wear and tear. A Use Clause protects you not only from the potential harm that a change in your tenants’ business could bring to your future rent prospects but also from the potential damage that it could do to the businesses of other tenants located in the immediate area.
#7 Decide on how to handle maintenance and repairs
When it comes to commercial real estate, one of the most contentious issues that frequently arise between landlords and tenants is the subject of who is responsible for handling repairs. It’s important to think about this in advance. By nailing down the ins and outs of repair requirements within the terms of your lease, you’ll be able to attract and keep a good renter. When doing so, consider many aspects, such as the length of the lease and the present state of the building.
Final thoughts on tips for first-time commercial landlords
We hope you found our tips for first-time commercial landlords beneficial and that they’ll help you have a smooth and easy beginning of your career as a commercial landlord. And if you need more guidance, you can always find more great resources for investors and landlords. Best of luck!