3 Fundamentals of Commercial Property Investing for Beginners
Investing in real estate can be a rewarding experience and a great way to build your wealth and portfolio. There is a lot to consider when you decide to invest in real estate, so these fundamentals can help you get going in your investments for commercial property.
Reading a Commercial Rental Property Proforma
Proforma is Latin for "for the sake of form." In the world of investment real estate, it is basically the projections on the cash flow of the property. Your proforma should include the gross revenue, vacancy rates, and operating expenses for the property.
Your gross revenue is the amount you can receive if the property is 100 percent occupied. For example, if your property has 25 units and you charge $2,000 per month. If all the units are occupied and the rent is paid on time, you are looking at a gross revenue of $50,000 per month.
Commercial real estate can deliver an excellent ROI, but only if there are stores occupying your units. This can often be the biggest expense listed in the proforma. Consider the length of the leases for existing and future tenants, as well as the amount of time that a unit might be vacant after a tenant moves out.
This is a good place to figure out the losses for the property while a vacant storefront is being fixed up before the next tenant moves in.
Your operating expenses include utility bills, maintenance, property taxes, repairs, and anything else that may come up during your ownership of the property.
If you do not live near your properties or do not wish to deal with the day-to-day life of a landlord, you can hire a property manager to take care of the property on your behalf.
Often a property manager will supervise and building maintenance, resolve issues with the tenants, collecting rent, showing and renting out vacant units, and advertising. They are your eyes and ears and they make sure your property is well taken care of.
Unlike a residential lease, which usually only lasts a year, a commercial lease is usually much longer-term than that. It is common for a lease to last five to 10 years, and sometimes even up to 20 years. This makes investing in commercial real estate slightly less risky since you should have the tenant for so long. You also will save money in not having a high tenant turnaround.
“These long-term contracts are considered acceptable due to the significant capital investment required to prepare these offices for their intended occupier use: international accounting regulations require occupiers to amortize their capital investment over their lease term and book the amortization as a period expense during each year of the lease. Longer terms reduce the annual amortization expense for occupiers, thereby improving their fiscal performance.”
Triple Net Leases
If you want a lower risk and a more passive method of investing, the triple net lease may be the right choice for you. These are a unique lease that has different criteria than other leases. A triple net lease is often for up to 10 years, or more in some cases.
Triple Net Criteria
To meet the following criteria for a triple net lease, you must own the building, but the tenant is responsible for all of the expenses. They cover the property taxes, the insurance, and the maintenance of the building.
You must write out every expense that the tenant will be covering in the lease, and how they will be covering these expenses. You can either cover them yourself and the tenant's rent will pay for all of it, or the expenses can be billed to the tenant and you just receive your monthly rent check from your tenant.
If you choose to do this, it is advised that you do an extensive background check on the tenant first to ensure that both the tenant and their company are trustworthy and lower risk.
This lease option can be difficult if you have a building with multiple offices; it is an easier lease for a single store or a single-family home. If you choose to have a property manager, this is most likely not the right lease choice for you.