Rental properties can be a great investment over the long term, but if you aren’t careful they could be a bad investment – even a nightmare. When leasing commercial properties, there are a number of things you need to consider from both a financial and a legal perspective. Here are four things you should know before you get started.
1. Expected rental income
Calculate how much you should be charging as rent. It should be enough to cover any expenses, and still leave you some profit to reinvest or pay off the mortgage faster. At the same time, it should be competitive with similar rented properties in the area. Higher rents will get you better returns and may seem justified, especially if your property is high quality construction or located in an affluent, high-traffic area. But higher prices may mean more difficulty in finding a tenant. Even if you own the property outright, there may still be some hefty costs involved.
2. Annual expenses of rental properties
Fixed: These are recurring payments, particularly for property taxes, insurance, care of the exterior (such as a groundskeeper), and the cost of any property management service you engage. They typically charge a fee of 10 percent.
Variable: You may also need to occasionally come up with funds for emergency repairs, such as water heaters, AC, or furnaces, roof maintenance, plumbing leaks, fences, tree trimming, and many other problems that can occur.
When hiring professionals to do repairs, you need to be sure you’re hiring reputable contractors. Check with vendor credentialing services. Whether it’s a facility management firm or a roofer, they should have proper insurance certificates to ensure you’re covered in case of negligence or breach of contract.
3. Risks in renting
Having a steady income from rent/maintenance surplus sounds great, but “steady” can sometimes be the exception, not the rule.
• Your property could be empty for months between renters, especially if there’s an economic downturn.
• You could face legal expenses if you have to evict a tenant, or seek recompense for damages.
• Some bad tenants may cause damage or fall behind on rent, and then disappear, leaving you with a loss of income and possibly additional maintenance.
Finding good tenants can be difficult, especially if the property has been empty and you’re desperate to see some profits again. Send out advertising online or enlist the help of a relator to spread the word about your property.
4. There Are Laws
In commercial leasing, you have no guarantees that the tenant, no matter how professional or well-intentioned, will succeed. The majority of small businesses fail within the first two years. At the same time, you have to abide by certain laws when it comes to dealing with tenants. These laws vary by state, but in general they differ from residential leases in several ways:
• Issues like late fees, intrusion of privacy, and use restrictions that are generally illegal in residential leases don’t apply to commercial property.
• You can still claim rent even if the property is damaged.
• There is no limit on security deposits, and the tenant has no assumed right of habitability.
But other laws such as discrimination statutes and commercial eviction procedures do apply. In most cases, whatever lease terms the tenant agrees to will be binding.
Renting commercial properties can be an excellent source of income, but unlike stocks or bonds, it’s strictly a long-term investment. If you decide to sell for lack of tenants, you might find nobody else is willing to make the same mistake. Be sure to investigate the property, the neighborhood, tenants, and vendors all with equal care.