Commercial property includes offices, shopping malls, and
storefronts. Some stores have apartments in the same building. Since the demand
for apartment property is relentless while the demand for commercial property
fluctuates with the state of the economy, such properties can be desirable as
they reduce your risk. Income from the property will always cover some of your
costs.
Office buildings have appeal because rents can be raised
regularly. Office buildings are in relatively short supply. Because the economy
is so service oriented, it's reasonable to expect a continuing demand for office
space. In some locations, overbuilding has created a glut, forcing landlords to
make rent concessions. Most small- and medium-sized retail and service
businesses operate from rented premises. Office buildings fall somewhere between
shopping centers and apartments. They will give you more headaches than the
latter and fewer than the former. Free-standing office space is essential for
such businesses as accounting, insurance, advertising, law, medicine,
employment, and engineering.
A modest profit can be boosted by deductions for interest,
taxes, and maintenance. You can also take a depreciation deduction. If you
renovate a commercial structure that is at least 20 years old, you're allowed a
tax credit. Finally, if your building is in a district designated for historic
preservation, you can write off renovation costs over 5 years even though the
building's useful life is longer.
Commercial property is easier to manage than residential
property. Maintenance duties are fewer. Business tenants are more apt to keep up
their own premises. They will often improve them. For the most part, they are
responsible for the interior of their building. Tenants usually stay longer.
They
often do their own janitorial work. Tenants also pay more for
rent, give a bigger security deposit, and accept tax escalation clauses in their
leases.
Leases can run for as long as 20 years. For a small property,
a 3-year lease with an annual escalator is typical. Some store leases call for a
minimum rent. Higher rents are payable depending on a certain volume of
business, with percentages of gross sales above the minimum payable to the
landlord. Commercial property leases are complicated. Before you buy a building
with leases in effect, have an accountant examine the leases and, if possible,
the tenant's income statements. Ask your lawyer to review the leases. Make sure
the building is not fully rented to tenants who have long-term leases that
restrict rent increases. Long-term leases are like rent control. They keep cash
flow down and reduce resale values. Recently negotiated long-term leases can
spell trouble for the new owner. It's often better if some of the leases are
about to expire. Bad tenants are easier to evict. Local landlord and tenant
ordinances are often stacked against residential landlords but in favor of
commercial landlords. Many investors prefer doing business with businesspeople.
They assume that those who run a business will always pay their rent because
they want to keep the location. However, many who run businesses have had lots
of practice stiff-arming creditors, and a landlord doesn't intimidate them at
all. A business is just as subject to eviction as an apartment dweller, but it's
not necessarily easy to accomplish.
However, commercial landlords take bigger risks. When a
vacancy does occur, you are hit with substantial renovating costs to suit a new
tenant, and the vacancy remains longer than an apartment vacancy. Professional
tenants can drive up utility and maintenance costs. Parking requirements are
greater than for apartment tenants.
Although new buildings are generally too expensive for small
investors, there are existing business properties for many checkbooks.
Commercial properties don't always require hefty down payments. A shortage of
mortgage money has made bank financing elusive for most small-scale business
property investing. In a tight mortgage market, the seller will often finance
the purchase, accepting 10 percent in cash or less. Bank financing, if you can
get it, generally involves putting up as much as half of the purchase price in
cash. A property you like may not even be listed for sale. Don't let that stop
you from inquiring about it. The owner may consider an offer for personal
reasons. Perhaps it will help him retire earlier than he had intended.
Do you own real estate articles or stories and want to share with other investors?
You have chance to win
$100 Amazon Gift Certificates. We will give
away 3 prizes for top authors each month!
Email your articles or stories to:
articles@buyincomeproperties.com
© Copyright 2001 - 2010 by
BuyIncomeProperties.com
Visit
Real Estate Forums
for every real estate investing topics!
Enter Here
Top of Page