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An interesting opportunity has developed whereby I could pick up some commercial property, for what appears to be, on the cheap.
I've only been doing residential for a relatively short time and have no experience in commercial investing or commercial landlording.
I am interested in getting opinions from those here on the major differences between commercial and residential.
The building currently has a local government office, a daycare center, and private Preschool as tenants. Its near (2-3 blocks from) a minor commercial district.
Here are some quick questions:
1) What lease lengths are generally used in commercial?
2) Are rent increases generally programmed in to leases?
3) Is triple-net-leasing generally used?
4) Does commercial RE typically pay more in taxes? Insurance?
5) How does the americans with disabilities act apply (if at all) differently than residential?
6) Are there more stringent building codes?
7) What allocations for maintenance and vacancy do you use when analyzing a property for commercial?
8) How much financial reserve do I set aside, compared with residential?
9) How does the ongoing management burden differ than with residential?
10) How do I screen perspective tenants?
Any other differences?
1) What lease lengths are generally used in commercial?
Depends on what you can negotiate. For a startup, you might only get one year. For an established business that is moving, or a gov't office, you should try for 5 to 10 years.
2) Are rent increases generally programmed in to leases?
yes.
3) Is triple-net-leasing generally used?
Where appropriate.
4) Does commercial RE typically pay more in taxes? Insurance?
Commercial properties are valued strictly on their income. Effectively, therefore, your property tax is an income tax.
5) How does the americans with disabilities act apply (if at all) differently than residential?
Usually more stringent. You have to provide access.
6) Are there more stringent building codes?
Consult your local code enforcement office.
7) What allocations for maintenance and vacancy do you use when analyzing a property for commercial?
This is a hard one. Varies considerably according to region, and to specific locale within region, and according to the type of tenants you can attract. The population you have will likely be stable, though you have a hidden liability risk with the daycare and preschool.
Ordinarily, tenants will be much longer term than residential, and ordinarily vacancies will last much longer than with residential - although these days residential vacancies can last for a long long time.
8) How much financial reserve do I set aside, compared with residential?
You should be able to carry the building empty for a year.
9) How does the ongoing management burden differ than with residential?
Usually much easier, especially with triple-net. You might only have to deal with CAM activities (Common Area Maintenance).
10) How do I screen prospective tenants?
Look at a corporation's credit rating. Look at a sole prop's principal, and otherwise screen just as you would a residential tenant. You might also want to give thought to the type of traffic the prospective business will bring, and consider how that matches with your other clients and the neighborhood. For instance, a carryout liquor store wouldn't go well next to a daycare and I for one wouldn't let one in. Also, for instance, pawn shops and check advance places reflect neighborhoods in decline, and I wouldn't let one of them in unless the neighborhood was in decline and I couldn't get anyone else.
About the Author: Jim Locker is a technical guy who has done a lot of real estate investing and landlording. The experiences he writes about and advice he gives are either first hand, or in answer to specific questions posed by others. He is commonly known as jiml8 around the internet.
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