Whether renting out for an office, restaurant, clinic, or shopping center, being a commercial property owner isn’t as easy as it sounds. As a commercial property investor, there are certain financial, administrative, and legal obligations you need to fulfill to get your business going.
Here are some of the things you should know when investing in a commercial property:
1. Property Tax And Other Mandatory Tax Payments
Acquiring a commercial property means you’re mandated to pay property taxes annually. Different jurisdictions use different calculations in determining property taxes, but ultimately, it’s decided by the city, state, or municipality.
Most territories have their tax rates and assessment methods to determine the land and building values of the commercial property. In Singapore, for instance, property tax rates are calculated by multiplying the building’s annual value to the property tax rates that apply.
Meanwhile, in Australia, when a commercial property is sold, damaged, or donated to someone else, it’s subject to capital gains tax. If this applies to you, read Commercial Loan’s article on how this type of tax affects commercial property value.
2. Keeping Everything In Order
An owner has an obligation under the law to stay compliant with the building and safety codes. To avoid running into costly repairs and renovations, perform preventive maintenance. Have your property checked for both minor and major issues—from structural integrity to the performance of its components such as heating and cooling systems, insulation, ventilation, and so on.
If your building is new, secure permits and other accreditations set forth by the local laws within your jurisdiction.
3. Hiring Skilled Professionals
A neophyte commercial property investor needs the services and guidance of the following skilled professionals to help with the various stages of the purchase:
- A real estate professional to provide insights on the best deals and best properties on the market and to assist with the procurement process.
- An accountant or bank representative to link the investor to reputable financial institutions offering the best commercial real estate loan products.
- A lawyer to negotiate on your behalf. A legal expert must also understand the implications of the purchase, create and notarize the deed of sale, and draft the lease contract and agreement that your future tenants will have to sign.
- An engineer to inspect the building for structural soundness.
Getting your commercial asset for the first time requires careful planning. If you lack the experience, it’s best to seek the guidance of seasoned professionals to come up with a smart decision.
4. Rental Returns And Net Operating Income
Business owners need to have a clear understanding of the commercial asset’s income-generating capacity. To quantify the profitability of a business space, investors typically compute the net operating income (NOI) of the entire property. You can get it by adding up the gross revenues or total rental income minus the operating expenses. These expenses don’t include depreciation costs, capital expenditures, and amortizations.
Generally speaking, commercial real estate revenues depend on the quality and size of the building, its location, and the current market performance.
5. Finding Long-Term Tenants
A successful commercial property is often measured by the amount of income it generates. While it’s more challenging to find a good lessor for business spaces than residential properties, commercial tenants are often subject to long-term contracts as it can be very costly to relocate a business.
To attract lessors who are in it for the long haul, choose a strategic location for your building. If your property is located in a suitable area, business renters will flock to your place. Besides location, organizations will also take into account accessibility to major transport networks, and the overall safety of the neighborhood. Floor space, layout, and available parking are also part of the main considerations.
6. Downsides To Being A Building Owner
If you plan to manage your own commercial property, be prepared to face the following challenges:
- Tenants violating terms of their contract lease agreement.
- Keeping current tenants and looking for new lessors.
- Tenants’ customers that cause potential problems with security and access.
- Several maintenance works that need to be done regularly and sometimes on an emergency basis.
- Ensuring compliance with the building code as well as fire and safety regulations.
- Pest infestation and other building problems.
- High energy consumption.
Tips Before Investing In Commercial Properties
Before parting off with your hard-earned cash, make sure the property you’re buying will generate cash flow. Real estate investors should make this their main consideration in buying commercial assets.
Additionally, don’t collect business properties if you’re a first-time building proprietor. Your new acquisition would require your time and attention, and you should get the hang of running one first before expanding to another venture. Put simply, focus on one type of commercial space to start with. Don’t mix both retail and office spaces so it doesn’t get complicated.
Not everything is rosy when it comes to owning a building. However, these issues are nothing but minor stumbling blocks that can be addressed with smart and informed decisions.
If you’re a building owner who’s worried about facing tenancy, tax compliance, and other related issues, don’t worry because it’s not the end of the world. By weighing all the pros and cons, you’ll be able to overcome these challenges.
Ultimately, a commercial property investment can be a long-term and high-yielding investment if you know how to choose and manage your property well.