Whether you’re looking for a source of revenue to fund your present lifestyle or would like to generate income to save for retirement, commercial real estate offers excellent investment opportunities for significant returns of between 6% and 12% of the purchase price, with some returns going as high as 15%.
The nature of commercial property creates sizable economies of scale that simply can’t be matched by its residential counterpart. Even a single, small office tower has more tenant capacity than several multifamily homes, allowing you to generate more income from one commercial property than you would from several residential ones.
This is possible because a commercial property’s true value lies in its Net Operating Income (NOI), defined as gross income minus operating expenses. Gross income is generated when tenants pay rental fees for the spaces they lease in your commercial property. Therefore, the more units your property has to rent out, the more tenants you will be able to rent to, and the more tenants you rent to, the more net income you will generate.
Based on this structure, it is evident that both tenant capacity and actual tenants are also integral parts of a commercial property’s value. Thus, attracting tenants and making sure their needs are taken care of are essential to your investment’s success.
Fortunately, filling a newly purchased commercial property with tenants may not be as daunting as it seems. A notable feature of purchasing commercial property is that existing leases will transfer to the new owner once the purchase is complete. Therefore, if the property that you’re looking to purchase is close to fully leased, you will be in very good shape because you are buying a property with a high value that will keep generating high returns.
However, even the leases that transfer to you after your purchase will expire in time. Generally, commercial leases run somewhere between five and 10 years, though some terminate after just three years. (You are free to write longer or shorter lease terms as well, and doing so may keep some high profile tenants who enjoy the security of long lease terms very happy.) Attending to your tenants’ needs in a timely manner will help keep them satisfied and allow them to feel confident when the time comes to renew their rental agreements.
Luckily, the best way to keep tenants happy is simply to provide what they are paying for: a functional space with working elevators and utilities, as well as clean public spaces. On occasion, they may also request some maintenance work in their designated office spaces. Though you will likely use your own contractors to complete the work, responsibility for fees are usually negotiable unless the responsibility is already covered by the rental agreement.
Investors with busy careers or retirement plans that call for less work and more enjoyment of life need not worry too much about the time commitment necessary to keep tenants taken care of. Many qualified property managers are available for hire to handle the day-to-day operations of your commercial property.