Investing in commercial property can be a wise decision with the correct choice of property, location, and purchase price. For many new investors in the commercial real estate market, the biggest obstacle is not in the purchase of the property, but in the ongoing commercial property management. Investors often assume that commercial property management is the same as residential property management with a few more leases and tenants.
However, this is not the case, as anyone who has experience in the industry can attest. For success in commercial property management, there are multiple factors to consider. While all factors are important, four specific strategies must be in place for ongoing financial and investment success.
Working Capital
Managing a commercial property is a more costly endeavor than residential property management. Having the correct level of working capital to tap into when repairs, tenant improvements (TI), or other expenses occur is critical to maintaining the property in top condition. At the same time, relying on high occupancy rates to maintain the working capital is another common error. Planning for higher than market average vacancy rates when determining the necessary working capital is always the best strategy.
Know Your Tenants
Having a good working knowledge of each tenant’s income is an essential factor when approving a leasing arrangement. Asking for tax returns and sales before approving a commercial property lease allows the commercial property manager to evaluate the ability of the tenant to uphold their end of the lease agreement. Most successful commercial property managers require other forms of guarantees on the lease if the rent amount is more than about 7% of the revenue generated by the business. These personal guarantees provide additional protection in the event the business goes bankrupt and leaves you with an unexpected vacancy and outstanding lease payment.
Maximize Automation Through IT
Many different software programs utilize artificial intelligence and learning to tailor your commercial property management services. The more information that is captured, analyzed, and applied to your properties, the more effective your commercial property management model. Higher levels of automation also reduce errors, hold tenants accountable, and ensure you have the data you need to make the essential decisions for current and future commercial properties. Using software to manage building systems and connect with contractors means less time spent dealing with day-to-day issues and more time spent bringing in new tenants.
The Importance of Property Management Companies
Commercial property management is a complex area. Hiring specialized firms to manage the property, particularly commercial properties outside of your geographic area, is always the best decision. Ideally, use a local commercial property management firm that can offer a personalized approach when tenants call with concerns or when setting up new leases.
