There are millions to be made in the business of commercial real estate. However, you have to be on top of your business if you want to succeed in this lucrative industry. Here are a few tips for investors looking to dip their toes into the field of commercial real estate.
Pay Attention to State Laws
There are many state-specific laws that govern the use of commercial real estate that property owners should be aware of. These laws will impact the financial relationship you have with your tenant and the potential profitability of your business - so it’s in your best interest to stay up to date with the necessary state laws.
State legislature that may impact your real estate business include:
- Zoning and Land Use
- Necessary disclosures
- Rights of the tenant
Property taxes are determined by state and local governments, as are zoning ordinances and land use laws. Commercial property owners should pay close attention to these laws because they will impact what kind of tenant you can rent to and how much profit you will make on your investment, among other important factors. State laws also impact the kinds of disclosures that property owners are required to make about the property, as well as the rights the tenant has to use your space and your rights as a property owner. You should pay close attention to these important laws if you want to avoid any unfortunate mishaps or disagreements.
Use Quality Accounting Software
Commercial real estate gets complicated. You have to keep track of complex expenses and learn about esoteric tax laws that may impact your business. If you think paying your normal income taxes is complex, paying the taxes on a commercial real estate property can be a nightmare. That’s why it helps to have quality accounting software to keep track of your expenses and make the necessary deductions. If you have the means to hire a professional CPA, it may help, especially if you’re thinking about investing in multiple properties that have different tax structures and complex expenses. However, a good accounting software will help you get started and avoid any costly mistakes that may hurt you around tax season.
Pay Attention to Local and National Trends
If you want to make money in the real estate industry, it’s important to pay attention to trends. These could be national trends or local trends. If you want to make money in commercial real estate, think about what kinds of businesses are popular and how you can serve that need. Perhaps you hear that a new highway is being built which will increase traffic to a particular area, and you want to buy a property in the vicinity before prices skyrocket. Or maybe you read a news article about a major retailer planning an expansion, and you want to try to pitch them on your location. Of course, you’ll need to find the right tenant or a good realtor to broker the deal. But paying attention to trends on both a macro and micro level will help you figure out which properties will bring in consistent revenue and which will be a money pit.
Prepare for Vacancies
Every business has its ups and downs. When you have a reliable tenant, who is paying you on time, it can be easy to get comfortable and forget that every relationship eventually comes to an end, and it’s wise to prepare for vacancies before they happen. This means keeping adequate cash reserves and always being on the lookout for new potential tenants. Even the most successful businesses go through hard times. Just because your tenant is flush with cash this year, doesn’t mean that they will still be in business the next.
The coronavirus pandemic has shown us all how quickly circumstances can change — so it’s wise to hope for the best and prepare for the worst. When you’re dealing with commercial tenants, you’re not dealing with renters who have the stability of a nine to five. Businesses inherently bring more risk, which is what makes commercial investing so profitable. But it means that you may occasionally have to deal with the downside of that risk. If you are prepared for the occasional vacancy, you should be fine, but if you’re not it could kill your business.
Keep Up with Maintenance
One of your primary ongoing responsibilities is to keep up with the necessary maintenance. Although every property owner should be mindful of the maintenance of their properties, commercial property owners are especially vulnerable to mishaps and potential lawsuits. Commercial space could have hundreds or thousands of people coming and going every day, which means that there is always the potential for an accident if you do not keep up with the maintenance.
If a customer of one of your tenants is inconvenienced or injured because you neglected to properly service the property, it will damage your reputation and leave you vulnerable to lawsuits. A good property management company can help you stay on top of these responsibilities, so you don’t have to take time out of your busy schedule to ensure all the necessary maintenance tasks are handled.
Commercial real estate is a complex business that requires careful planning and execution. But if you do your homework, there are fortunes to be made in this lucrative industry.