Commercial Real Estate is more complex than Residential Real Estate, but it has its pros and cons. The Financing is a lot tougher on Commercial properties and it is a true numbers game.No emotional purchases.The positive side is that the arrangements with tenants are a lot more controllable and in favor of the landlord as opposed to residential where the landlord assumes most of the risk.Also,there is far less competition on these properties as the barriers to entry are higher.
Thing to Consider When Buying Commercial Property
Commercial property law can be very complex and the leases can be intimidating BUT, unlike Residential leases,they are subject to contract law. This means that the lease is whatever you and the tenant agree to and it is enforceable. One thing all commercial leases have in common is that they really protect the landlord. Leases are renegotiated, not automatically renewed and there is no limit to the rent increases except what you agree to and what the tenant can pay or the market will bear.
Commercial properties generally have higher entry requirements. Down payments are 30 to 35%. Financing is never CMHC approved so you need good credit and be willing to put personal guarantees on the building. Mortgage rates are higher,and the banks are a lot tougher as they understand the risks involved and business failure rates.
These properties can be more difficult to rent. You must also evaluate the feasibility of the business at that location.Generally these spaces stay empty longer and are more difficult to rent. Consider changing the use of the space,demising the space into smaller units or Clean up and present the space in good condition.You will get better tenants and they will want to stay for a long time. Five or ten year leases with options to renew are normal.
Most leases for commercial properties are Net Net Net. This means that the tenant is responsible for Taxes, Maintenance and Insurance for the property. Utilities are paid by the tenant. Some businesses use lots of hydro, gas or water. You can be fully insulated against increases in your costs.
One of the best options for the entry level investor is to consider a mixed use property. That way ,you can hedge your investment and remove some risk.There are less legal risks being a commercial landlord than a residential one.Overall ,when buying a commercial property,it is not an emotional decision,but should be based purely on the numbers, and a good long term strategy for the property.
MAKE SMART MOVES and invest in up and coming areas where the rents can be be increased as the turnover in the area requires better services,restaurants,and shops that cater to the surrounding population.