HOW TO LEASE COMMERCIAL PROPERTY PRIVATELY
Commercial real estate is a means of building long lasting wealth for the investor. We consider long lasting wealth as an investment that pays you every month, and one in which the value increases every year. In this eBook, we will discuss how your commercial real estate has the ability to generate sizable cash flow every month as well as appreciate in value. Our goal is to give you enough information so that you’ll be able to get the most out of your investment at the lowest possible cost. A common misconception that many commercial real estate investors make is that you must involve a property manager in the process of leasing your property. However by using some of the clever techniques and valuable knowledge shared in this eBook, you’ll soon be asking yourself “why didn’t I do this sooner?”. We have helped hundreds of Australian commercial real estate investors lease their own properties themselves and saved them thousands of dollars in doing so. There is no good reason why you can’t be one of those hundreds of smart and successful investors. In these pages, you have all the answers to complex issues broken down into an easy-to-read format. Start at the beginning, in the middle, or simply pick a section that interests you most. It doesn’t matter where you start because the most important thing is that you start right now. With this eBook, you finally have the opportunity and the information you need to take charge of your investment and start reaping the rewards.
COMMERCIAL REAL ESTATE INVESTING
Commercial real estate projects are passive investments only after they’re up and running. Remember that unless you have a ton of money and don’t care about getting huge returns, commercial real estate will take a lot of your time and effort to get started. The good news is that after you have a commercial project off the ground, it’s usually big enough that it allows you to pay other people to take care of it. So it won’t take much of your time at all and that’s why it’s called a passive investment. Compare this to a residential investment property that may require collecting rents and making repairs for many years to come. Commercial real estate also has the potential to significantly increase your wealth with just one deal. Doing one commercial deal the right way can generate you a profit several times your yearly salary in addition to providing sizable monthly income as long as you own the property.
By comparison, residential real estate will not generate anywhere near the cash flow that a commercial property will. You’ll receive one cheque per month from a residential investment property, but you can receive many more cheques per month property. Investing in commercial real from a commercial estate essentially boils down to one thing: leverage. Leverage is what allows you to use a small amount of your time and money to bring you a magnified return. Commercial properties are usually bigger and more valuable than other types of real estate, such as single residential properties. What this means to you is that once you get the ball rolling, you’ll be able to sit back and watch the magic of leverage work wonders for your financial future. Most people dream about creating a six figure annual income stream so that they can quit the rat race, however many have doubts if they can actually make it happen. We want you to use this powerful eBook to get an edge over your competitors and generate sizable wealth for yourself by applying the knowledge we’re about to share with you.
FINDING YOUR TENANTS
There are many ways of finding tenants for commercial properties, and in this section we discuss a few. Firstly we discuss online advertising which has an enormous pulling power due to its convenience, accessibility, and ability to be updated in real time thus showing up to date information. Then we turn our attention towards other less popular but still effective ways of advertising.
- A staggering 85% of consumers identify the Internet as their primary research tool1, and in terms of where real estate leads come from, 55% of enquiries are now coming from the Internet
- The biggest player in the Australian online commercial real estate advertising game is realcommercial.com.au owned by the REA group. Realcommercial.com.au is visited by 180,000 people each month, who visit about 4 times per month
- 78% of visitors are commercial property decision makers, 44% of buyers are looking to buy in the next 6 months, and 67% of tenants are looking to lease in the next 6 months
- However the problem lies in that private advertisers such as you cannot advertise on realcommercial.com.au and other industry-only websites without first going through a conventional agent and paying enormous advertising costs and commission fees.
Owner-assist agencies such as For Sale For Lease are a window of opportunity for private advertisers as they offer a hugely reduced advertising cost on industry-only websites because they involve the owner in the lease of their property. The only two things that the owner is required to do is answer enquiries about their property and conduct Open For Inspections (OFIs).
OTHER WAYS TO ADVERTISE
The graph below represents the origin of real estate agent leads, that is, where people have seen a property before they approached the real estate agent to enquire about it.
- Print 21%
- Referral 13%
- Internet 55%
- Walk by 5%
- Other 6%
As you can see, up to 55% of these leads come from the Internet, further highlighting the importance of getting good exposure for your property online, however there are also other ways of advertising that can be just as effective:
- Signage – The tried and true “For Rent” or “For Lease” signs are amazingly effective and inexpensive. Banners, lawn signs, and photo boards are also popular.
- Referrals – Referrals by tenants are quite helpful. They can either be free or you may wish to offer your tenant money or discount on rent for a referral. Also, it’s always a compliment to your property when a tenant feels obliged to recruit for you.
- Print media – The most expensive, but not necessarily the most effective method, in our opinion, is running an ad in the local newspaper.
- Professional advertising agency – You can hire a professional advertising agency to do the advertising for you, however doing it yourself can be just as rewarding and you can save thousands of dollars do so.
MANAGING YOUR OWN PROPERTY
The secret about making decent profits, growing your real estate investment portfolio, and making smart investment decisions is that it’s not about the property, it’s about you. It’s about you, the investor; you, the property owner; and you, the property manager. Your property’s success will never surpass your own personal business development. You should spend a considerable amount of time educating yourself on how to successfully manage a property and improve your overall business skills. investment you make! It could be the best investment you make.
IMPROVE YOUR MANAGEMENT SKILLS
Here is some time-tested advice that you should take into consideration when managing your commercial property:
Never be friends with your tenants
Make your relationship with your tenants a business-friendly one. The last thing you want to do is take your friend to court for an eviction which probably won’t happen and you’ll be on the losing end.
People cause problems, not properties
Properties are not the ones that pay late, cause damage, or cause high vacancy. People cause these problems, so make it a point to lease to good and reputable tenants and companies. Sometimes having no tenant can be better than having a bad one.
Put everything in writing
Words are worthless if they are not recorded. Make sure that you write everything down, including rent increases, promises to pay, renewals, or improvements or repairs that the tenant has agreed to do.
Know everything there is to know about the market
Always keep abreast of the current status of the market and keep an eye on your competitors down the block. Know what they’re offering to their tenants, know what sells, and know what the tenant-landlord laws are in your area.
Don’t put anything in your name
Protect your personal wealth and assets from lawsuits by having your properties and businesses legally detached from you personally. To begin with, your commercial property should be in a Limited Liability Company (LLC) or in another type of legal entity that you and your conveyancer and tax advisor agree on. That way if a tenant files a lawsuit, s/he can only go after what’s in the LLC or entity, not after your home, car and other personal belongings.
Also, don’t mix your personal expenses with that of your business because in most cases that will negate the protection an LLC or entity provides you. The success and profitability of your commercial real estate investing business also depends a lot on your management techniques and how you implement them. Here are a few tips to assist you:
Polish up your people skills
When managing commercial real estate, you’re responsible for managing people of many different types and walk of life including your tenants, employees, contractors, vendors, government employees, and so on. The key to success is patience, tact, and manners
Understand your lease agreements completely before they’re signed by either side
It’s often said that when you buy a commercial property, you’re buying the lease and the building comes for free. In other words, if your lease is legally weak, then your investment is financially weak as far as other investors, lenders, and appraisers are concerned.
Develop a business plan for the property
Remember, at the end of the day commercial properties are businesses. Therefore you should have a good and well thought out business plan that includes a property summary, market analysis, sales and marketing plan, management summary, and a financial plan.
Be aware of your strengths and weaknesses in managing the property
Those tasks that you do well and enjoy doing. Contract out the tasks that you don’t do well or that you don’t enjoy doing.
Don’t do it again – do it right the first time
Focus on quality, thoroughness, and attention to detail in everything you do concerning the property. This means that sometimes the cheapest option may not be the best one. After you assess your strengths and weaknesses, build on your strengths and take on.
DEVELOPING BASIC BUSINESS SYSTEMS
Just as with any other business, you have customers (your tenants) and you have inventory (the premises that you’re leasing). There’s also a sizable exchange of money between you and the tenants. Therefore you should keep in mind that every well-operated business develops basic systems to help it run efficiently, and commercial properties are no different. For instance, you need to develop the following basic business systems in order to successfully manage your own property:
An accounting system
This system will assist you with handling the cash flowing in and out. You must always be conscientious of your accounts because cash is what keeps your business running. Always make sure that you remain diligent and that cash is accounted for every day, not just once a month.
A sales and marketing system
When managing your own property you’re essentially a sales person. You’re selling units of space, apartments, or entire floors to a customer – your tenant. So act like a sales person would act: smile and close that sale. Your sales and marketing system can also include various means of advertising, tracking the effectiveness of your advertising, training of staff to show prospective tenants the property, and market studies about competition.
An operations system
When managing your own property, you have to keep track of all the legal requirements of operating a property, such as enforcement of leases, building codes, local ordinances, building security, and hiring and managing contractors and vendors. And don’t forget to track lease renewals.
A maintenance system
You need to have a system for tenants to report maintenance issues and be able to have those issues resolved quickly and effectively. You should also implement a preventive maintenance plan for every moving part on your property, such as air conditioners, furnaces, fans, elevators, escalators, and whatever else has moving parts.
When you first start managing your commercial property you may end up doing everything yourself. That means you’ll look after the advertising, OFIs, leasing, credit checks, some of the maintenance, hiring help, keeping the books, and other odd jobs. This may seem overwhelming at first but think of it as a great way to learn your business from the inside out, earning your stripes, while at the same time cutting costs by doing those things yourself. Here are a few helpful questions to sort through as you get started:
Is the commercial space ready to be leased?
Is it clean and presentable, does it meet building codes, and is it approved for its intended use?
Who are you intending to lease to?
Make a decision about who your ideal tenants would be and market to them specifically. Trying to appeal to everyone will make you seem disingenuous and reduce your chances of finding your ideal tenant.
How much are you leasing the unit or space for?
Do some research before you decide on the rent. Find out what the neighbouring commercial properties are charging for similar spaces. Commercial spaces that are kept full are priced just right.
Do you have a solid lease agreement?
Make sure your lease agreement comes from a reputable source and is lawyer approved. If this lease is your first ever, definitely get some help from a local conveyancer. Remember: there’s no such thing as a standard lease agreement. Office building, retail centre, and apartment leases are completely different from each other.
Can you do a background and credit check on the prospective tenant?
No matter who you’re leasing to, your tenants need to be creditworthy and qualified with solid financial strength. For Sale For Lease can conduct a National Tenancy Database check for you, however you will still need to do professional and personal reference, and credit checks.
Do you have a support team on standby?
This includes a contractor, an electrician, a plumber, a janitor, a landscaper, a bookkeeper, and a solicitor, and they all need to be on hand at all times in case you need them.
RESPECT YOUR PROPERTY
Your tenants’ profiles will reflect the way you run your property. If you have a run-down property, you’ll attract tenants of the same calibre. Conversely if you own a property that shows pride of ownership, you’ll attract tenants that are equally dignified. Here are some tips to keep in mind when you lease out your property:
Allow peaceful enjoyment of the premises
Allowing loud noises, loud parties, and rowdy gatherings is a definite way for things to get out of hand quickly. This isn’t good practice for a business or home, and it reflects badly on your profile as a responsible and caring neighbour to surrounding properties. To avoid an exodus of tenants, give everyone a strict guideline on what noises aren’t permitted, when certain noises can take place, and where those noises can take place.
Implement a system to report maintenance issues
To avoid cranky tenants, make sure that everyone is well informed on how to report any maintenance or repair issue with their particular unit or with any safety issues they notice on your property. Give the tenants a very simple and convenient method of reporting such things. You may also wish to consider providing access to an emergency service available 24/7 for late at night, weekends, and holidays. When a tenant reports a problem, it needs to be taken care of swiftly, cost-effectively, and correctly, and the boss must be notified when it’s done. Maintenance should focus on curb appeal, daily and routine maintenance, and last, capital improvements.
Conduct routine physical inspections
As a preventive measure that’s sure to create happy tenants, perform routine physical inspections of the units or space on a regular basis such as semi-annually or annually. This gives you the opportunity to see if any property abuses are occurring, and if there are, you can address them right away with the tenant. The proper way to make these inspections is to give the tenants advance notice that you’ll be conducting an inspection of their units or space on a certain day and time.
Provide a feeling of order within the property
All tenants desire order and consistency in their place of stay or business. To help facilitate this atmosphere, make sure signs are well cared for and clean. Make sure any posted notices are in good shape and are up to date. Make sure gates are closed when and where they should be. Make sure the landscape is regularly maintained. Even make sure that your company stationery is professional and consistent. There’s nothing like professionalism to set the tone.
Present written tenant policies and procedures
Providing a list of policies and procedures is important because it provides a road map as to how you will
operate the property. Make sure that each tenant reads, acknowledges, and signs your policy and procedures form as part of their lease package. Include your operational policies and procedures on how your expect tenants to perform their part of the lease agreement. For instance, you can include expectations regarding payment, parking, environmental disturbances, maintenance, pets (if allowed), and so on.
Don’t accept late payments
Cash-flow problems start with tenants not paying on time. Properties with a history of late payments are an absolute property management nightmare. You must set the rules clearly and firmly right at the beginning and ensure that you tenants abide by them. Issues stemming from commercial properties that fail to make profit are usually initiated by tenants not paying on time or in full. Make sure that this never happens on your watch.
As a novice landlord or even as an experienced one, you might be asking questions such as what tools do I need to get the job done as a property manager, what skilled people do I need to hire, or what type of data or research do I always need to have on hand? We’ve compiled a list of things you need to have or know to manage your property:
Property management software
Keeping track of all properties you own can be a time consuming and even overwhelming task. It is often a good idea to start using property management software that allows you to keep track of tenant information, tenant payments, vacancies, delinquencies, lease rates and renewals, maintenance records, and vendor information. This type of software is a wise investment and will likely enable you to expand your business. There are many good software packages available so do a little homework and find one that suits you.
There’s a wide range of accounting software programs that you can use to keep track of your property’s finances. Managing your properties using your computer’s in-built spread sheets can be laborious and cumbersome. You will soon outgrow its capabilities and need a more professional program. You can take this task to the next level by combining your accounting software with property management software.
You’re going to need to contract with skilled people to do such things as electrical, plumbing, carpentry, landscaping, or anything that you’re unable to do yourself due to your lack of skill or time. The best way to find these types of vendors is by word of mouth. Ask for a referral from a fellow investor or from one of your other vendors. Always check references and ask to see a sample of their work, if available.
Handymen are invaluable in the commercial real estate business, and are responsible for routine and preventive maintenance and small repairs around or on the property. In the apartment business, a good rule of thumb is to have one maintenance person for every 50 apartment units. For shopping centres and offices, property needs vary too greatly toestimate.
Professional legal assistance
Evictions and tenant disputes are bound to occur at some time – it’s just part of the business. Unless you stay up to date and familiar with the local laws involving tenant-landlord matters, it is recommended that you hire a conveyancer (real estate attorney, or a solicitor) to handle these types of things. You can go ahead and handle some of the more routine evictions, but consult a real estate attorney for the more complex matters. This is recommended because forms and notices that are improperly drawn up can be thrown out of court and can send you back to square one with the problem tenant.
A market survey
One way of knowing if you can increase your rents is if your property consistently stays completely occupied. When your space is constantly full, it usually means that your rates are low for the area. But how do you know for sure if your rents are low? The answer is to perform a rent- and lease-rate survey or a competitive analysis of neighbouring properties by researching and asking those property managers what their rates are. Compare their rates to yours and if your rates are lower than theirs and your property is completely occupied, this indicates that there’s room for you to increase your rates to at least the competitor’s level.
Increasing your property value
Commercial real estate is very dynamic and not as immovable or inflexible as most people think. Because it is primarily valued on the amount of net operating income it generates, it’s smart to think of ways to increase your net income and to increase the overall value, equity, and profit of the property. You can implement simple strategies, such as raising the rent or reducing your expenses to increase your property value, or you can do complex things, such as changing the use of the property or hiring a new management team. Here are a few tips that might help:
Raise the rents
The easiest way to increase the value of your commercial property is to raise the rents. To find out if it’s time to raise your rents, get on the phone and do a quick survey, call your broker and ask them to do a rent comparable report for you, or call a local leasing agent and pick their brain. One easy way to tell if your rents are below market is to find out whether you’re the only apartment complex that rarely has vacancies. This is an indication that you have the best deal (cheapest rent) in town for tenants. Rent increases are a very sensitive topic, and usually tenants expect noticeable improvements or a reason for the increase. So, if there’s a large gap between their rent and the market rent, try increasing the rent gradually rather than all at once. Huge one-time increases will upset and scare away tenants, so that’s the last thing you want to do. However, if you’re filling a vacant space, it’s OK to charge the new tenant the highest rent possible.
Budget your expenses
Reducing operating expenses increases your net operating income in the same way that raising the rent does. And as the net operating income goes up, so does the value of your property. The first thing to do is to review all the expenses in great detail and look for expenses that are out of the norm. You may need a similar property’s expenses statements to compare, or consider combining heads with an experienced property manager. Sometimes low-income apartments experience high turnover rates, and in those buildings, turnover costs (costs to fix up the property and make it rentable) tend to be the highest of all operating expenses. To cut these costs, consider removing the contractors that are responsible for doing your turnover work and hire staff to do this work instead. Simply give the staff a list of everything that needs to be done to each unit and the time allotted for each item. Doing this can save you hundreds of dollars per unit. And as an added bonus, the turnover-turnaround time for each unit will likely be reduced to days rather than weeks.
Renovate your property
Making improvements to your property can add value in more ways than one. First of all, giving your shopping centre a new facade and repaving the parking lot gives your tenants a boost of new customers who are looking for the “new” shopping experience. This boost in turn enables you to raise your rents on new tenants and sets you up for higher rents when lease renewals come up. Plus, a good makeover and image enhancement always bodes well to add what investors call “prestige value”. For an apartment building, upgrading the interior of the units with new appliances, paint, and accents and giving the landscaping a facelift allows you to raise rents, and it may also move your apartment into a new class entirely which may also place you into a lower cap rate. After the property gets stamped with a lower cap rate, its value automatically increases.
Change the property’s use
Changing a property’s use can significantly change the value of the property. In some instances, a property can be obsolete for what it was originally built for. There are numerous examples of a big investment company purchasing an unused piece of land or obsolete building and turning it into a multi-level car park, apartment complex, shopping centre, or even for expansion of the surrounding developments such as offices, warehouses or storage spaces.
ADD ADDITIONAL VALUE TO YOUR PROPERTY
Give your tenants more bang for their buck. Here are some of the amenities that can have a huge positive impact on your property values, your client’s property values, and the neighbourhood values:
- Business centre with computers, fax machine and photocopier.
- Conference room to hold meetings.
- Fitness centre with trainers available for hire.
- Free wireless Internet (especially near Universities and business areas).
- A coffee bar.
- Concierge services.
Because these items take money and time to plan out and construct, be sure to constantly look at the costs and benefits of each as they’re used (or not used in some cases). The goal here of course is to provide your tenants with a unique experience and well thought out service that they can’t get elsewhere (or at least in your neighbourhood). Keeping paying tenants happy and staying put (tenant retention) is the key to keeping a stable property. As for a direct cash-generating amenity, consider putting vending machines on the property.
Pass utility bills to tenants
Utilities are one of the fastest growing expense categories for commercial property owners. Landlords are pretty much at the mercy of the utility companies, especially if they pay for any of the property’s utility bills. On some properties, particularly those built in the 1970s and prior, landlords may pay for electric, gas, and water usage because back then, the spaces or units didn’t have individual utility meters. So, the landlord is stuck with paying for every tenant’s utility bills. This situation creates a sure opportunity for the tenants to abuseutilities, such as water usage, because they aren’t paying for it.
You can implement some solutions that positively affect your bottom line and add value immediately. For example, if you have a gas-heated property that’s warmed with boilers, but the electric is individually metered, consider removing the boiler and installing baseboard heaters that run off of the unit’s electricity. That way, the tenant can control the heating of his own unit and pay for it. Your gas bill will go from thousands of dollars per month during the winter to nearly zero.
Unfortunately, the cost of water has increased dramatically over the last few years and most properties have one water meter that the landlord pays for. But more and more landlords are passing most of the water costs to the tenants via a method called sub-metering. When you sub-meter the water bill, you install a meter outside of each unit and measure the usage per month. Then you, as the landlord, can charge the tenants for their usage. This accomplishes two things: your water bill reduces dramatically, and the tenants start to conserve water now that they’re paying for it. This is good for the environment and your bottom line.
Renegotiate the leases
When you have solid leases with plenty of time left on them, you’re more likely to receive a higher appraised value from an appraiser. Leases are the lifeblood of commercial real estate. A ten-year lease with rent increases every three years is worth more to investors (and lenders) than a one-year lease with no intention of the tenant to renew. It is a good idea to sign new tenants to long-term leases and to renegotiate or extend current tenant leases to maximise the value of your property.
Bring in a new management team
New management teams with new ideas, new philosophies, and totally different energies, come in and save the company or team from their demise or jolt them to brand-new levels of performance. The same can apply to your property. Bringing in a new management team to your property can add tremendous worth to your property. New management can bring in fresh ideas on increasing income, reducing expenses without harming the operations, enhance the tenant experience and satisfaction, and give the property appearance that “fresh” feeling. All of this does nothing but increase the value of the property.
Divide your land
If you’re a landlord of raw land, there are many ways to increase your property value. You can develop it and cash in when the properties are sold. But before you develop it, why not just add utilities and build roads? By doing this alone, you add value because now it has great development potential. You can sell it at this point because you’ve just fast tracked the land for development for an investor or developer. Make it even simpler to add value by splitting the lot of land up into separate, smaller lots that are large enough to put a stand-alone property onto. After it’s divided up and sold separately, the total will be far greater than selling it off as one lot. Getting land that’s entitled is a sequence of events leading up to having the land approved for more productive use. If the land is currently approved for industrial use, but it’s found to be a poor location for such use, and the land was then approved and entitled for multifamily residential use, that’s where the big dollars are made. Either splitting land into smaller pieces, or getting it approved for a higher use, makes land ownership very lucrative.
Commercial real estate investing is called passive investing because once the property is up and running it allows you to pay other people to take care of it. Commercial real estate also has the potential to significantly increase your wealth with just one deal, and it all comes down to leverage – using a small amount of your time and money to bring you a magnified return. The first step to make is to find the right tenants. There are many ways you can advertise your commercial property however Internet is the most widely used and convenient method of advertising real estate these days, and it is important that you target popular commercial real estate websites. Once you secure a tenant you need to find the most optimal way of managing your property. This is a somewhat involved process and you need to consider a wide range of issues in this respect. As a responsible landlord you need to make sure that your management skills are up to scratch and that you maintain a professional yet friendly rapport with your tenants. Never let your tenants fall behind on their payments or you’ll set a precedent that could financially ruin you.
Implementing basic business systems such as accounting, sales and management, operations and maintenance systems is of paramount importance in order to be able to successfully manage your own property. At the end of the day, your property is your business and maybe even your livelihood, so you need to have adequate and effective systems in place to run a well-oiled machine that will generate sizeable profits. Lastly in order to continue trading successfully and invest in more commercial properties, you need to think about all the different ways you can increase value of your commercial real estate. Remember that commercial properties rarely appreciate so you need to be clever when thinking up ways of achieving this. Raising the rent is an obvious candidate, and so is managing your expenses, however there are plenty of other strategies you can implement to achieve this goal. Make sure that you always remain ahead of your competition and keep a finger on the market pulse.