Why Are You Buying A Commercial Building Without Knowing This Stuff?
Someone called me this AM, sweet person, noticed that I have a lot of Mohave County AZ Commercial Real Estate listings.
I guess I must be livin' right!
She's thinking of buying a building (told me where it was) and wanted to pick my brain, do I do property management - what could the units rent for?
No (been there, not my drug of choice), and wait a minute.
Where's your agent?
I don't have one.
Where's the listing agent. (One guess!) FSBO.
OK, you're not MY client so I'm not going on record with market rents, return on investment, etc (although as a Mohave County AZ CRE Broker, we DO that for our clients - it's what we do)
BUT you're cool, so I am going to advise you to HIRE a commercial leasing agent/property manager (we have good connects, ask us) and formally engage them to represent you as a landlord.
You will need someone to:
- Assess rentability of the property. What kind of location? Amenities? Accessibility? Nearby residential to service? Walkability? What about nearby businesses that could symbiotically coexist? ALWAYS start with the END in mind.
- Along the same lines . . . who is the ideal tenant ? How and where do you find them? CAN you find them and attract them to the property? At what price? Does that price pencil out for you?
- Income analysis. What IS the target rental rate? Expenses? And how does that translate into return? You don't want to overpay for the property and struggle to keep it full. Know this GOING IN.
- Marketing plan. What are the best ways of attracting quality tenants? Can your broker do this? Some of these marketing methods are pricey - make sure they can cover all the basis without cutting their own corners. And how well connected are they?
- Quality tenants. This is HUGE. Your rep should be carefully vetting businesses, checking corporate standings, reviewing financials and if it's a startup, business plan.
- Someone needs to personally guarantee the lease. And that someone needs to likewise be checked out. Guaranty = landlord can go after that person legally in event of default. But what if there is no blood to squeeze out of the turnip?
- Deposit. Unlike residential real estate, there is no Statute that limits deposit amounts. Evaluate the strength of the tenant and cost of a disaster, and get enough skin in the game up front to provide some degree of assurance.
- Maintenance. A decent property management company will have licensed contractors at the ready for TIs, repairs and maintenance.
- Service Contracts. Big ticket items like HVAC are expensive to repair and maintain, and there are companies who offer service contracts (kind of like a home warranty) for them. Find out who does and the cost. Then, negotiate it into your deal. Everyone wins when the cooler is working in July!
- Insurance. Require enough from your tenant to cover their contents, liability, employees etc. and make it part of the deal.
Truly, buying an income producing commercial property IS A BUSINESS and for that, you need a business plan.
Start by hiring good help.