Successfully Manage Commercial Real Estate Properties With These 14 Tips
Branching into the commercial real estate market is often a lucrative investment. However, there are challenges to managing these kinds of properties, especially if youТre new to the industry or have only had experience in the residential sector.
Get A Personal Guarantee
CRE managers should try to negotiate a personal guarantee from regional and local tenants who aren't backed by a corporate guarantee from a national affiliate. Be diligent and ensure the local business owner has the balance sheet to actually back up their personal guarantee. If the owner has insufficient assets, a personal guarantee won't provide you with any recourse if the tenant defaults.
Maintain Sufficient Reserves For Working Capital
One of the biggest mistakes I've seen investors make is not having sufficient working capital. Compared to residential, commercial has increased vacancy risk, increased budget for TI allowances and higher maintenance and repair expenses. Investors need to be able to cover their expenses despite vacancies as well as maintain the quality of their assets to keep their property in leaseable condition.
Leave It To The Experts
I am one to leave to the experts in that for some of us, the best way to go about owning is to find solid management companies to partner with. We can not do it all, nor should we feel compelled to. Sometimes the best way to grow is to hire third-party firms.
Take An Active Approach
My advice is to take an active approach. Too many times, owners and managers will take a passive approach. This can make current tenants frustrated. It can also set an owner back when pursuing new tenants. Strive to have good communication with current tenants, have a well-maintained property, know your market and chase active prospects. This will set you ahead of your competition.
Buy Triple Net Leased Properties
I believe that the best way to hold commercial property is triple net (NNN) leased properties with strong national or regional tenants. With this type of property, you will have no expenses as those are borne by and in some cases, paid directly by the tenant.
Check Sales And Tax Returns Of Commercial Tenants
Same as credit score or residential W-2, you will want to check the sales and tax returns for your commercial tenants. It depends on the retail tenant's business but if the rent is higher than 6-8% of their revenue, I start to look at other items more closely like personal assets or guarantees for protection. If they go bankrupt, I get zero rent no matter how good I am at HVAC maintenance.
Acquire The Expertise Required For Success
Commercial real estate management is night and day different from residential management. If you are an investor but have no experience managing, get a property manager. Hire one with experience and good software that automates management or get good software and study to learn about net leases, CAMs, costs and other kinds of contracts you will need to be successful as a manager landlord.
Have A Technology-First Approach
Utilize artificial intelligence and automation-based technologies in your daily workflow, particularly in client acquisition and marketing, data management and financial modeling and valuation. This will ensure that your business remains ahead of the curve and is an early adopter of disruptive technology.
Have Systems In Place
Have systems in place when managing your properties. First, you should have management software that keeps track of everything for you. Second, you should have professionals on hand to call with each issue that may arise. Having a way to quickly take care of any issues is the best way to remove the stress of property management. Plan ahead and management is easy.
Proactively Manage Maintenance Expenses
One of the biggest challenges is controlling maintenance expenses. Try to convert tenants on triple net leases (NNN) rather than gross leases so the tenant is responsible for real estate taxes, building insurance and maintenance. Include common area maintenance (CAM) reserves so when larger maintenance costs arise (such as painting, seal coating, snow removal, etc.), funds are available for use.
Keep It Local
While CRE tenants may be national or regional, the managers for the building should be local and within 20-minutes of the building. Property managers are busy fielding calls and requests all day long. I've found the best ones to be the ones who are able to physically drive by the properties on a regular basis. Tenants like this "hands-on" approach, and it leads to better returns.
Use The Right Systems And Processes
Fundamentally, as in most businesses, the right systems and processes are critical. We've been able to accelerate our business by leveraging more and more technology to help us streamline and become drastically more efficient than our competitors. We run our management more like a tech company than a CRE company from simple things like Slack/Asana integration to more complex pieces like BI and HappyCo.
Use A Property Management Firm
Commercial real estate can be a complex investment and unless you have a property management background or are willing to commit to managing your property as a full-time job, a management firm should be used. The more special-purpose the commercial real estate you own is, the more problems you can anticipate. It will be worth the expense to have a professional take these worries off your hands.
Fix Small Leaks So The Ship Doesn't Sink
The key is detailed expense records. "Behind-the-envelope" economics leave minor expenses unaccounted for with a level of diligence required. Whether fixing an appliance or sending a worker on-site and understanding the cost of the gas, itТs crucial to track expenses with meticulous detail to manage commercial properties. That way you can manage your P&L and balance sheet and maximize profits.
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