Commercial property type – residential apartment rentals
This category of commercial property includes multifamily houses of 5 families and above, as well as small, medium and large apartment buildings. Like residential rentals, many of the same basic concepts for acquiring and managing these types of buildings can be applied. However, the larger the apartment building, the greater the economies of scale, and the potential for much greater profit exists. However, most of the risk inherent in this type of investment lies in vacancy rates. The larger the number of units in a building, the greater the responsibility of keeping them fully occupied at any given point in time. This represents the greatest challenge in managing these kinds of properties.
Commercial property type – Office buildings
There are many forms of office buildings The most common types consist of small offices, low-rise buildings, high-rise buildings and office parks. Tenants typically are non-retail business operations that do not require street frontage.
When evaluating the profitability of any commercial space, you will need to determine what the realistic market rent for the space should be. If it currently is too little, then the building’s profit potential is being minimized. And where rents charged are too high, you’ll have many vacancies – producing a potential cash flow shortage.
Market rent has to take into account the overall economic landscape, the quality and location of the building and the services the property provides (for example, parking, air conditioning, utilities, floor coverings). Rents are usually established as a specific dollar amount per square foot of usable space.
In general, standard leases are used when renting out commercial space. However, there are special conditions that can be added to the lease to tailor them for any specific renter. An example of these type of conditions is an escalation clause. With this provision in a lease, rent can be adjusted upwards each year at a set rate. This helps the building owner offset increasing building expenses.
Many leases allow for special types of services to be provided, like a janitor or maintenance service, receptionist or storage facilities use. Another special condition that’s sometimes allowed by building owners, is for the ability of any tenant to sublet their space should the tenant need to move. This a kind of escape clause, and traditionally requires the landlord’s approval of the subletting company.
Usually when entire buildings are being rented out, triple net leases are used. This type of lease calls for the tenant to pay for all utilities, taxes and insurance on the building during the term of the lease.
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