A Property Owner’s Guide to Being a Successful Commercial Real Estate Landlord
If being a commercial real estate landlord were easy, there’d be a lot less money in it.
A solid understanding of what it means to be a property owner is essential for first-time landlords and seasoned CRE professionals alike. This landlord guide offers tips and insights to make sure your first (or your 50th) commercial real estate investment is a success.
Here are eight ideas you need to understand to become a successful landlord:
LANDLORDS MUST BRUSH UP ON THEIR BUSINESS SKILLS
From the outset, successful commercial real estate investors treat their investments like running a business. From limiting liability by taking title as an LLC to refusing to rent to friends or family, avoid treating property ownership as a hobby.
Create a business plan. Present this business plan to experts and solicit their feedback. Create a budget and stick to it. Even if you’re only investing personal cash, hold yourself to the same level of scrutiny as if friends or colleagues entrusted you with their hard-earned money.
GOOD LANDLORDS ARE PEOPLE PEOPLE
As we mentioned as our final tip in Five Things You Must Know Before Investing in Commercial Real Estate, CRE investing demands that landlords execute across a dizzying array of disciplines. And while you can handle a handful of these tasks from the comfort of your pajamas, far more occur by interacting directly with other, fully-clothed humans.
Being a proactive, engaged, and responsible landlord entails constant and, at times, delicate interactions with people. From tenants to brokers to contractors, successful property owners make and keep connections with a variety of individuals across the industry. Bankers and plumbers are rarely cut from the same cloth, and savvy landlords must excel at fostering trust both in the board room and in the crawlspace.
PLAN FOR THE UNEXPECTED
Landlords have the best stories; however, from weekend squatters to rivers of raw sewage, these story-worthy situations typically come with a price tag.
The most common of these unexpected problems are maintenance-related, and many are unavoidable. Even the most turnkey investment can necessitate emergency repairs, so don’t skimp on cash reserves. Establishing an “in case of emergency” account from the outset minimizes having to dig into family savings to fix a leaky roof, termite invasion, or wind-driven palm frond.
As an example, my team once over-raised equity at the expense of projected returns, adhering to the axiom “raise capital when you can, not when you must.” When three below-market tenants moved out unexpectedly, we were glad to have the extra cash on hand for the surprise upside: an opportunity to renovate the vacated units.
LEGAL DETAILS MATTER
Legal matters surrounding property ownership can be a source of both enormous frustration and extreme satisfaction. Navigating the web of local rental statutes, building codes, and fair housing rules — not to mention state and federal tax codes — can be a daunting task. Engage experts and don’t be afraid to spend money to learn the essentials — nominal advisory fees upfront can save you thousands in mistakes.
But if you can wade through the morass of regulations, commercial real estate deal-making can be remarkably creative and rewarding. Fortunes are made before a single hammer is swung, using options, joint ventures, partnerships, creative financing, and other structuring tools. It may not seem sexy at the time, but a good understanding of contracts, escrow, and financing basics is the foundation of negotiating profitable deals.
YOU CAN’T BE TOO CAREFUL ABOUT TENANT SELECTION
Whether you’re renting an apartment, storefront, or warehouse, tenant selection is often the most critical decision a landlord can make. Check references, run background checks, and meet tenants in person whenever possible.
Reliable tenants can make being a landlord seem like actual free money. Lousy tenants, however, are not only expensive and time consuming — the stress of managing problem tenants will bleed into your personal life and day job. Trust your instincts, and don’t be afraid to forgo a little rent for some peace of mind.
LANDLORDS REAP WHAT THEY SOW
It may sound counterintuitive, but a tenant’s behavior toward the landlord reflects and landlord’s treatment of the tenant. Hands-off owners tend to get hands-off tenants, who do their own repairs but may be lax on other obligations — like paying rent. Likewise, landlords who call tenants the day rent is due often get called the minute a lightbulb goes out.
Neither relationship dynamic is inherently wrong but understand your investment goals and act accordingly. Don’t be casual on collections if your lender needs a delinquency report on the second of the month, and don’t expect tenants to respect their lease obligations to the letter of the law if you’re not ready to do the same.
DON’T THROW GOOD MONEY AFTER BAD
Optimizing rent can be tempting for obvious reasons. However, tenants offering lots of dollars sometimes lack credit or business savvy, and failed business endeavors equal vacant commercial space. Other times, great tenants are willing to pay up for the perfect space.
Evaluate your tenant’s business plan and incorporate it into lease terms appropriately. A proven business may be worth a larger tenant improvement (or “TI”) allowance, whereas a big build-out to take a flyer on an unproven concept could be throwing good money after bad.
For example, at a warehouse we own in a city with legalized cannabis, an entrepreneurial husband and wife team offered an eye-popping rent to open their first pot club. They wanted a considerable TI budget and long lease, in exchange for a rent that would have put us at almost twice our expected revenue. But upon reading their business plan, their pro forma didn’t add up, and they bragged about using almost entirely OPM to fund their project — they had virtually no skin in the game. As tempting as the high number was, we passed.
OBEY THE GOLDEN RULE
Too many landlords approach property ownership like a zero-sum game, treating tenants like adversaries. Don’t fall into this trap.
Approach tenant relations with respect, handling the inevitable difficult situation the way you’d like your landlord to act if the roles were reversed. Remember your tenants are people first, a revenue line-item second. Empathy isn’t just ethical; it’s opportunistic.
Commercial real estate investors who invest in their tenants’ success often reap the benefits, hearing things like “I’m looking to expand, and I like the way you run this building. Would you be willing to buy properties I can anchor?” Buying with a tenant in-hand is a powerful advantage that combative or absentee landlords never see.
Last year, we had the unfortunate experience of seeing a restaurant in one of our buildings fail. The business owners had patiently endured a lengthy build-out, and we repaid their patience by voluntarily extending our original teaser rent period by six months. We maintained an open, transparent relationship during the entire process. When the tenant’s business sale dragged on for reasons outside their control, the owners didn’t blink at keeping the rent payments coming in even after the restaurant had closed its doors.
Commercial real estate investing can deliver financial freedom if done correctly. But mishandling the business of being a landlord can invite disaster for first-time commercial real estate investors and professionals alike.
Ready to find your next commercial real estate investment? Check out CRE properties for sale at CREXi.