How To Become A Commercial Landlord
Becoming a commercial landlord is an effective way to not only tap into a substantial revenue stream, but also to expand your portfolio and experience. There is no doubt that commercial property represents an exciting way to generate income, and countless potential investors are attracted to this lucrative and challenging investment opportunity.
However, becoming a commercial landlord isn’t without its difficulties, especially if you want to create a business that is consistently profitable and successful. Before embarking on this journey, there are several essential considerations that should be kept in mind so that you are as prepared as possible. The following article is an in-depth exploration of what it means to be a commercial landlord, and what you can do to make the most of this opportunity.
- Choosing A Property
- Your Responsibilities
- Legal Components
- The Importance Of An Insurance Policy
- Auctions And Commercial Properties
1. Choosing a property
The outcome of your investment will be largely determined by the type of property you choose, where it is located and who you intend your tenants to be. A commercial property is any building or land that is intended for profit-generating activities, rather than regular residential purposes. They are usually owned by a landlord, who then leases these properties to tenants. The rent that is received by the landlord comprises his or her profits, once offset by any associated costs such as repairs, legal fees and insurance. Offices, shopping centres, restaurants, warehouses and even apartment complexes are regarded as examples of commercial properties.
What’s more, the location of the commercial property should be carefully considered, as you want it to be within easy access of the tenants that you are looking for. If you want to invest in an apartment complex, for example, then it should be located in a residential area and the tenants you attract will probably be young families and working professionals. On the other hand, if you are investing in a storefront then a central location with heavy traffic is preferable, and the ideal tenant will be a dedicated business owner. By carefully choosing the location in accordance with the desired purpose of the property, you will have no problem in attracting the right tenant.
2. Your responsibilities
When letting out your commercial premises, you are expected to fulfil certain responsibilities towards your tenant. Many of these responsibilities are stipulated within legislation, and they are designed to protect the safety of tenants, landlords, employees and members of the public. Health and safety is particularly important, as it will be your duty to oversee and maintain temperature, ventilation, lighting, water supply and hygiene. Fire safety is another critical area, and it is essential that your property complies with the relevant regulations when it comes to fire safety equipment, fire exits and fire alarm systems.
For gas and electrical safety, a registered engineer will be expected to check the property on a regular basis and then issue a certificate confirming it is deemed to be safe. For asbestos management, you will be expected to determine the location and condition of materials that may contain asbestos, and share this information with the tenants. Anyone who possesses a commercial property is also obliged to provide prospective tenants with an Energy Performance Certificate (EPC), a certificate that describes the energy efficiency of a property and in what ways it may be improved.
3. Legal components
A landlord is required to uphold various legal obligations, and these can be complicated when it is a commercial property, as compared to their residential counterparts. A detailed and solid lease contract will clearly state your rights and responsibilities with the tenant, covering questions such as the length of the lease, who is responsible for the ongoing maintenance of the property, any service charges and after how long the rent may be reviewed. A good tenancy agreement will protect yourself as well as the tenant in the vast majority of situations, primarily because it establishes the role of each party throughout the duration of the lease. In the event that a dispute arises, the lease can be referred to in order to determine each party’s position.
You may also want to carefully review the terms of the lease before making any commitment with a tenant. There are disadvantages and advantages to short-term and long-term leases. Short-term leases offer little stability, but it is a viable option for a business that is just beginning to establish itself and you as a landlord are not tethered to a problematic tenant for years either. A long-term lease provides considerable security, but there is a chance that any disagreements with your tenant could become significantly drawn-out. There are ways to terminate a commercial lease, albeit it depends on whether the tenant has broken any of the clauses in the contract or if the landlord provides adequate notice or an alternative property.
4. The importance of an insurance policy
As a landlord with a commercial property, you are essentially operating as a business. Moreover, the risks that you assume are different from those of a business premises that is occupied by its owners, and this is reflected in the insurance policies that are available to you. The benefits associated with a robust insurance policy cannot be underestimated, protecting you from any of the risks and challenges that you may be exposed to as a commercial landlord.
There are many types of insurance that you can invest in, and their relevance will depend on your property, its purpose and its location. For example, building insurance, landlord’s insurance, owner’s liability insurance, employer’s liability insurance and public liability insurance are types of insurance that may be important for you to have depending on your circumstances.
5. Auctions and commercial properties
Auctions were once typically reserved for residential properties, but with the passage of time more and more commercial properties are appearing in auctions. Considering the variety of premises and reasonable prices that are offered during an auction, it can seem like an exciting proposition for someone who is just beginning their journey as a commercial landlord. However, purchasing a property through an auction has always been regarded as a risky venture. Every property that is placed in an auction will have a legal pack, which is a set of documents provided by the seller for the buyer to review prior to placing a bid. These legal packs are complex, and you may overlook something, which could have serious financial implications.
It is crucial that you seek legal assistance and guidance before attending an auction, particularly for the legal pack. The reason for this is because if the auction hammer falls on your bid, the contracts are immediately exchanged and you are bound to purchase the property, even if you haven’t signed anything and you change your mind afterwards. If the property fails to meet your expectations and requirements, it will be an incredibly expensive mistake. With professional advice, however, you can still participate in an auction whilst mitigating the risks as much as possible.