If you have experience with real estate investing, you may consider expanding your investments into commercial properties. Commercial property can be a very profitable investment. However, economic cycles and seasons can have an impact on your revenues, especially with retail spaces. These are a few rental ideas you may consider as you prepare for your first commercial property tenant.
Leases Based on Percentage
If you choose to pursue a percentage lease, you need to determine your minimum monthly rent requirement. Therefore, what is the absolute minimum you need to collect in rent? This is your base amount for a percentage lease.
Next, you can choose either adding a percentage over the base amount. This amount is typically a percentage of the tenant’s gross receipts. If the business is a moneymaker, you can expect a high rent each month, but if it is seasonal or struggling, you may only receive your base rent. For example, if your tenant runs a fly fishing business, you may receive very high rental payments during the spring and summer, but this amount will fall to your base rate during the autumn and winter. However, if you rent to a ski shop, you may receive great rental income during the fall and spring, but you will only receive your base amount during the summer and fall.
With this option, you are guaranteed your base rate, but the total rent amount could vary significantly every month.
Your first rental calculation option is to charge per square foot. This is a common strategy for retail, manufacturing and warehouse spaces, but it can work well for office space as well. You need to do some market research to determine the average cost per square foot on other rentals. Then, calculate your rent per year divided by 12 to get your monthly rental income.
Commercial properties include shopping centers, offices and warehousing, so commercial tenants are focused on business. They understand the leasing process and have support teams to negotiate and find leasing spaces. However, it is expensive to relocate businesses, so these tenants tend to be long-term, resulting in dependable income and consistent positive cash flow. In addition, any repairs or remodeling will typically be paid for by your tenant.
Commercial tenants seek to reduce their operating costs as much as possible. They also understand the market and know what commercial spaces should cost to rent.
Research your potential rental income before you expand your real estate investing into commercial properties.