Do you find value in this?
Hi all,
I'm working on offering a free report to commercial real estate investors and multifamily property owners as a way to build my authority, credibility, and expertise in my local community, and I'd like do get your opinion on it. My marketing plan is to mail out letters introducing myself to the community and offering my free report as something of value. No hard-sell, just free information in exchange for an introduction. Hopefully this post isn't too long, and I appreciate those of you who take the time to read it (takes less than 10 mins) and comment.
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Dear Commercial Property Owner,
Have you ever thought to yourself: if I could just increase my cash flow from my commercial property and experience a higher return on my investment then I could… pay off my loan faster or… increase my net worth or… sell this asset to exchange into a different property or… pull my equity out to buy a second home in my dream location?
If you are a commercial property owner, you may find the following information valuable - here’s why:
You’ll discover tips on:
- How to increase your building’s net operating income
- Methods to cut your building’s expenses
- Creative ways to increase your building’s value
Owning Commercial Real Estate is Like Running a Business
Owning and managing a commercial property and running a business are very similar – the goal is to be profitable. And while there are many other similarities between real estate and business, there are a few qualities of real estate that put it in a class of its own. I find it interesting that many pundits in the media are always clamoring to invest in the latest and greatest company, and how few of those same people are discussing the merits of commercial property ownership.
There are two main qualities of real estate that I’ll highlight here to illustrate why I believe it to be the better choice: first, it is a much more permanent investment when compared to a company. Think of how many buildings there are around the world that have existed for 50, 500, or even 1,000 years and are still standing today! Comparatively, how many large corporations have been able to succeed for that long? If you look at the Fortune 500 from 1955 and compare it to the list from 2015, you will find that only 12% of the companies listed made it to 2015. Not exactly the same longevity.
My second reason for believing real estate to be the better investment is that it is constantly appreciating in value. As time goes by, the value of the asset steadily increases, keeping pace with inflation, if not beating it. These, among a multitude of other reasons are why many of the wealthiest individuals and families around the world have used real estate as their vehicle to achieve financial freedom.
Perhaps the one main concern of investors about real estate is that there are many aspects to owning commercial property that require your constant attention and care. The most successful commercial real estate owners take an active role in the management of their property. With sound investment advice, due diligence, and consistent maintenance, commercial real estate investors can generate far better returns from their properties than traditional investments like CDs, or stocks and bonds.
Of course, generating an exceptional return on your investment is something that every commercial property owner strives for. However, there are cases when you may not be seeing such returns for a variety of reasons. I have put together this report to share with you three strategies that you can implement today, without investing large sums of money in capital improvements, to make your ownership experience more profitable and enjoyable.
As you keep reading, we will dive right into the three strategies that you can implement today to increase your monthly cash flow in the near-term, and likely increase your property’s market value in the long term, for if and when the time comes to sell.
STRATEGY ONE:
INCREASE YOUR NET OPERATING INCOME
Your number one priority as a commercial property owner should be to maximize your net operating income (NOI), as your building's value is based almost entirely off this number. The net operating income is calculated by taking the sum of all the rent collected during the year and then subtracting all maintenance, taxes, insurance, and utility expenses. Your building's fair market value is established by taking the NOI and dividing it by the local market capitalization rate. The cap rate is the rate of return the market has determined is adequate to deploy capital for this type of property.
As a commercial property owner, you inherently understand that NOI should be your focus because commercial properties derive much of their value from the income they produce. Thus, if you can increase your net operating income, your building's value can raise by a proportional amount. Below I'll expand upon the two main ways to increase your NOI: be at or near 100% occupancy, and increase your rental rates.
Occupancy
Let’s first discuss occupancy, since having vacant space inherently means less income. The rent your tenants pay to occupy space in your building is its main source of income, so you obviously have incentive to lease all of your spaces and then keep them leased.
What does it take to do so? Primarily it takes attracting great tenants, having a professional leasing advisor who can properly market and screen for great tenants, a professional management company that does a stellar job at taking care of your tenants, and properly positioning your asking rent so that prospective tenants perceive your building as being a good value.
As a commercial real estate agent, I’ve seen that there are many building owners who take on the task of leasing their buildings themselves. I’m always surprised when I see this however. While most building owners realize that they do not want to manage the property themselves on a daily basis, they don’t realize what a specialty it is to find and attract the right tenants. This should not be taken lightly, and I highly recommend finding an experienced leasing advisor that has the creative vision to see and understand what business owners will be looking for in a space, along with the necessary communication skills to be able to convey that vision.
The reality is that leasing and marketing your building should be taken just as seriously as any other aspect of commercial property ownership. It’s just as important because leasing to solid tenants is the primary driver of great cash flow, which is how your building is going to be valued in the marketplace.
Beyond properly marketing the space, it is crucial to understand that when business owners are in the market to lease that they are looking for a space that will reflect what their business does, how it operates, and how it succeeds. So, take the same approach with your own building by envisioning what your spaces can become in the future, not what they are now. A great leasing advisor will be experienced in this process from doing many, many leasing deals and will have the vision to be able to communicate it to the prospective tenant. You want someone who can sell the tenant on how being in your building will be good for his business.
When you position your building properly, have professional leasing advisors who are on the front lines daily with tenants seeking new space, and have a professional management company that can smoothly maintain and operate your building, you have a recipe for maximizing your occupancy. Now you're on your way towards maximizing your NOI and profit potential.
Rental Rates
Your second tactic for increasing your net operating income is to use the ideas we just discussed as justification for charging the appropriate market rent. If you’ve accomplished the trifecta of proper positioning, professional leasing services, and professional management, you put your building in the best position to create demand from business owners who looking for space. Higher demand to be in your building means you can ask higher rental rates.
At this point, don’t shoot yourself in the foot by not charging the appropriate asking rent. Unfortunately, there are many times when commercial property owners charge their tenants below market rates, if for no other reason than to “be nice.” We are all familiar with the saying “it’s not personal, it’s business,” and commercial property ownership is no different.
By charging below market rents you are hurting yourself in the near term by limiting your cash flow and profit potential from your investment, and hurting yourself in the long term by inadvertently lowering the potential sale price of your property. As we discussed earlier, commercial properties derive the majority of their value from the net operating income. By working hard to raise the NOI, you can raise your building's market value and better position your property in the marketplace.
If you’re feeling apprehensive about raising your rental rates, I recommend at least taking the time to see what other nearby buildings of similar character are charging for rent. The marketplace will tell you what is fair, and if you are charging below market rates, I urge you to raise them as soon as possible.
Now obviously, depending on the number of tenants you have in your building and the length and structure of their leases, raising your rental rates may be difficult. And it may take some time to fully implement this strategy. But having the foresight to do so will pay off by providing you with increased cash flow now, and likely a higher sale price later, for if and when the time comes to sell.
STRATEGY TWO:
DECREASE YOUR EXPENSES
When it comes to commercial property ownership, expenses are generally the factor you have the least control over. Typical expenses are for repairs and maintenance, utilities, advertising and marketing, management fees, payroll, property taxes, and insurance. Of these, property taxes, insurance and utilities will be the largest expenses against your property. Some costs you are only able to reduce by so much.
What then, can a commercial property owner do to mitigate these costs? First, you will need to have a proper understanding of each and every one of your expense items. I then recommend that you break them down into a cost per square foot basis. Once you have done this, you can now begin to structure your lease document so that you can pass your main expenses on to your tenants via Triple Net or NNN leases.
To summarize, a NNN lease is one where you, the landlord, can pass certain costs of property ownership on to your tenets as an additional expense on top of their base rent. The "nets" refer to your building's property taxes, maintenance, and insurance. This way your tenants are paying for the costs of running and maintaining the building, dramatically reducing your out of pocket expenses and increasing your net operating income.
This is one of the most effective ways towards making a big change in your expense category. Among the various types of commercial leases, the triple net lease is by far the most favorable to the landlord and will play a major factor in your ability to increase your cash flow/net operating income; both in the near-term and in the long-term.
I recommend that you spend the time to calculate the yearly average cost of these expenses against your net operating income. Doing so will help illuminate the issue so that you can decide to charge your tenants, instead of paying for the expenses on your own. It is true that you will need to keep diligent records of your expenses and provide a yearly reconciliation to your tenant. And yes, it will take some time and effort in the beginning to implement this strategy. But if doing so could add thousands of dollars to your net operating income, thus increasing your cash flow while also increasing your property’s value, wouldn’t it be worth it?
STRATEGY THREE:
BE CREATIVE WITH ADDITIONAL SOURCES OF INCOME
Perceptive landlords don’t stop at the above strategies; they look for additional ways to maximize the value of their building. Take a moment and think about what amenities your commercial property offers your tenants. Are there a few perks that your tenants take for granted that you could break out as a separate expense?
For example, in an office building you could charge a fee for additional storage. Or if your building offers on-site parking and there is limited street parking, a small monthly fee for the convenience of parking close to work can easily raise your net operating income. This works well for service related businesses that rely heavily on foot traffic, such as medical professions.
For owners of multifamily apartment complexes there are many simple ways to increase net operating income: update the exterior and interior of the units to reflect current trends, install in-unit washer and dryers, use sub-meters for utilities, offer on-site workout facilities, install LED lighting in all the common areas, or charge additional rent for allowing pets.
Every little dollar helps, so I urge you not underestimate even the smallest of increases. A few hundred dollars a month added to your net operating income will translate into thousands of dollars over the course of a year. Try to be creative while providing value for your tenants. Create add-ons that your tenants will desire and be happy to pay for. This will help properly position and differentiate your commercial property from others in your local area. It will also create higher demand from prospective tenants vying to be in your building, justifying your market rental rates.
INCREASE CASH FLOW NOW, INCREASE SALE PROCEEDS LATER
Successful profitability is what business and real estate are all about, so I recommend that you to treat your commercial property ownership like a business. Don’t think you that won’t be able to implement these strategies right away and not see any results, because if done right, you will. The best part about implementing these strategies is that you can test each of these ideas one by one to find out which one works best for your property.
Your goal is to manage your property intelligently and efficiently to maximize the value of your building. Thus, you provide value for yourself in the near-term with increased cash flow, and in the long-term by increasing your building’s market value for when and if the time comes to sell. Properly position your property, and engage with a professional leasing advisor and property management company. They are your team mates on your journey towards commercial real estate success. Prepare now so that you’re ready for when that day comes to make a change by enacting these strategies right away.