ommercial property rentals store, and then sell it to an
wit triple-net leases mean investor who leases it back to
little management and high them.
returns. However, this can be a
The triple net lease means
tough market to break into, and that the investor has a
you can have negative cash flow guaranteed return on his
on vacant storefronts for a year investment, more or less. Rising
at a time. property taxes or insurance rates
How about a real estate don't affect him, because the
investment in which the renter lessee pays these, as well as
pays not only the rent, but the maintenance costs. Essentially,
taxes and insurance, and the owner of the property just
maintenance costs as well? That collects the rent for the term of
is the idea behind the "triple the lease. As you can imagine,
net lease." It is common in these are deals that many
commercial real estate.
investors would love to have.
Many companies make too much
Commercial Property Rentals -
money on their products to have An Example
their capital tied up in a
Suppose you find a building
building or real estate. For that is suitable for a furniture
example, if a retailer can turn store or other retail store. You
over $500,000 worth of inventory can get it for $600,000. You find
six times per year, making 10% that the bank will loan you
profit each time, they make $480,000, or 80% of the value -
$300,000, or 60% on that capital. but only if you have a lease
It wouldn't make sense to have first. You have enough cash to
that $500,000 invested in a invest (or a partner does), so
building. This is why they rent. you can handle the deal if you
In fact, many large retailers can find a renter.
will buy real estate, build their
The seller will give you an
option on the property for $120,000, and about $30,000 in
$10,000 for four months, and will other expenses, you have $150,000
apply the option fee towards the invested, making it a
purchase if you can close the cash-on-cash return of about
deal. This buys you time to find 8%.
a renter. Of course, you will
Your total return will be
lose the $10,000 if you can't substantially higher. This is
close the deal.
because you will get a
You hire a good real estate depreciation allowance for the
agent who has experience with building at tax time, and you
commercial leasing, and get busy. gaining equity with each payment
After two months, you find a hot on the mortgage loan.
tub company that seems to be
Of course the company you rent
doing well and wants a store in to could go bankrupt. This is a
your area. After checking out real possibility. What happens
their references, you negotiate a then? You rent out the building
rental rate of $4,500 per month to a new tenant hopefully.
on a ten-year lease. They also
This is where commercial real
pay property taxes, insurance and estate gets tricky. You have no
maintenance expenses.
cash flow when the building is
The bank loan is due in ten empty, but you still have
years, but amortized over 30 payments on the loan, as well as
years, with eight percent taxes, insurance and maintenance.
interest. This means your payment In the example given, these could
will be about $3,500. Since the add up to $4,200 per month. You
renter pays virtually all of the may also have to pay utilities,
other expenses, this means you and advertising costs, and a fee
get positive cash flow of about to an agent to help you get the
$1,000 per month, or $12,000 per place rented again.
year. With a down payment of
Now for the really bad news.
It is not uncommon for commercial relatively few investors who
real estate to remain empty for a pursue these kinds of deals.
year or more. It takes time to
Of course, this means less
find the right tenant for a competition than in some areas of
building. It isn't anything like investing. Then, when you do get
residential real estate, where a good ten-year tenant on a
there are always a few buyers triple net lease, you get to
around, and they can live in many enjoy the cash flow with none of
types of houses. Each business the usual headaches of being a
has its own particular needs.
landlord.
Imagine that it takes thirteen
You may want to find a mentor
months to get the place rented and study the market before
out again. The good news? Perhaps considering any commercial real
you can get $250 more rent this estate investments. Find out what
time. The bad news? Thirteen kind of returns investors are
months of expenses, plus the expecting. Commercial property
expenses of re-renting it will rentals have to pay you a higher
likely add up to about $60,000. return than residential property,
That means you have $210,000 because the risk of long
invested now, and the cash flow vacancies is greater, as is the
of $15,000 represents just a bit possibility of rents going
over 7% cash-on-cash return.
down.
If you don't have the $60,000
to cover this period of vacancy,
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Article Tags: cash, property, real
