Investing In Office Buildings & Retail BuildingsInvesting in office buildings can be obtainable for any investor, however, it typically is one of the biggest investments of the real estate investment type. On this page I am putting office and retail buildings in the same category together because the features are similar. Investing in office buildings will provide you with many benefits. Like apartment complexes, you can enjoy the benefit of the multiple tenant feature. With office and retail buildings you also have longer term tenants. Before investing in office buildings or retail buildings you must read the book Investing In Income Properties by Ken Rosen. I read it recently and I really took away some good information from it. Ken talks about what he calls The Big Six Formula for income properties. I believe this book paints a very realistic picture for investors.
Location is more critical with this type of investment. You want to find "B" buildings in "A" locations. Which means you are finding buildings where the income can be improved (ex. increase rents or add units, etc) in locations that are the best in town. These locations command top rent, attract national franchises, upscale businesses, and office attorneys, dentists, etc. An "A" location will be in an area where there is no more room to expand or build new. Finding a "B" building in an "A" location does require a lot of research. You are looking at an investment from $500,000 on up. If you don't have at least $50,000 to put down, I wouldn't even recommend trying to purchase. However, I would spend time looking at listings because it teaches you about the market and gains you insight into those properties.
You also enjoy more flexibility with structuring leases. With residential houses you are pretty much limited. Investing in office buildings or retail buildings allows you some choices in regards to types of leases. Gross Lease- In this type of lease the tenant pays the landlord a gross amount for rent. The landlord then pays the property's operating expenses such as property taxes, insurance, management or maintenance costs from the income they receive. The tenant may be responsible for electric, telephone, and possibly water & sewer charges depending on the verbiage of the lease document. In addition, a CAM, common area charge, may be assessed to alleviate the cost associated with maintaining the property or public utilities paid by the landlord. With some gross leases, the landlord may put an expense stop provision in the lease. In this type of clause the tenant pays the excess over a specified ceiling on operating costs. This would be when expenses go over the base year. The base year is the amount of the expense during the tenant's first year. Triple Net Lease- Most common with today's commercial properties, the Triple Net Lease,also known as a net lease, directs the tenant to pay the landlord a “Base Rent” which is net of property expenses, PLUS an additional amount for tenant's share of the property's expenses such as property taxes, insurance, common area maintenance (C.A.M.), management, etc.Many times this is referred to as a "triple net" lease in reference to base rent being "net" of: Property taxes,Insurance, and Common Area Maintenance (CAM). These are the two most common types. There are variations to these such as double net lease where one of the three expenses is dropped or just a Net lease. There are also full service gross leases or modified gross leases. All of these are variations on who pays what expenses. Leases are negotiable and being flexible is important, however, the owner or landlord needs to make sure their expenses are covered. Leases with office or retail buildings are typically 5 years with renewables. If you decide investing in office buildings or retail buildings is something you are going to do, I highly recommend using a commercial property manager. They will know leases and know the law. You really should utilize them since their fee is only 3-5% for commercial properties.
Return from Investing in Office Buildings to Investing in Commercial Real Estate
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