Why commercial real estate is more lucrative than residential sector
Investing in commercial real estate is widely considered more trouble than it’s worth, but according to Sam Beckford, founder of Successful Property Strategies, not only is it vastly more lucrative than investing in residential, it’s a lot easier than people think.
Beckford is a Vancouver-based investment coach and author of four books about small businesses and business coaching that have been translated into nine languages, and he owns three commercial properties worth $14.5mln that have only $1.68mln left of repayment. A major reason he’s keen on being a commercial real estate landlord, aside from the positive cash flow he maintains, is stability.
“One of my tenants is the federal government of Canada,” he said of the Service Canada office in his building. “That lease is worth about $1.3mln in payments. Other tenants signed five-year leases with five-year renewals. In their previous office, Service Canada was in that building for 26 years, so to have a single tenant who has the potential of that long of a lifespan is unheard of in residential.”
Moreover, residential landlords don’t have nearly as many rights as their tenants, but because commercial leases are longer and, therefore, more instructive, landlords more often than not emerge from litigation unscathed.
“You’re also dealing with contracts, not people,” explained Beckford. “That’s huge because when it comes to people having horror stories with bad tenants and bad management, the courts side with the tenants because they think they’re being taken advantage of, but with commercial properties, you’re dealing with 30-, 40-page contracts that clearly define everybody’s responsibilities and rights, and courts typically side with the landlord.
“But usually it doesn’t get to that because the lease is so defined. With residential properties, even if the tenant is doing something illegal, or borderline illegal, you can’t evict them because it’s their home, but with commercial you can lock the doors.”
The key to finding a good investment property is finding one with chronic vacancy because that’s a bargaining chip. But, advises Beckford, plan ahead.
“I find buildings’ weaknesses and see them as strengths, because it’s strength in negotiating,” said Beckford. “I’ll have a tenant lined up before even putting an offer in, and have them committed if I get the building, and then I’ll do the offer based on having that tenant in my pocket. Commercial investors avoid vacancy like the plague because a property is only valuable if you have a stream of income. But if you can get the right stream—and more importantly, combine the right stream of income and getting tenants who contribute to each other’s success—you have a long-term formula for profitability.
“It’s like opening up a truck rental business next to Home Depot.”
Another major boon to being a commercial landlord is that tenants typically look after the property because it is, after all, their place of business. While there’s precious little to incent a residential tenant to look after the home they’re renting, commercial tenants have put their life savings into their ventures.
“They take care of the place because they’re running a business. I had a karate studio that opened up and they spent over $150,000 improving the space, and the renovations they made would be valuable to a future tenant if they ever moved out. It’s impossible to fathom that a residential tenant would spend money on your space and improve your residential unit.
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