Investing in office buildings can return significant profits. An investor can achieve this goal by getting tenants into long term leases of three years or more. This is fairly common practice for office buildings. A Full Service lease is the most common rental structured lease. This type of lease charges the commercial real estate tenant one fee which is inclusive of the base rent and all other operating expenses including cleaning and utilities. The other most common lease structure in the office space rental market is the Triple-Net (NNN) lease. For Triple-Net leases, commercial real estate tenants pay the base rent plus all other operating expenses which include the office building’s real estate taxes, insurance, and maintenance. The income is usually very attractive for office buildings versus residential due to offices space experiencing longer periods of lease terms.
An advantage of office buildings is normally their prime location to prospective businesses. As a result, the buildings replacement cost will always increase. A patient investor can purchase an office building in a recession period at a discount and hold onto it until the forthcoming economic recovery, which basically guarantees a substantial profit once sold.
On the flip side when the economy is stalling or in a recession, an investor can experience lease cancellations and higher vacancy rates resulting in decreases in rental income. So, there will be wide swings in vacancy rates sometimes as much as forty percent even in a high traffic area. It all depends on the economy. Although having long term leases does reduce your risk, always have at least a year of savings to cover any expenses and unexpected vacancies.
When financing an office building for purchase or even a refinance, the lender already discounts building income by at least thirty-five to forty percent for vacancy expense into their underwriting formula.
What is important to the financing company is the income the office building is generating and will generate which is why you want solid credit-worthy tenants with long term leases. As a rule of thumb, you should get into negotiations to buy an office building which has existing tenants already in place and preferably tenants who have a minimum of two years left on their leases.
Office building tenants are not easy to find like in the residential market. An office building and its space is unique and it will take time to replace those tenants with new ones. Once you do find new tenants, they are sometimes more demanding than the average residential tenants since they are in the office eight or more hours per day while residential tenants are out at work. However, with either investment you choose, you should have a full-time maintenance person to take care of service requests. As with any large investment, do your research first before diving in to diversify your portfolio of real estate.
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