For Beginners: Commercial Property Management and Upkeep
Specializes in providing actionable insights into the commercial real estate space for investors, brokers, lessors, and lessees. He covers quarterly market data reports, investment strategies, how-to guides, and top-down perspectives on market movements.
Owning a rental property can provide you with a solid, consistent source of passive income, but it also comes with its own bag of responsibilities.
These responsibilities live inside the realm of property management and upkeep, wherein your tenants rely on you to keep their spaces safe, presentable, and functional.
And this bag of responsibility may soon turn your passive investment into an active one.
So what exactly is commercial property management and upkeep? What goes into it? Should you hire a property management company instead?
What Is Commercial Property Management?
Commercial property management is the oversight of the everyday functionality, presentation, financials, and safety of commercial properties, not residential.
Commercial properties include:
- Office spaces;
- Retail spaces;
- Industrial spaces (like warehouses);
- Hotels and motels;
- Multifamily real estate (like apartment complexes);
- And more.
The investor who owns the commercial property is referred to as the landlord. This is also the case with residential property, but a commercial property landlord is held to different standards than those of residential property.
What Goes Into Commercial Property Management?
Think about the last time you completed a home improvement or renovation project. What was the planning process like? What materials and tools did you have to collect? How did you handle roadblocks and other unforeseen circumstances along the way?
These are some of the questions that commercial property managers are often tasked with answering when they set out to create their own commercial property management plans and budgets.
Moreover, commercial property management doesn’t only refer to property upkeep; it also refers to the marketing, budget management, vendor management, and insurance provided for the property.
Property Management Responsibilities & Key Components
Some of the major responsibilities and key components of commercial property management include:
- Rent collection. Many new investors to the scene often make the mistake of thinking that rent collection is their only responsibility when, in fact, this is simply not true.
- Lease management. What are the terms and conditions of your leases? What do you expect out of your tenants? What happens when a tenant wants to cancel early? What are the rent abatements and concessions that you’ll offer?
- Customer service. How available are you going to be for your tenants? What does your life outside of your property management duties look like?
- Budget management. Will you be able to stay organized and on top of your property’s financial commitments? Are you a good negotiator? Will you be able to pay the property’s bills on time?
- Property repairs. How will you handle property repairs when they come up? Are you well-connected enough to get the best deals from local contractors? How will you reassure your tenants that the job gets done properly the first time?
- Evictions. If you get a bad tenant who either fails to pay up or causes more problems than they solve, how will you handle their eviction?
These are the fundamentals of commercial property management; depending on the type of commercial property you own, this list may get longer or shorter.
How to Stay on Top of Property Management and Upkeep
As you can probably tell, commercial property management really isn’t a one-man-show.
Even if you decide to go it alone, you’ll have to enlist the technical help and expertise of other professionals which means more upfront investment in the property.
Your Organization & Technical Expertise Matter
Your tenants are relying on you to make sure the bills are paid on time, the property is presented well, and their space is insured.
The relationship between tenant and landlord is symbiotic: a sloppy, unorganized, and uneducated landlord creates confused, angry tenants.
Depending on the property’s cash-on-cash return, contracting professional help by yourself might be a viable strategy, but most investors don’t choose commercial real estate for a hands-on management career.
Instead, most prefer to offload as much of the property management responsibility as possible to qualified professionals.
Enter the property management company.
Should You Hire a Property Management Company?
As a new commercial real estate investor, spending any money outside of the initial investment in your first property sounds like a scary, unnecessary idea, but it is quite the contrary.
This is not one of those lessons you want to learn through baptism-by-fire.
Instead, before you sign on the dotted line, you should line up the necessary property management professionals you believe the property will need first. This way, you’ll stay organized and prepared when the time comes for hands-on management.
One such management professional is the property management company. In essence, a property management company takes on any and all management responsibilities that come along with your investment.
How Property Management Companies Work
A property management company charges the landlord of the property for the complete and total list of administrative, routine, marketing, and management needs of their investment.
They’ll also handle any last-minute emergencies brought about by tenants.
The exact list of responsibilities of the company will be spelled out in your contract, which is why it’s important to at least hire a commercial real estate attorney as an investor before signing anything at all.
But at the end of the day, hiring a property management company keeps your investment passive.
Paying the Property Management Company
Most property management businesses run on their own pricing models; however, they usually collect a percentage of the property’s rental income (somewhere between 8% and 12%).
In the vetting phase, you should distinguish whether this amount will be out of rent due (the amount yet to be collected from tenants) or rent collected (cold cash already collected).
Some companies also require a reserve fund to be set in place and funded by the property owner. This way, in the event of emergencies, the company doesn’t have to wait for the owner to wire the money.
Finally, you may expect to pay for other fees related to running credit and background checks on tenants, property repairs, accounting, and other expenses.
Finding and Vetting a Property Management Company
According to ibisworld.com, the property management industry is worth billions with almost 300,000 companies in the United States alone.
You have your options and the capacity for a great deal, you just have to know how to find them.
And knowing how to find them starts by understanding the right questions to ask.
Questions to Ask Property Management Companies
The basic questions to ask property management businesses include:
- What services do you provide?
- What do you charge?
- What extraneous fees do you charge?
- Do you have any professional references?
But some more strategic questions you may want to ask include:
- What type of eviction protection do you offer?
- What’s the guaranteed response window for tenants with emergencies?
- How do you organize and communicate the property’s move-in and move-out procedures?
- Do you charge fees on vacant units?
- What’s your rent collection procedure like?
- Are you up-to-date on local codes and inspections?
- What kind of reporting can I expect from you?
The list goes on, but these 11 questions are a great place to start.
Ultimately as a new investor, hiring good property management will help you learn the ropes of the job without risking everything at the same time.
And the best part? Despite the extra investment, you get to remain passive.
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