Lessons learned in commercial real estate

I have started, run and invested in a wide variety of businesses over the past 45 years. Income-generating real estate-wise, I owned residential rentals going back nearly 20 years. But I didn’t get into commercial real estate until 2012 or so. And the truth is, I had many lessons to learn.

Here are a few of the most important of those lessons:
• Buy low, sell high.
This may seem obvious, but most people don’t practice it. It was explained to me long ago by a very successful commercial real estate investor who was the landlord for our Boston office. He told me their secret was they bought apartments when no one wanted apartments and sold them when the apartment market was hot. Then, they bought office space when vacancy rates were high and kept it until demand exceeded supply, at which time they’d sell. They did this over and over again and became very wealthy. It makes sense.

• Work with the right broker.
Just as is the case with all professionals, find someone who is the best at what they do. I also prefer those who actually depend on the money they make as commercial brokers versus those collecting trust fund checks who don’t need it. They work harder. Whether buying or selling, a good broker is going to know the market, know what properties are actually selling for, know what the appropriate cap rates are for the area and property type, and know what kind of lease rates are possible there. They will also be a great negotiator, anticipate problems, help you with contracts, and much more.

• There is less buyer competition in commercial real estate than there is in residential.
Thanks to HGTV, everybody and their brother thinks they can “flip” houses or should have at least one rent house. There is one buyer for commercial real estate for every 50 buyers of residential. I like that. Undervalued commercial properties may be more plentiful as a result.

• Long leases can be a double-edged sword.
While it’s great to have your building(s) leased, if the rate is too low and you are locked into a long-term lease, it can kill your value. Don’t forget that income-producing real estate is valued based on the income it generates, not comparable sales as is the case with single-family residential. These below-market leases can come back to bite you when you go to sell or refinance your commercial property.

• If you become a commercial property landlord, triple net leases are the way to go.
Write all your leases as triple net leases where your tenants pay their pro rata share of property taxes, insurance, common area utilities and maintenance. That way, if those things go up, it’s not going to be a problem for you because you can pass some or all of the increase along to the tenant.

• If you own your own business, you should own your own building.
It’s a classic small business wealth-builder. Your business pays off your real estate over time, and regardless of the condition of your business, you end up with a significant asset in your real estate that you can either sell or lease out to whoever buys your business.

• Some property managers are good; some are not so good.
Good ones market your properties when you have a vacancy, they help vet out potential tenants and make sure all of your tenants are happy. Bad ones let vacancies go untended and allow the property to go downhill from poor maintenance.

• Help your tenants succeed.
Promote their businesses. Give them advice that will make them more successful. Anything you can do that helps them increases your odds of getting a rent check every month, on time.

I could go on here, but am out of space.

Editor’s note: Mark Zweig is the founder of two Fayetteville-based Inc. 500/5000 companies. He is also entrepreneur-in-residence in the Sam M. Walton College of Business at the University of Arkansas and author of the award-winning book, “Confessions of an Entrepreneur.” The opinions expressed are those of the author.