Whether you just bought your first commercial property or you have been a landlord for decades, managing a commercial property and its tenants is never easy. From dealing with tenant issues, changing commercial property laws, and safety and maintenance, you want to stay informed and proactive. This way, it becomes easier to avoid lawsuits and protect your commercial building. Overlooking small issues can expose you to costly risks. In this guide, we’ve outlined three mistakes every commercial property investor should avoid.
Ignoring Insurance
You probably have commercial insurance, but does your current policy still reflect changes to your property, business operations, and tenant needs? For most commercial property owners, insurance is a ‘set-it-and-forget’ task. Be sure to review your coverage regularly. You don’t want to leave your investment exposed to risks you may not have considered.
For instance, carrying insufficient coverage for your commercial building may seem like a minor issue, but it’s a major risk. You want to understand whether your policy covers replacement cost or fair market value. This is especially critical if your building is old. Rebuilding it could cost far more than its current market value.
You probably don’t think much about tenant-funded upgrades, but you should. Even when tenants pay for upgrades, these changes can increase the property’s overall value and replacement cost. Make sure to review your policy to ensure it accounts for these improvements and provides enough coverage to rebuild or restore the property after a loss.
Failing to Protect Personal Assets
When you decide to invest in a commercial property, the first thing you should do is form a business entity. Every commercial property you buy or own should be registered under this entity. For instance, you can form an LLC (Limited Liability Company). An LLC helps limit your liability should there be a lawsuit or issues with your investment partners.
If you have not formed an LLC to protect your personal assets, you are creating a huge personal risk. Be sure to form an LLC and register your commercial properties under it before the risk becomes real.
Maintenance Oversight
As stipulated in your lease agreement, it’s your responsibility to reactively and proactively maintain your commercial building. Make sure repairs are done as soon as possible, especially when not caused by a tenant. If you fail to do repairs promptly, it could cause issues on several fronts, including:
- Your property will deteriorate, which will hurt its market value
- It can lower the rent you can charge
- It can hurt your reputation, making it harder to attract and retain tenants
- It can expose you to tenant complaints and potential lawsuits
For the best results, you should hire a property management company. This will help to lower property maintenance risks. If that’s an option for you or you like handling things yourself, create a repeatable property maintenance schedule. It should be both proactive and responsive. This way, your building will remain in impeccable condition, and your tenants will remain happy.
Endnote
Commercial properties are not without risks, but you don’t want to make mistakes that will make the risks real. Regularly review your commercial property coverage, protect your personal assets by registering an LLC, and don’t ignore property maintenance.