The Hidden Costs Of Owning Commercial Property (And What To Do About Them)

In theory, making a profit from a commercial property should be straightforward. You deliver the space, the tenants deliver the revenue, and everyone’s happy.

Alas, life is rarely as straightforward as we’d like it to be. If you’ve done your due diligence, then making a profit from a commercial property will be possible, but it’s not guaranteed. The truth is that many new commercial property owners underestimate some of their costs, resulting in poor cash flow and additional stress.

The good news is that it’s rare that a cost is truly hidden and appears from nowhere. In nearly all cases, it’s one that could have been avoided if managed correctly. In this post, we’ll run through some of the most common “unexpected” costs, as well as outline their solutions. 

Extended Vacancy Periods

You’ll likely have a strong pathway to profitability provided you’re at full occupancy, but what if you’re not? Having empty units can put a serious dent in a commercial property’s finances, since it means there’s zero income from those spaces even though other costs, such as taxes and maintenance, remain.

You’ll have a better vacancy record if you rent to the right tenant in the first place. Performing tenant background checks and investing in the relationship can help ensure that your tenants stay on a long-term basis. 

Overlooking Tax Deductions

It’s inevitable that you’ll need to pay some money in taxes, yet a surprisingly high percentage of commercial property owners actually end up paying more than they actually should. This happens especially to investors who are new to commercial real estate, since they’re unaware of the tax strategies, such as accelerating their tax deductions with cost segregation, that they can use to minimize their tax bill. Using these strategies can significantly improve cash flow, which can then be used for capital improvements or to pay down debt. 

Unexpected Repairs

Few people expect things to break, but the reality is that they do. When that happens, commercial property owners are often left with a big bill that can seriously impact their bottom line. Even a single major repair job, such as replacing an HVAC system, can run into the tens of thousands of dollars.

There are two ways to handle unexpected repairs. The first is to reduce their likelihood of occurring in the first place by putting together a comprehensive maintenance schedule. The other is to build your capital expenditure reserves from the first day you get your hands on the keys. Setting aside 1-2% of revenue should ensure that you have cash in place to make repairs when they’re necessary. 

Property Management Costs

Commercial property owners can pay for property management in one of two ways — in time or in money. If you take the DIY approach, then you’ll be paying in time. The majority find that it’s much easier to let a property management company handle the job on their behalf, though it’s important to compare costs, since they can vary significantly. Aim for a fee percentage of 8% – 12% of collected rent.