Retail/commercial vs SFH

[Mohammad Sheatt]

I have been investing in SFH (fix/flip and fix hold) I came across a small retail space that I am considering. it is about 1500 sq and listed at 40k and need 10k in repairs. it is devided into 2 spaces 900 sq rented to a hairstylist for 600/mo. the other space is empty but can get around 500/mo. My question to the community is what are the pros/cons of retail vs SFH? do you need a manager for the propery? who pays maintenance? is it easy to get out of later? is a lease to buy option with the current tenant a good exit strategy while generating income? Any input is greatly appreciated

[Oren K.]

Mohammad,

For a small retail storefront as you are describing, I would expect that the tenant would be responsible for all utilities, trash collection if it is not city pickup and maintenance of the any existing mechanicals (e.g. HW Tank, AC, etc.) while you would be responsible for structural (e.g. roof ), insurance and property taxes. Insurance will cover a truck running into the front of the building or a fire but if the roof leaks, you are on your own. There are what are called triple net leases (NNN) where the tenant is literally responsible for EVERYTHING but would not expect you could write that kind of lease for the space you are describing.

As you scale up in the commercial world it is common to see a base rent and a separate amount to cover Common Area Maintenance (CAM). The CAM is for keeping the parking lot in good shape, exterior lighting, property tax increases and any other increases in operating the property. Basically, you get to pass on any increases to the tenant.

One thing you do need to spend some time looking at are eviction laws. Generally speaking, residential and commercial evictions laws are very different in most jurisdictions. As far as I know, virtually all places will NOT allow you to simply lock out a residential tenant for non-payment of rent. You have to go to court, get an order, have it served and after a set period of time when they are physically removed from the property, you can change the locks.

In many places, if the commercial tenant misses even one payment, you can change the lock and take possession of all the fixtures and chattel present (note: Any leased equipment stays the possession of the leasing company).

Commercial is much less regulated then residential and is much more of a contract / tort relationship. For small retail properties I have seen 1 page leases up to 50 page leases. Ideally, the lease should fully spell out all the landlord and tenant responsibilities, any concessions (e.g. rent free period, landlord work), penalties, CAM responsibilities, reporting, emergency procedures, etc. etc.

Get a good boiler-plate lease, have it reviewed by a lawyer that deals with leases and good luck.

Oren