New Commercial Rental Property Rent Increase?

Question

I just took over management for a commercial building that's split into 4 units. One of them is a franchise name and is the largest unit. Two of the units currently have a cheap salon and the other is a cheap mom & pop beauty store which are only open a few days a week so I can't image they make a lot. The last unit is vacant. The owner who I took this over from has no leases with the current tenants so they always pay late and their only paying around $.85 per sqft in rent when we value it at around $1.25 per sqft. I know telling the tenants we're taking over and increasing the rent an extra $300-400 a month won't be easy as they barely pay their rent now on time. Does anyone have experience with commercial properties and if it's worth kicking them out and waiting to find new commercial tenants or better to keep them there and slowly increase rent over time. The building in total should be getting around $5500 in rent per month and currently is only getting $3000.

Nathan Gesner · Answer

You bought a business, so run it like a business.

The tenant pays rent late and they are way below market. If you want a strong business, you need to get rid of them and find a new renter that pays on time and pays you what the space is worth. A loss of $2,000 a month is $24,000 a year. Own your business.

H. Jack Miller · Answer

There are a lot of factors that go into this decision. But we would raise rents to market one tenant at a time. This way you don't have a property that's totally vacant

Andrew T Bolton · Answer

I would first get the tenants on a lease. Then check the vacancy rates for that area. That will let you know if you have to do a gradual increase instead of immediate. Thirdly I would do an advertising campaign for the vacant unit and lease it at the new rate. At least then there is still some kind of cash flow if you find yourself having to fight the good fight.

Account Closed · Answer

It’s really expensive to turn-over commercial units. Since you are new, I suggest that you stabilize the property as it sits. Your goal should be to get the current tenants paying rent on time and getting to know the building. After a year or so, you can start thinking about whether aggressive escalations, not renewing leases and finding new tenants makes sense.

Matt Lefebvre · Answer

@Chris Geer the most important thing to consider in this scenario is that residential vacancy and commercial vacancy are vastly different.  As a general rule, renting an apartment in most markets around the country takes anywhere from a couple hours to a couple of weeks to fill.   A vacant retail unit can take a couple of weeks if all the stars align, but more likely will take months and can sit empty for years.  There's not enough information in your post to tell you what's "the right thing to do", but personally I would rather work with the existing tenants to make moderate rent increases (if they're paying $0.85 and the market is $1.25... why not stagger an increase to a $1.00 for the end of 2022?), get everyone signed to a month-to-month lease with new terms (including some hefty late fees could help), and work towards filling the vacant unit at $1.25 to "test the waters" and see how the market reacts.

We're in a very volatile real estate market and economy as a whole; I'd feel a lot more comfortable owning a 100% occupied retail building that's 20% below market rent than owning a 25% occupied one that everyone is paying market rent.

Dave Finigan · Answer

No need to kick out the tenants right now, you might as well enjoy the cash flow. However, start marketing the spaces as available for lease immediately. Lease it out from under the current tenants in other words, if you want to upgrade the tenancy. If the tenants are of a suitable quality, then set expectations with them by getting them into an executed lease at market rates or with escalations that get them to market over the next 6 months. Real estate is an occupancy game: find good tenants, make them happy, keep them.

Tanh Truong · Answer

I would take a multi-faceted approach. First, I would look at the demographics and the vacancies in the area to determine whether or not you're able to acquire a new tenant. Second, it would be a good idea to get the tenants on a lease, whether month to month or a  longer term lease at the new rate or close to the new market rate depending on the typical vacancy for your area. Hope this helps!

H. Jack Miller · Answer

as a follow up, another way to think of it. If you can raise rents to the markets rents and that's 30k more on an annual basis. While I am not sure of the cap rate for this property, but lets just say a 7% Cap rate that would be 438k increased value.

New Commercial Rental Property Rent Increase?

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