Commercial real estate can be a profitable investment, but doing it wrong can cost you a fortune. Even seasoned landlords can stumble into costly mistakes that kill profits and invite legal trouble.
Understanding the most common errors is crucial for safeguarding your investments and ensuring long-term profitability.
1. Dismissing or being ignorant of the law
In the United States, ignorance of the law is no excuse for violations. You can and will be held legally responsible regardless. Where commercial property is concerned, the consequences can be financially devastating.
When you own commercial real estate, there are a host of potential legal pitfalls to avoid, and sometimes the stakes are higher in big cities. For example, in Los Angeles, there are a handful of laws that can spell disaster for investors. L.A.’s Zoning laws are particularly complex, and violating them can lead to huge fines and forced closure. To stay compliant, it’s crucial to check zoning ordinances before you sign a lease or begin a major renovation.
Taking on the responsibility of knowing the law also applies to the rental aspect of your business. You need to be aware of commercial landlord-tenant laws so you don’t unknowingly violate someone’s rights or make an illegal move. For instance, skipping ADA compliance can cost you thousands of dollars in required renovations and lawsuit judgments.
2. Creating ambiguous lease terms
You might not mean to, but writing vague lease terms can turn small misunderstandings into costly legal battles. Words like “maintenance” or “repairs” seem straightforward, but can cause confusion without clear definitions. Instead of assigning general responsibilities, spell out exactly who handles what.
For example, if your lease simply states that the landlord is responsible for “property maintenance,” your tenant might assume that includes tasks like cleaning gutters, when you were actually referring to structural upkeep and major repairs. Ambiguity like that can lead to finger-pointing, neglected tasks, and even lawsuits.
3. Neglecting tenant screening
The importance of tenant screening and holding applicants to high standards can’t be stated enough. It’s the only way to avoid preventable property damage, legal issues, and late payments. Always run a credit check to verify financial responsibility and ensure timely rent payments. Never rent to someone with a poor credit score or accounts in collections.
Background checks are equally important and will tell you if someone has a criminal history that may pose risks to your property or the surrounding businesses. Last, always call references and previous landlords to gauge an applicant’s behavior as a tenant.
4. Not having proper or adequate insurance
Owning commercial real estate carries some big risks, and that’s what insurance policies are designed to cover. Depending on your state and local laws, you’ll be required to carry a certain amount of general liability coverage, but you may also need additional policies. At the very least, you need a policy that will protect against damage from theft, vandalism, fires, storms, and injuries sustained on the property. You might even want to get a policy that will cover lost rental income while you perform repairs.
5. Poor record keeping
Keeping organized, meticulous records is crucial. Disorganized records will make filing your tax returns difficult and can complicate legal proceedings. Make sure you have signed copies of all your lease agreements and amendments, detailed income and expense reports, and logs of all maintenance, repairs, and inspections.
Good record keeping won’t just help you with your finances – it will give you a clear picture of your property’s status, help you stay profitable, and create a verifiable maintenance history that can add value if you ever decide to sell.
6. Not planning for vacancies
You’ll find commercial vacancies even in the busiest locations, and not planning for this potential can create unexpected expenses. Protect yourself by setting aside funds to cover your expenses during inevitable vacancies and have a marketing plan to attract new, quality tenants.
To avoid preventable vacancies, treat your tenants well, take care of the property, and maintain good relationships to encourage regular lease renewals. Most business owners renting a good location won’t want to relocate unless there’s a serious problem with the building or their landlord is difficult to work with.
Protect your profits
Commercial real estate can be a highly profitable investment, but only if you avoid the pitfalls that can tank your investments. The most costly mistakes aren’t dramatic. They’re usually small and stem from oversights and poor management practices. By tightening up your lease language, maintaining accurate records, and prioritizing legal compliance, you can build a more profitable, long-term investment business.
Founder Dinis Guarda
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