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by: Steven Gillman
Office
buildings can be very profitable, and long-term leases mean less
management than with residential income properties. The downside?
Nothing seems to go up and down as much as office rents and office
occupancy rates.
Investing in office buildings can be very profitable. A friend of
mine bought the office building that his law firm was renting, and
rented it to his company. It generated cash flow from the start. Now
that the original mortgage is paid off, the net income is a
sufficient retirement plan by itself.
There are risks with office buildings. The biggest one is simply
that the rental rates can go up and down with the economy. In the
worst of times, the same number of people need housing, but there
may be a major drop in the number of businesses, or at least the
number that are looking for an office to rent. After the dot-com
crash, for example the rent for many buildings in the silicon valley
area dropped by 30% or more.
A drop of that much means losing the property for many investors.
Suddenly having a large negative cash flow for years isn't an easy
problem to overcome. But even worse is the fact that during these
rough times, many office buildings are empty for a year or two, with
no income coming in at all. I have seen office space and even whole
buildings sit empty for several years.
You might think that long-term leases reduce this risk. They may to
some extent. And the long lease periods that are common are one of
the attractions of this kind of investment. However, lease or no
lease, if the company in your building goes bankrupt during a
recession, they will not be paying the rent. Suing them probably
won't help at that point either.
Does this mean you shouldn't invest in office buildings? Not
necessarily. If there is a low vacancy rate in the area, and the
economy is doing well, you can have good cash flow from office
space. However, because of the inherent unpredictability of future
vacancy rates and rent levels, you should always plan to have a good
chunk of cash set aside to cover the rough times.
You also want to get a higher rate of return than with something
like residential rentals. Higher risk doesn't make sense if you
don't make more for it. You might do okay breaking even on your
rental houses while the renters pay down those mortgages, but you
better have a good positive cash flow if you invest in office
buildings.
Ideally, you want to buy a building that already has a the tenant or
tenants in place, and with leases that have a couple years to run.
There is not necessarily a line of tenants waiting to take their
place, like there can be with residential rentals. Office buildings,
and the tenants in them, are unique, and fitting the two together
will almost always take a little time.
If you risk buying an empty building (probably a bad idea), start
advertising before you close on the deal. You should also plan on a
year without income. You should also be getting the building at a
price that assures you of really good cash flow when you do get it
rented - to make up for that vacant time period that will be eating
up your money.
Talk to other owners of office buildings in the area, to see what
their biggest problems are. Find out what the usual arrangements
are, like who pays for landscaping, and how much the tenants are
allowed to modify a building. Find the buildings most similar to the
one you are considering, and see if you can find out what they are
renting for. In other words, if you do invest in office buildings,
you should do your research.
Article Source:
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Copyright Steve Gillman. This article was an excerpt from 69 Ways To
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