Owning a triple net property is a perfect way to ensure a steady passive income for years to come. With no management responsibilities and nearly all of the expenses for the property taken on by the tenant, a triple net property is an ideal investment for many investors.
Although triple net properties are nearly expense free, there are still some expenses that you as an investor are responsible for. Planning for these commercial real estate expenses beforehand will ensure you don’t get hit by the unexpected.
1. Capital Expenditures (CapEx)
Estimating repairs, vacancy, and management costs for a typical commercial income property is fairly easy. For some reason though, many investors have a hard time doing the same when it comes to CapEx.
CapEx expenses include features such as the roof, plumbing, HVAC system, or any other big budget item that will eventually need to be repaired or replaced.
These commercial real estate expenses are often hard to estimate because a lot depends on the property type including the age of the property and the age of the item in question. At the same time, it’s hard to estimate how long a roof, for example, will actually last. Many investors (understandably) are reluctant to rely on the manufacturer’s estimate of longevity.
Fortunately, you can determine how long an item is expected to last by searching online. Start by taking the cost of replacing the item and divide it by the number of years left until it will need to be replaced.
Once you determine the expected lifetime for each CapEx item, you can then determine how many years you have left until the item will likely need to be replaced. This will tell you how much money you need to put aside each month in order to be prepared for a major CapEx replacement.
Do you have more questions? Contact the experts at Westwood to help you through this process.
Of course, if you own a triple net property, then you are most likely not responsible for any CapEx repairs. Those commercial real estate expenses, along with all insurance and property taxes, are covered by the tenant.
2. Cleaning Up Contaminated Property
Decontaminating a commercial property and the surrounding land is an expensive proposition which investors can avoid by doing thorough due diligence before a property is purchased.
Soil and water contaminations are the most common types of environmental issues in this industry. Typically, the tenant is responsible for remediation. Keep in mind that some types of contamination, such as soil and water contamination, take years to show up and may be difficult to address. If this happens to you, a reputable hazard remediation cleanup team is essential.
3. Plan For Vacancies
Vacancies in commercial real estate are inevitable, particularly if you own a commercial retail property. Your best bet is to take the same tactic as CapEx expenses and plan beforehand.
First of all, make sure you keep track of when tenant leases are about to expire to give yourself and your tenants time to prepare. You’ll want to find out what your tenants’ intentions are beforehand, as well as leave time for negotiations.
To Wrap It Up
There are many commercial real estate expenses, some which are easily estimated and others which take more planning. Realizing that prevention is half the cure won’t just make you smarter – but it will also save you quite a bundle. Planning for these three commercial real estate expenses that often take people by surprise is key.