What Are the Benefits of Buying a Commercial Property with Existing Tenants?
From establishing an immediate rental income to increasing your chances of getting finance, buying commercial property with existing tenants offers a plethora of advantages that make it an excellent move in your investment strategy.
Today, we’re going to look at these benefits in more detail, along with the drawbacks and some other considerations, to help make it clearer for you to decide whether or not buying commercial property with existing tenants is the right choice for your personal investment goals.5 Benefits of Buying a Commercial Property With Existing Tenants
Let’s start by taking a look at the benefits of buying a commercial property with existing tenants. As you might imagine, there are quite a few, but we’ve simplified things down to the biggest five.
Immediate Rental Income Stream
Perhaps the biggest benefit of buying commercial property with an existing tenant is that it offers an immediate rental income stream. This consistent cash flow from day one means that you’re guaranteed financial stability straight away, will be able to cover your mortgage payments, and predict and better manage your revenue stream for the foreseeable future.
Reduced Vacancy Risk
By purchasing a property that is already leased to tenants, you bypass the challenge of having to find and secure new occupants. This doesn’t only reduce the downtime between tenants but also minimises vacancy risk and the associated financial losses.
Established Tenant Relationships
Inheriting established tenant relationships can also foster a smoother transition, as it allows for ongoing communication and understanding of lease agreements. It allows the current tenants the opportunity to raise any concerns or maintenance needs with the new property owner as well, further establishing relationships and promoting tenant retention.
Can be Easier to Get Financing
Purchasing a commercial property with established tenants can simplify the financing process, and lenders often value stability and reliable income. Also, banks may view existing leases as assets that offer a lower-risk investment, bolstering confidence in the loan approval in the process.
Since rental income from existing tenants also provides immediate cash flow, lenders are likely to be better reassured of your repayment capabilities, and this can result in high loan amounts with more favourable terms.Risk Mitigation
Again, as currently occupied spaces provide an immediate rental income, investing in a commercial property with existing tenants significantly mitigates risk. This is also strengthened by the fact that existing lease agreements offer a clearer financial outlook, and tenant history provides insights into reliability.
As well as this, acquiring a property with a proven track record of occupancy not only stabilises your income stream but also fortifies the investment against market fluctuations, making it a good choice for risk-conscious investors.Are There Any Potential Drawbacks to Buying a Commercial Property With Existing Tenants?
While buying commercial property with existing tenants boasts several advantages, there are also some potential drawbacks you’ll need to consider before deciding if it’s the right move for your portfolio.
Lease Terms and Conditions
One of the biggest issues you may face is that existing lease agreements might have extended terms, which limits flexibility over both adjusting rental rates and property modifications. This can be particularly damaging if the existing tenant is paying below the market rate, as this will restrict immediate opportunities for rental income growth.
Property Condition and Management
Another disadvantage you may face is that existing tenants could have caused wear and tear to the property that requires immediate repair, increasing the overall cost of acquiring the property. Likewise, changing the management company responsible for taking care of the property could disrupt current tenant relationships.
Exit Strategy
You may also find that it becomes harder to sell the property in the future, as existing lease agreements or tenant profiles could be unattractive to potential buyers. Similarly, you may also face difficult obstacles when altering the use of the property or repositioning it in the market due to existing tenancy agreements.
To learn more about the benefits and drawbacks of buy commercial property with existing tenants, contact us today and book a 15-minute no-obligation call. Our team of experts will answer all of your questions, offer advice on your next potential steps, and make it clear whether or not this is the right investment strategy for you.
What Do You Need to Consider Before Buying a Commercial Property With Existing Tenants?
Purchasing a commercial property with existing tenants requires careful consideration and thorough evaluation to secure a successful investment, and some of the things you’ll need to consider include:
Tenant Assessment
One of the most important things you’ll need to do is review existing lease agreements, as this will give you a better understanding of the rental rate, renewal options, expiry dates, and your obligations. You’ll also be able to assess tenant reliability, payment history, and any potential management issues the existing tenant may pose.
Property Condition and Management
It’s also important to conduct a detailed property inspection to identify the building’s maintenance needs, look at any required repairs, and factor the renovation costs into the overall purchase price. Be sure to also look at records held by the management company, including details of maintenance and repairs, along with tenant communication to assess any ongoing needs.
Financial Evaluation
Consider your operating costs, property taxes, insurance, and potential capital expenses before purchasing a commercial property with existing tenants too, as this will help you calculate your net income more accurately. When doing this, be sure to also review rental income consistency and potential growth opportunities through rent adjustments or lease renewals.
Market and Location
You’ll need to understand current market conditions and rental demand before you purchase a commercial property with existing tenants, as this will give you a better idea of future growth prospects. Do this by assessing similar properties in the same location to gauge competitiveness and potential appreciation.
Due Diligence and Professional Assistance
Before purchasing, you should hire a team of experts who will be able to conduct thorough property inspections and assessments and ensure that everything is up to standard. This will need to be a team of legal, financial, and real estate professionals who, working together, will ensure you get a comprehensive understanding of the potential investment.
Need Help With Your Commercial Property? Book a Free Call with an Experienced Commercial Buyer Agent
Contact Revolve Commercial today, and let us do the hard work for you. Speak with our team of experienced commercial property buyer agents, and you’ll soon be on the road to investing in a commercial property with existing tenants while being fully supported at every step of the way.
Jan Rautenbach
