Why commercial real estate makes you more money

by Neil Sharma on 14 Mar 2018

Vancouver-based Sam Beckford wants to dispel the notion that commercial real estate is a risky endeavour.

The founder of Successful Property Strategies is an adherent of “the McDonald’s strategy of business—they’re more in the real estate business than the hamburger business,” and owns three commercial properties worth $14.5mln that have only $1.68mln left of repayment. He understands the reticence people have towards commercial real estate, but says, if done properly, it can yield substantial returns.

As an overture, Beckford—an investment coach and author of four books about small business and business coaching that have been translated into nine languages—says that owning commercial real estate is much less cumbersome than owning a residential property and renting it out, because of the quality of tenants and the leasing structure.

“One of my tenants is the federal government of Canada,” he said of the Services Canada office in his building. “That lease is worth about $1.3mln in payments. Other tenants signed five-year leases with five-year renewals. In their previous office, Service Canada was in that building for 26 years, so to have a single tenant who has the potential of that long of a lifespan is unheard of in residential.

“You’re also dealing with contracts, not people. That’s huge because when it comes to people having horror stories with bad tenants and bad management, the courts side with the tenants because they think they’re being taken advantage of, but with commercial properties, you’re dealing with 30-, 40-page contracts that clearly define everybody’s responsibilities and rights, and courts typically side with the landlord. But usually it doesn’t get to that because the lease is so defined. With residential properties, even if the tenant is doing something illegal, or borderline illegal, you can’t evict them because it’s their home, but with commercial you can lock the doors.”

Beckford has heard time and again that commercial properties are too expensive to buy as investments, however, unbeknownst to most people, the Business Development Bank of Canada loans considerable sums of money for commercial property ventures.

Coupled with the fact that a commercial landlord is responsible for much less than a residential landlord—including maintenance and property taxes—Beckford calls it a no-brainer.

“In commercial, maintenance is the responsibility of the tenants. If it’s inside the space, they’re responsible, whereas with residential maintenance, it falls on the landlord. The commercial tenant pays their share of property taxes, too, so you’re protected against your cost increases.”

 

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