If there’s one thing that I hear more than any other when it comes to people not jumping into commercial investing with both feet it’s this:
What if I lose a tenant?
And it’s fair enough really.
If you have a property that is a single tenancy and they don’t renew their lease or if they go bust and stop paying their rent then, sure, there is the potential of the property costing you some money for a while.
There’s nothing worse than buying a property on the promise of it providing you an income for years , only to have it turn around and start costing you money.
Remember – we hate negative gearing here.
As with any property investment – having no tenant and the property cost you money is a potential risk…
But you can’t let this fear hold you hostage.
As a landlord I go out of my way to keep my tenants happy. I figure, if they do well, I do well. Everybody wins.
But sometimes even if they are doing well – you just have to give them the boot.
A few months ago I went to do an inspection on a property which has a cafe tenant. Out the back of the building is rear lane access and a couple of car parks.
When I went out the back I found that the tenant had been dumping garbage and ashtrays out the back in a big hideous pile. It was not the first time that this had happened – even had the neighbours complaining.
It was nasty.
I lost my temper with him and the property manager as well!
Even though I’d had that tenant for years – I decided that this was grounds for breaking the lease.
One of the clauses was that the property had to be kept in a good condition – and a big pile of crap falls into what I deemed to be a breach of the lease.
So I got rid of him.
It took a few months – I still had to give him notice.
Finally, now he’s gone and I can start again.
He still had a few years on the lease and another option on top of that, so in a way it was a loss of a guaranteed long-term income.
Everyone’s worst nightmare right?
Well here’s the thing.
First of all – I also had two tenants upstairs… in apartments – so there was still income coming in from the property…
…but here’s the silver lining from this story I wasn't even aware of at the time.
I had a chat to the rental agent who was managing the property and he said that, even though the rent was $7,500 a month, and increases were written into the lease,
…rents in the area had gone up dramatically and he reckoned that within 2 weeks he would have a replacement tenant in there paying $9,500 a month.
Are you serious?
I’ve been lumped with this mucky-pup as a tenant when I could have a nice new tenant paying 30% more?
But there’s a second silver lining…
You’ll know from reading my blog that the value of commercial property is directly related to the rental income.
So a 30% increase in rental income means a 30% jump in property value practically overnight.
Beats that market driven capital growth!
Remember how everyone’s worst fear is losing a tenant?
Sometimes your worst fears turn out to be the greatest gift.
There are of course other things at play here:
All these things help.
But when all’s said and done losing a tenant is not such a big deal.
And it’s certainly not so big a deal that it should stop you from buying a commercial property with the potential of providing you with years of passive income to support your lifestyle.