Category: Real Estate

Blog

What are the Disadvantages of Owning Commercial Property?

If you own an apartment building, a warehouse or a retail space, what you have is a commercial property. Unlike a residential real estate, a commercial property doesn’t serve as a home for people. Instead, it is used for business, as a workspace, or for other income-generating activities.

Commercial properties can be categorized into four classes: multifamily rental, office space, retail, and industrial properties. They can include a wide range of real estate properties, such as office buildings, apartment buildings, warehouses, hotels and resorts, restaurants, strip malls, and healthcare facilities.  

A well-run commercial property could benefit greatly from having the following (we’ll discuss in greater detail later):

  • Property Management company
  • Commercial Insurance
  • Public Adjuster to manage insurance claims
  • Regular maintenance and repair services to ensure the property remains in top condition
  • Security services to safeguard the property and its tenants
  • An energy management system to optimize energy use and reduce costs

However, to be considered a commercial property, the owner must have bought it for the sole purpose of earning a return through price appreciation or capital gain, or rental income, or both. Commercial properties are typically leased by businesses, except in the case of multifamily rentals and apartments. 

Because they appreciate in value and have the potential to generate income for the owner, commercial properties are good investments. It’s a stable source of income too, one that doesn’t perform poorly even through market shocks. A major factor for this stability is that tenants of commercial properties often lease them for a longer period compared to residential real estate. And, the rental rates are higher too. 

However, despite these and other benefits, commercial buildings also come with some disadvantages. Let’s discuss several of them below. 

Higher Initial Investment or Cost of Ownership

Generally speaking, commercial properties are more significantly expensive than residential real estate. There are several factors contributing to this high price, including limited availability, prime locations, potential for higher rental yields, reputable tenant demand, and development costs.  

Even if it’s a small commercial property, it will still be expensive. Commercial property investors will need a substantial down payment and closing costs, not to mention other expenses necessary to lease and operate it. In other words, you will typically need a huge chunk of capital to buy a commercial property no matter the size. 

Because the upfront investment is significant, commercial property investors also shoulder the potential risk of losing a huge amount of capital.  

Bigger Renovation Costs

Shelling out money to purchase a commercial property is just one of the costs of owning one. Once you have a commercial real estate under your name, you still have to do tons of work to make the space suitable for leasing out. 

One such expense is renovation, the costs of which can stack up depending on the tenant’s needs. According to accounting software firm FreshBooks, you could pay less than $30 per square foot to more than $300 per square foot for renovating a commercial property. The actual cost will depend on several factors such as location, building codes, building use, building materials, and labor cost. 

In addition to high renovation costs, commercial property owners also need to ensure that the amenities, security, and parking needs of the tenant are met. 

Legal and Regulatory Complexities

The law is a complex subject and navigating it can be complicated. In fact, regulations surrounding commercial real estate is a major roadblock or hindrance to prospective investors. 

There are rules and regulations on purchasing, maintenance, and taxes, for instance, and they can differ from state to state. Legal requirements might also vary for different industries, zones, sizes, and zones, among others. The laws surrounding commercial leases are also stricter compared with residential lease agreements. 

If a commercial real estate investor is not careful, they could open themselves up to lawsuits and claims from not only tenants but also customers, employees, and contractors. That is why, most commercial property owners ask professionals who know their way around the law, such as lawyers and property management firms, to help protect their business.

More Intensive Property Management

Property management for a commercial property includes similar duties as those for residential property management. Commercial property managers also deal with tasks such as marketing, tenant screening, rent collection, and regular maintenance. But, imagine those duties on a much larger scale. 

Because of the property’s size and the number of tenants involved, the scale of operations is just much bigger compared to that of a residential property. So, property managers of a commercial real estate need to possess expertise for efficient management. 

Higher Maintenance Cost

As with any real estate property, regular maintenance of a commercial property is necessary to preserve its value, keep its functionality, and ensure safety in its premises at the very least. Ongoing management, upkeep, and repair of the property is also important for optimizing performance and complying with relevant laws and regulations.

However, unlike residential properties, commercial real estate might require the use of specialized services and equipment for maintenance and repairs. As such, the costs are higher. 

The average annual maintenance cost for commercial properties ranges from $2 to $2.50 per square foot, according to the International Facility Management Association (IFMA), the world’s largest international association of facility management professionals. 

These costs vary based on factors such as location, age, and usage. For instance, commercial properties used for retail have lower average annual maintenance costs at $1.50 to $2 per square foot. Meanwhile, those used as offices incur an annual average maintenance cost of about $2.15 per square foot, according to the Building Owners and Managers Association (BOMA).

Exposure to More Risks and Liabilities

Although a commercial property has the potential to earn more than a residential property, it does come with more risks and liabilities. 

Public Safety

A commercial property, especially one that is used for retail purposes, typically has more public visitors. With more people on the property daily, the chance that these individuals can get hurt or do damage to the commercial real estate is much higher. Even if the injury or damage is minor, such as someone slipping and falling or vandalism, it still represents a liability for the owner. 

Credit Risk

While commercial leases represent a higher amount and go for longer periods than residential lease agreements, the risk of non-payment is also greater. Because we’re talking about significant amounts of money here, a business with declining sales or which suddenly closes poses a huge financial risk for commercial property owners. 

Businesses who can’t pay their lease will impact not only the property’s income but also its value. Then there’s also the cost of litigation to collect rent.

climate change insurance public adjuster Blog

How Will Climate Change Affect Property Insurance?

The insurance industry is raising rates, demanding higher deductibles, and even withdrawing coverage altogether in regions battered by climate change. For example, if you live in an area of the Midwest where they are historically somewhat immune to large natural disasters, you may not have to face unfortunate occurrences like:

  • Hurricanes
  • Tsunamis
  • Earthquakes
  • Mudslides
  • Volcanos

However, if your area doesn’t see the above happen often, chances are, you might face some other potentially disastrous natural occurrences such as:

  • Blizzards
  • Winter storms
  • Floods
  • Drought ((lack of precipitation, shortage of water in the environment, water restrictions, etc. may cause people to resort to alternative methods for watering gardens or agriculture, such as using irrigation systems or pumps. If not properly maintained or used cautiously, these practices can increase the risk of accidental fires and with dry conditions, will spread rapidly)
  • Hail
  • Lightening
  • Heatwave
  • Frigid, cold front
  • Wildfires (I would not have imagined this as a threat until recently when the wildfires happening in Canada directly affected our air quality in Michigan for almost the whole summer) To date, the following illuminates the extent of the fires and where they were geographically:
    • British Columbia: 7 million acres burned, more than double the old record.
    • Alberta: 5.5 million acres burned, nearly 2 million acres ahead of the old record.
    • Quebec: 12.8 million acres burned, more than double the old record.
    • Nova Scotia: 62,000 acres burned, about six times the old record of around 10,000 acres.

If you find yourself in one of these disaster-prone areas, it is crucial to fully understand your policy, especially if disaster strikes. If you do not, experts suggest hiring a private adjuster who will work with you and your trusted advisors as part of your claim recovery team.

Only a fraction of private adjusters have handled thousands of property damage claims of all sizes across multiple industries and regions. Some have almost a century’s worth of experience, with a unique insight into what is most important to large and niche industries throughout their region and how to best handle their property insurance claims. The right type of company will work exclusively for you, not the insurance company.

Be sure to do your research and find a company dedicated to representing property and business owners during the complicated claims process and one that will optimize the settlement you are entitled to receive under your property insurance policy.

Insurance rates climate change

Ok, so if the insurance companies’ reasoning on why rates are going up is because climate change is contributing to the uprising of natural disasters, then why are my rates so high when I do not live in a disaster-prone area?

In an article on APNews, they cited a recent report from First Street Foundation that states such as California, Florida, and Louisiana, prone to wildfires, damaging storms, and flooding, are likely to see the most dramatic increases in premiums. But the fire that destroyed the Hawaiian community of Lahaina on Aug. 8, 2013, as well as the historic flooding in Vermont and Maine in July, are examples of events that could drive up insurance costs for homeowners in other states.

Climate change is causing significant shifts in weather patterns, leading to increased extreme weather events, which can result in extensive property damage. As a result, insurance companies face higher claims costs and are forced to adjust their policies accordingly. This has led to rising insurance rates across the board, even in areas that were historically considered less prone to natural disasters.

One example would be how wildfires have now become a significant concern with climate change. Extended periods of drought and hotter temperatures have created the perfect conditions for wildfires to occur and spread rapidly. As witnessed in recent years, wildfires are not limited to specific regions and can now affect areas that were previously considered low-risk.

Do you need a public adjuster?

With insurance companies changing their policy rules and regulations, having a professional on your team is even more critical. These pros understand when clients ask questions like, “Ok, but do we really need a public adjuster? I’ve worked with my agent for more than twenty years. “They suggest thinking of it this way. If you sell your property, you work with a realtor to get the best possible outcome. If you are dealing with the IRS, you hire an accountant to get the best possible outcome. If you suffer property damage, you should hire a professional public adjuster to get the best possible outcome from your claim.

Basically, a policyholder will hire a public adjuster to assist in filing a claim and to ensure a satisfactory settlement. You can determine if hiring a public adjuster and paying this fee is appropriate for your situation, depending on the size of the claim and the amount of damages.

While it may seem tempting to rely solely on your insurance agent when filing a claim, the expertise and advocacy of a public adjuster can make a significant difference in the outcome of your settlement. From navigating complex insurance policies to accurately assessing damages and negotiating with insurance companies, a public adjuster protects your interests and ensures a satisfactory resolution to your claim.

Value of a public adjuster

Public adjusters, distinct from insurance company adjusters, work on behalf of policyholders. Their primary role is to prepare, present, and negotiate insurance claims to ensure policyholders receive fair compensation for their losses. With extensive experience in dealing with insurance companies and an in-depth understanding of policy language, they are well-equipped to maximize your claim’s potential.

Their familiarity with the intricacies of insurance claims sets them apart as advocates in what is often the largest financial transaction of someone’s life. Their expertise extends to assessing the full scope of damage, identifying hidden costs, and accurately valuing your losses. By having a public adjuster on your side, you gain a dedicated professional who will meticulously examine your policy and vigorously negotiate to secure the best possible outcome for you.

How will climate change affect property insurance?

In conclusion, climate change directly and indirectly impacts insurance rates across various regions. The increasing frequency and severity of natural disasters are leading to rising claims costs, prompting insurers to raise rates to mitigate their own risk exposure. Even areas previously considered less prone to such events are experiencing higher insurance costs as the effects of climate change continue to unfold. Property owners must be aware of these changes, understand their policy coverage, and explore options for mitigating risks.

Blog

Should I Refinance My Mortgage?

Refinancing your mortgage means getting a new mortgage to pay off your old mortgage. In other words, you’re getting a new loan on your house to pay off an existing one, and many people get refinancing for various reasons.

First of all, it’s easier to get refinancing than securing another loan. Other reasons include getting a lower interest rate, shortening your mortgage term, switching your loan terms, consolidating debt, or to raise funds. 

However, one thing you should remember is this: Refinancing can either save you money or cost you money. Refinancing interest rates range from 3% to 6% the loan’s principal and it will also incur application fees.

Refinancing would also entail title search and an appraisal. With all of these into consideration, when is it wise to refinance your mortgage and when is it unwise to do so? Let’s find out below. 

Instances When Refinancing Your Mortgage Makes Sense 

There are a number of situations when taking a refinancing agreement makes sense. These include: 

Refinancing Your Mortgage to Lower Your Interest Rate

The no. 1 reason you should refinance your mortgage is to lower your interest rate. The rule of thumb here is to refinance if you can reduce your current interest rate by 1% or more. In this way, you can save money. You can use a mortgage calculator, such as this one from Investopedia, to calculate the costs of refinancing. 

Other benefits for entering a refinancing agreement when current interest rates are low is to build your home equity faster. Equity is the fair market value of your house minus the amount you still owe. You build equity by paying off the loan principal or making payments on your mortgage. 

In addition, refinanced mortgages at lower interest rates can also reduce your monthly payment. For instance, imagine keeping $100 that used to go to mortgage payment every month – It can go a long way. In a year, you’ll have saved $1,200!

Refinancing Your Mortgage to Shorten Your Mortgage Term

Another good reason to enter a refinancing agreement is to shorten your mortgage term.

When you do this, you can own your house sooner. Typically, shortening your mortgage term results in lower interest rates but an increase in monthly payments. So, it’s essential that you do the math first before signing on a refinancing agreement to ensure you can afford the new monthly payments. 

Refinancing Your Mortgage to Lengthen Your Mortgage Term

Refinancing your mortgage may also be a wise move if there’s been a change in your income and you are having trouble making the monthly payments. With a refinance agreement, you can lengthen the term of your mortgage to lower your monthly payments to a more affordable amount. However, bear in mind that the new loan may have a slightly higher interest rate and you’ll likely end up paying more interest over time. But, it does free up some cash that you can use for other things, such as necessities or investments. 

Refinancing Your Mortgage for Renovations or Home Improvements

If you’ve been living in your house for several years now, chances are that something needs fixing or updating, such as a broken HVAC or outdated kitchen or bathroom fixtures. These upgrades can add curb appeal and increase your house’s value so that you can get more money when it’s time to sell your house. 

While you could get a personal loan or charge your credit card for home improvements or renovations, a cash-out refinance typically has a lower interest rate. Just remember that you should get an estimate from contractors and other repair professionals so you don’t end up taking too much or too little cash from the refinancing. 

Refinancing Your Mortgage to Increase Your Retirement Savings

If you haven’t maxed out your annual retirement contribution limits, you could take on a refinancing agreement to do so. You can use the money from a cash-out refinance and invest it into your retirement savings.

Refinancing in These Situations Can Be Good or Bad –  It Depends 

There are a couple instances when refinancing your mortgage can be wise or unwise, depending on several factors. You’ll have to examine your particular situation, do the math, and decide if a refinance makes sense for you or not.

Switching loan terms

When you mortgage your house, you can do so either as an adjustable-rate mortgage (ARM) or a fixed-rate mortgage. The difference between the two lies in the interest rate applied to your loan. ARM typically has a lower interest rate at the start of the loan but it fluctuates after several years due to periodic adjustments and the change isn’t always in your favor, whereas a fixed-rate mortgage applies a fixed interest on your loan throughout its term. 

You might want to switch from ARM to a fixed-rate mortgage to eliminate the risk of paying a higher interest rate. Conversely, a switch from fixed-rate to ARM may be a smart move when interest rates are dropping or you plan to sell your home before the interest rate increases, but it involves some risk.

Should I Refinance My Mortgage?

Ultimately, the decision to convert from one mortgage type to another really depends on the interest rates and how long you plan to stay in your house. 

Investments

Invest in Stocks or Real Estate?

When evaluating if it’s better to invest is stocks or real estate, there really is no easy answer. Many factors go into your decision, including personality, comfort with risk, lifestyle wants and needs and more.

The decision to invest in stocks or real estate significantly depends on timing. You can find very few stocks that would have beat buying beachfront property on the West Coast in the 70’s using debt, then cashing in twenty years later. Virtually no real estate could have beat the returns you earned if you invested in shares of Amazon, Apple or Google early on in the companies’ history, especially if you reinvested your dividends.

When making investment choices, you don’t have a crystal ball and timing is impossible to predict. But understanding types of investments is crucial when choosing the best strategy to help your money grow and foster financial security.

Real Estate vs. Stocks

Purchasing shares of stock means you are essentially buying a piece of a company. For example, if a company has one million shares and you own 10,000 shares, you own 1% of the company.

As the value of the shares grows, the value of your stock in the company also grows. Stakeholders elect the company’s board of directors to watch over the management, and they decide how much of the profit each year gets reinvested in expansion and how much gets paid out as cash dividends.

Stocks can be over- or under-valued very easily. Before investing, be sure to study the company as a whole, paying particular attention to how much of their profit is paid out as dividends. A good rule of thumb is that if a company is paying more than 60% of profits as dividends, make sure you are comfortable with the risk that they may not have enough cash flow to cover unexpected changes in the market.

Investing in real estate means are you are buying a physical land or property. Real estate can either be cash-generating or a recurring cost.  Recurring cost real estate can require money every month, like in the case of a vacant lot that requires taxes and maintenance while you find a developer interested in purchasing it.

Cash-generating real estate can be apartment buildings, rental homes, or strip malls where you pay expenses, and the tenants pay rent to you as the landlord, and you keep the difference as profit.

Each type of investment comes with benefits and drawbacks.

Pros and Cons of Investing in Real Estate

Is real estate the right investment for you? Understanding the pros and con can help you decide.

Pros of Investing in Real Estate

  • Cash flow. Real estate rent can provide steady, reliable cash flow on a consistent basis. Often, real estate investments only improve your cash flow in the long-term and then again when you sell them.
  • Limiting fraud. It is more challenging to be the victim of fraud in real estate investing. You are able to literally see the building or property and inspect it, you can run background checks potential tenants, and complete or oversee repairs.  With stocks, you have to trust the management and the auditors to do their jobs correctly.
  • Using debt. Using debt, or leverage, in real estate can be structured far more easily and safely than using debt to buy stocks by trading on margin.
  • Safety. Real estate investments have long been a solid inflation hedge to protect against a loss in the purchasing power of the dollar.

Cons of Investing in Real Estate

  • Time and effort. Real estate takes a lot of hands-on work when compared to stocks. There are many factors to consider, like managing tenant issues with repairs, gas leaks, the possibility of getting sued for building defects, and more. Hiring a property manager to take care of your real estate can mitigate some of the time investment but managing your property will still require occasional meetings and oversight.
  • Continued costs. Real estate will cost you every month if the property is unoccupied. Items like taxes, maintenance, utilities, and insurance must still be paid. If you find yourself with long term vacancy rates due to factors beyond your control, you may end up losing money every month.
  • Value. With a few exceptions, the actual value of real estate hardly ever increases when examined in inflation-adjusted terms. Keep in mind that even if the actual value doesn’t increase, you benefit from the power of leverage.

Pros and Cons of Investing in Stocks

Like real estate, investing in the stock market comes with its own set of pros and cons.

  • Longevity. Over 100 years of research have proven that despite all of the downturns and crashes, buying stocks, reinvesting the dividends, and holding them for long periods of time has been the greatest wealth generator in history.
  • Minimal work. Unlike running your own small business, owning part of a business through shares of their stock doesn’t require any work on your part (other than making sure the company is a sound investment). You benefit from the company’s results but don’t have to put in the time and effort to show up to work.
  • Access. You don’t have to be wealthy with huge sums of available cash to begin investing in the stock market. With certain mutual funds or individual stocks, you can invest as little as $100 per month. You can also look into the growing variety of microsaving apps that allow you to begin investing for less than $26.  Real estate requires significantly more money for your initial investment, as well as the cost of maintenance and improvements.
  • Liquidity. Stocks are far more liquid than real estate investments, meaning that during trading hours, you can sell your entire position, many times, in a matter of minutes or even seconds. You might have a real estate listing for weeks, months, or even years before finding a buyer.

Cons of Investing in Stocks

  • Investing Emotionally. Though stocks have been thoroughly proven to generate wealth in the long run, many investors are too emotional and unsteady to benefit fully. Psychological factors can cause them to lose money, panic selling during downturns when they should instead be buying.
  • Short-term volatility. The price of stocks can go through extreme fluctuations in the short-term. Your $90 stock may go to $20 or to $180. If you know why you own shares of a particular company, this shouldn’t alter your course. You can use the opportunity to buy more shares.  When you hold onto well-valued stocks over the long-term, the extremes are often smoothed out.
  • Stagnation. If you invest in companies that don’t have much room for growth, then your stocks may not look like they’ve gone anywhere for ten years or more during sideways markets.

Should You Invest in Stocks or Real Estate?

Both real estate and stocks can provide substantial long-term financial gain, and both come with their own set of risks. When choosing the right investment strategy, the best way to mitigate against that risk while taking advantage of the potential gains is to diversify as much as you are able and work with professionals who can guide your investments to perform optimally.