When it comes to commercial real estate, profitability is the key goal. Your net profit is influenced by various factors, including expenses such as utilities, vacancy, and insurance. In this guide, we’ll explore effective strategies to reduce these expenses and enhance your cashflow, ultimately increasing the value of your commercial property.
Your 3 Biggest Commercial Real Estate Expenses
The purpose of owning commercial real estate is to make a profit. When you purchase a commercial property, you collect the income, pay expenses, pay the mortgage, and what’s left over is your cashflow, or your net profit. The higher your expenses, the lower your net operating income, which means less cashflow and ultimately a lower property value. So, the most profitable commercial investments maximize the income, reduce expenses, and finance with the best possible loan.
In this blog, you’ll discover how to reduce expenses. Operating expenses are the recurring costs that support the day-to-day operations of the property, and they fall into two categories: fixed expenses which are determined annually, and variable expenses that vary month to month. The 3 biggest expenses that can hurt your cashflow the most are:
- Utilities
- Vacancy
- Insurance
NOTE! The fourth major expense for commercial property owners is property taxes. To learn more about this, check out “Guide to Property Tax Savings.” We will describe how to lower commercial property taxes. You will discover why you are likely overpaying on your real estate taxes and how to get them reduced.
Big Expense #1: Utilities - Controlling Costs for Maximum Profit
Utility costs have increased dramatically in the last few years, hurting everyone’s bottom line, and commercial real estate investors are no exception. Learn how to reduce your utility expenses with these three value-add strategies:
- Install Water Saving Fixtures: Reduce water consumption with regulated shower heads, faucets, and low-flow toilets.
- Implement the RUBS System: Share utility costs with tenants to encourage mindful usage.
- Programmable Thermostats: Control heating and cooling costs with programmable thermostats in common areas.
Big Expense #2: Vacancy - Minimizing Costs Through Proactive Management
Vacancy isn’t usually thought of as an expense, but an unoccupied unit can cost you a lot of money! Here are three proactive steps to minimize vacancy expenses:
- Focus on Tenant Retention: Maintain the property and provide exceptional service for long-term tenant relationships.
- Quick Turnover Time: Efficiently fill vacancies by pre-inspecting units, calculating turnover costs, and pre-leasing units.
- Bonus System for Management: Implement a bonus system for management or leasing agents to motivate quick tenant placement.
Big Expense #3: Insurance - Optimizing Protection and Costs
The final big commercial property expense is insurance. Learn how to optimize your insurance costs with these strategies:
- Shop Around: Explore multiple insurance options to find the most affordable rates.
- Consider a Master Policy: Inquire about a master policy through your property manager for potential cost savings.
- Think Twice Before Filing a Claim: Evaluate repair costs before filing a claim to avoid premium increases.
- Raising Deductibles: Increase deductibles to lower premiums, especially for smaller claims.
- Maintain the Property: Keep your property well-maintained to prevent insurance rate hikes.
By implementing these strategies, you can significantly reduce your commercial real estate expenses, boosting your cashflow and maximizing your overall profits.
