Mistakes to Avoid in Commercial Real Estate Investing
Commercial real estate is property used for business that generates income. Often, commercial real estate (CRE) is leased to tenants. CRE could be a residential duplex, an office building, a warehouse, or a restaurant. If purchased solely to generate income, similar to any investment, CRE comes with inherent risks and common mistakes that every investor should avoid.
Commercial real estate investing differs from buying a house. There are many factors to consider, such as potential income, suitability of the location for commercial activities, and legal requirements such as zoning. For a better investing outcome, don’t go it alone. Work with a property professional. Look for someone with experience in the local commercial property market. In particular, work with a professional well versed in your preferred type of property, whether it is retail outlets, office space, or residential units.
A common mistake when buying a commercial property is to focus primarily on the ROI. While a CRE’s projected ROI is often a useful indicator of an asset’s viability, don’t limit your investment decision to this factor alone. Other factors to consider include cash flow and potential property appreciation over time. Also, explore any tax benefits and deductions that you may qualify for when you invest in CRE.
You cannot afford to skip due diligence when buying a commercial property. Due diligence includes a thorough property inspection before buying. This will also involve carefully reading the sale contract terms before you sign the agreement. This process can help you avoid many problems and unpleasant surprises later. For example, most sellers, real estate agents, and brokers might only show you the best parts of a property when you visit. These parts might be recently painted or renovated to make a good impression. A thorough property inspection will give you a complete and accurate picture.
When investing in CRE, if possible don’t put all of your money into one sector. Whether it’s retail space, a hotel, or an apartment building, each sector comes with its share of risks, and you should understand them before investing. To mitigate these risks, you can spread your investments across properties in several CRE spaces. Also, to reduce risk further, invest in different geographic locations, in case one market weakens or doesn’t perform well.
Another common mistake is neglecting to properly calculate all the costs associated with the investment. On top of your mortgage repayments, take into account repair and maintenance costs, insurance, and property taxes. Also, set up an emergency fund to help you with any unexpected costs or emergency repairs.
Be careful about observing the applicable zoning or environmental laws. It could lead to losses if you invest in a property only to discover that your planned business activity is not allowed in the area. For example, putting up a pub next to a learning institution might not be permitted by local zoning ordinances.
Finally, while you might have your reasons to conclude the deal as quickly as possible, a hasty decision might lead you to make avoidable mistakes. Give yourself ample time to research the selling party and determine their trustworthiness. When everything finally appears to be in order, take time to check the sale documents and their legality to avoid legal issues later that might also stall the deal. Having a property lawyer or investment advisor look at the documents is always a wise idea.
