If you’re just getting started in real estate investing, don’t expect to become an expert overnight. Yes, you can make money buying and selling properties, but it’s important to remember that this also takes knowledge, determination, and skill. It also helps to know some of the common mistakes that others make when they start investing in commercial real estate to help you avoid making them too. Luckily, you’ve come to the right place because we are sharing seven mistakes to avoid when investing in commercial real estate.
1. Doing Everything on Your Own
First things first – If you want a stress-free and cost-efficient experience when you purchase a commercial property, work with a real estate professional.
Look for an agent who has experience in the commercial property market, especially involving your preferred type of property (e.g. office space, retail space, industrial building, etc.). Their expertise and local professional network will be your invaluable resource as you navigate the property buying process from start to finish.
2. Misunderstanding the Market
First time buyers especially are at risk for buying the wrong property at the wrong time. They may want to get into the market in order to diversify their investment portfolio. And while it’s true that real estate does tend to go up over time, this doesn’t mean that you should rush into a decision even when the market is doing well. You need to be sure a property is a good investment decision for you. That requires thoroughly understanding the market and sub-market so you don’t overpay, which will lower your return over the long run.
If you are a business owner, then understanding the market also entails knowing the demographics of the area. Data analysis is critical in order to know whether or not the market will support the product or service your company offers. You’ll need to look at population and job growth, the unemployment rate and property taxes among other stats. Failure to do this while you are looking at different locations could ultimately hurt business.
3. Failing to Perform Due Diligence
One thing in common between commercial and residential properties is the necessity for due diligence before closing any deals. For commercial real estate investors, several factors are necessary to make deliberate, fully informed decisions.
Examples include:
- A full inspection of the entire property
- Reviewing the lender’s underwriting requirements
- Assessing the location relative to the nature, purpose, and target market of your business
- Understanding how local zoning ordinances affect how you can use the property
- Conducting a thorough risk assessment for the investment
- Reviewing the business profiles and existing leases of current tenants
- Searching for potential hidden charges in the property’s sale terms
Simply put, always take your time when buying commercial real estate even if you are competing against others for your targeted property. Act only when you are sure that the investment puts you in a position to generate returns, rather than incurring losses.
4. Letting Your Emotions Take Over
“It’s not personal, it’s business.” Commercial and residential real estate are different in many ways. When you’re looking for a home, it is personal because you and your family will live there. With commercial property, however, it’s important to not let emotions factor into your decision no matter what the property looks like or how prestigious the address. Instead, base your decision strictly on sound business considerations.
5. Overlooking Tenants’ Leases and Earnings
When investing in a building that has tenants in place, carefully evaluate their existing leases. If most have signed short-term leases, then you may find yourself with vacancies to fill in a few months or years. This, of course, will reduce your income. Also, be aware if any of the tenants have special provisions such as co-tenancy, which means they have the right to a reduced rent or a lease cancellation if a major tenant within the center vacates.
Are any of the tenants retailers? If so, then you should inquire about sales. The rent-to-sales ratio will be an important indicator of whether or not the business has longevity. In most markets, rent should not be more than about five percent of sales.
6. Focusing Primarily on the Return on Investment
A commercial property’s projected return on investment (ROI) often stands out as a useful indicator of its viability as an investment asset. But don’t limit your decision on this factor alone. Consider cash flow, property appreciation, and how much equity you gain as you pay off your mortgage. Inquire about any tax benefits that you may qualify for when you purchase a commercial property.
7. Lack of Planning and Foresight
Acquiring commercial real estate requires significant long-term planning. Equipped with a feasible business plan, consider your company’s growth trajectory. Will the commercial building be able to accommodate an increase in personnel and equipment? Planning ahead also involves coming up with an exit strategy. Whether or not your investment pays off, an exit strategy will enable you to facilitate a smooth transition to your next move.
