5 Commercial Real Estate Investment Mistakes to Avoid
Commercial real estate can be financially rewarding, but like with most major investment opportunities, it comes with risks. To set yourself up for the best possible chance of success, its key to do your research, make calculated decisions that fit your long-term goals, and avoid making costly mistakes. We’re sharing our insight on five common pitfalls that are easily avoided when purchasing a new commercial investment property:
- Rushing the Due-Diligence Period. The due-diligence period of a commercial transaction can be tedious, time-consuming and expensive – but it’s worth it. An investor looking to out-bid other parties and close on a property quickly may sacrifice steps throughout the process that can come back to haunt them later. Always make sure you know what you are agreeing to purchase and take every stage of the inspections seriously. In addition to the aspects related to the property itself, investors should evaluate every aspect that could affect their income and experience as a commercial property owner.
- Getting In Over Your Head. Investors, especially those just starting out, will need to borrow money to make their investment dreams a reality. Commercial loans are often high, but you can easily borrow too much and set yourself up for disaster down the road. Having a smart deal structure and investment strategy is critical, and something a team of professionals can help you create and plan. It’s also important to put funds in reserve to help protect your investment and deal with unforeseen circumstances such as a natural disaster, losing a large tenant, or a sudden market crash.
- Focusing Too Much on Gross Income. New and seasoned investors can easily get caught up calculating gross income when they should be looking more closely at net income after expenses. Property sellers and brokers may advertise expected returns and a smart investor will look into if those advertised figures are actual or projected figures. It’s important to consider all factors that will impact your actual income, rather than relying on the current owner’s situation. You should take into consideration property taxes, potential necessary improvements, and any other specific items that may come up in the near future. Your real estate advisement team can help you understand every nuance so you can make a decision that will serve you well now and for many years to come.
- Failure to Accurately Evaluate and Underwrite Current Tenants. Purchasing a building already filled with tenants seems like a great idea and it may be an ideal way to begin making gains quickly – just make sure you do your research. Like the due diligence, you’ll complete on the building itself, you’ll want to underwrite the current tenants to ensure they’ll continue paying their rent on time for the foreseeable future. It’s great to work with an accountant to look at the numbers on paper but it’s also smart to get in some facetime and evaluate the people and the businesses for yourself before making the leap to become their new landlord.
- Failing to Hire the Right Real Estate Professionals. Hiring a team of experts including a commercial real estate broker, real estate attorney, and an accountant will go a long way in ensuring your investment is lucrative. A great professional broker is acutely keyed into their local market and can help you find a property as well as guide your decision making throughout the purchasing process. Your attorney will evaluate the legal paperwork every step of the way and ensure the deal is solid. Your accountant can help you run the numbers and help you understand your obligations and likely income, assuring every aspect of your long-term plan makes sense and is doable for your specific circumstance.