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Real estate investing is already complicated enough as it is, but it can be more so with commercial properties. Other than different market trends to watch out for, you'll also need a higher risk tolerance since commercial properties require a significant amount for a down payment alone.
Here are the mistakes you should avoid to mitigate risk and make the most of your commercial real estate investment.
1. Not Researching the Local Market
Commercial real estate investing can be lucrative if market demand is high, but that's not always the case. Researching the local market allows you to identify growth potential, economic conditions, customer demographics, population growth, and other crucial factors to make a data-driven decision.
If your commercial property is meant for a retail store, for instance, customer demographics are among the key factors you should consider before purchasing properties in the area.
2. Failing to Inform Your Lender
New investors frequently miss the essential step of consulting the lender during their due diligence. Securing financing for commercial real estate can be challenging because the initial investment required is significantly greater.
To develop a clear investment strategy, you must first secure approvals from lenders and commercial real estate investors. If your lender declines, your entire investment plan could fail.
3. Overlooking External Factors to the Property
Doing your due diligence for the rental property is extremely important, but you must also consider external elements that can affect your business, such as the surrounding area. Real estate investors won't find a property enticing when the neighbor is not ideal.
Customers will likely choose businesses that are conveniently located near transportation, and companies seeking office buildings will prefer properties close to amenities such as coffee shops and restaurants. When browsing the real estate market, choose properties near essential amenities.
4. Not Conducting Your Own Inspections
Never trust the seller to disclose all of the problems with the property's physical condition. This is among the most costly mistakes new investors make. Unexpected expenses like maintenance costs on top of mortgage payments can cripple your business, and you will lose money.
You can hire a professional property inspector to assess the commercial real estate property conditions and find issues like safety hazards, structural damage, and compliance with local regulations.
5. Ignoring Competition
The volume of the competition you have can determine your property value as well. The fewer competitors you have, the higher rent price you can charge for your property. You will then be more likely to have a positive cash flow from your business.
Keep in mind that your real estate investment can differentiate itself from competitors as long as it offers amenities that appeal to your target market.
6. Underestimating Responsibilities
Before investing in a commercial property, consider the responsibilities that come with owning a rental. Efficient property management is crucial for generating rental income, and failing to do so can quickly lead to financial strain.
New investors often engage property managers to assist with demanding responsibilities. However, in the realm of multifamily real estate, even experienced landlords seek professional help to enhance efficiency and prevent common pitfalls associated with property management.
7. Skipping In-Person Inspections
Even if you hire a professional property inspector to assess the property, you should still visit the building in person. This allows you to identify flaws that may not necessarily be classified as damages or disrepair, but could become serious problems later.
How Can You Avoid These Mistakes?
Conduct Thorough Research
Conducting thorough research can help you avoid unforeseen expenses and poor returns, ultimately maximizing the return on your investment. Savvy commercial real estate investors cover all their bases first, from estimating the acquisition costs to potential cash flow.
Consult Professionals
While thorough due diligence can get you far, you can obtain valuable advice from professionals like real estate agents that you cannot discover yourself. They can provide you with expert knowledge about market cycles, signs of bad deals, how you can avoid financial stress, and more.
Set a Realistic Budget
Underestimating expenses is a bad idea, as it can stall the progress of your investment goals. Many investors set a higher budget than what the investment requires to mitigate potential risks and expenses.
Acknowledge That You Need Help
The real estate industry is a hard sector to navigate. Even a single property can be a handful, especially for commercial real estate. It's not uncommon for investors to seek assistance. In fact, it’s the smart thing to do.
Commercial Real Estate FAQs
What factors should I consider before purchasing commercial real estate?
- Key factors include location, economic conditions, supply and demand, zoning regulations, property condition, amenities, and purchase price.
How do I calculate the capitalization rate of a property?
- The cap rate is calculated by dividing net operating income (NOI) by the current market value or purchase price.
What costs should I expect when purchasing commercial properties?
- The common costs you can expect are the purchase price, due diligence costs, closing costs, renovations, repairs, maintenance, and potentially property management fees.
Are commercial rental properties more profitable than residential rentals?
- They are generally more lucrative since you get higher rental yields and longer lease terms. However, you also stand to lose more if you fail to manage it efficiently.
Why You Should Hire Professionals Now
Investing in real estate is a huge undertaking, and it will take a lot of effort and expertise to ensure success. Acquiring a commercial property is only the first step, and ES Property Management's only goal is to maximize the potential of your property.
You can earn passive income and stay stress-free as we handle everything. With more time on your hands, you can freely explore other investment opportunities to expand your portfolio.
You won’t have to commit right away! Schedule a free consultation and determine whether we are the right company for your business goals.
