10 Costly Mistakes to Avoid When Buying Commercial Property
People who are new to investing in commercial real estate might make costly mistakes if they use the same thinking as they would for residential properties.
Here are 10 costly mistakes to avoid when buying commercial real estate.
1. Ignoring the Fundamentals
As an investor, you should focus on the basic factors when evaluating commercial deals rather than always looking for special opportunities to add value. If the fundamental factors of a property are positive, it's likely to be a good investment.
Putting too much emphasis on finding value-added opportunities may lead to spending more time searching for the perfect property and missing out on other excellent opportunities that could be even better.
2. Not Checking Enough Information for Decision-Making
Our experts consider due diligence crucial, as it helps prevent unexpected problems. When dealing with commercial property, due diligence includes examining legal aspects, property conditions, location, zoning restrictions, and local market conditions.
A physical inspection, review of lease agreements, thorough research into the tenant's business and industry, analysis of financial statements, and building and pest inspections are all part of the process.
This thorough investigation is essential for making informed decisions and avoiding unpleasant surprises in the future.
3. Not Understanding Yields
Failing to comprehend yields, which show how much income a property generates compared to its total value, can lead to problems. As an investor, you must investigate, understand, and calculate a property's potential yield.
This measure plays a central role in the decision-making process, helping you determine how much you can earn from a property relative to its overall value.
4. Focusing on High Rent Only
Focusing solely on high rents might be a mistake for investors. It's important to ensure that the rent is at a reasonable level. The value of a commercial property is closely tied to the rental income it generates.
Paying above-market rent could lead to overpaying for the property, limiting the potential for future increases in rent during reviews.
5. Choosing a Wrong Property Type
Picking the wrong type of property is a common mistake, especially if you are new in the real estate business. The choice of the right commercial property type depends on factors like your risk tolerance, investor profile, existing properties, and financial goals.
It's crucial to understand and stick to your property investment strategy and plan to ensure the best performance for your portfolio.
6. Chasing Yields Only
Yields are important in commercial property investment, but they're not the only factor. Simply choosing a property based on a high yield is not advisable. It's crucial to consider both income growth and capital growth as your main sources of profit in the long run.
Relying solely on a high yield may not lead to sustained and substantial profits over time.
7. Choosing a Wrong Location
Similar to residential property, the location is crucial in commercial real estate. Some investors may prioritize a higher yield or a seemingly better deal over the location.
However, in the long term, choosing the wrong location can negatively impact rental and value growth, leading to longer periods of vacancy. It's important to give proper attention to the location of a commercial property to ensure better prospects for rental and value appreciation over time.
8. Not Having a Strategy
Buying commercial property is a big financial decision, so having a clear investment strategy is crucial. As Benjamin Franklin said, "If you fail to plan, you are planning to fail."
While specific tactics and strategies in real estate may change, having a long-term vision remains important. Planning and having a well-thought-out strategy are key to success in commercial property investment.
9. Not Having a Financial Backup
Not having a financial backup is a potential mistake in commercial property investment. Commercial properties often have longer vacancy periods, catching some investors unprepared and causing cash flow issues during consecutive months without rental income.
It's important to have a financial backup to handle such situations and ensure stability during periods of property vacancy.
10. Prioritizing Emotions Instead of Logic
Letting emotions guide decisions can be a huge mistake in property investing. While trusting your instincts can be helpful in life, it's essential to remove emotions when buying property.
Instead, rely on research and logic for a more objective and analytical approach. Making sound investment decisions is best achieved by staying objective and considering the facts rather than being driven by emotions.
To Sum Up
When investing in commercial real estate, you should avoid common pitfalls. These include
Overlooking fundamental property factors
Neglecting due diligence
Misunderstanding yields
Focusing solely on high-rent
Choosing the wrong property type or location
Lacking a clear strategy
Not having a financial backup, and
Letting emotions guide decisions.
A well-thought-out plan and objective, analytical decision-making are crucial for success. Need help with buying the right commercial property in Atlanta? Contact Terra Alma today.