- 14 Jan
6 mistakes to avoid when it comes to investment in commercial real estate
1 — Having a questionnaire mind is usually a good thing but it can have a bad impact on your commercial real estate deals, especially for investment deals:
Yes, you read right, in a commercial real estate deal the seller consider the buyer the person with a lesser interest and potential to buy when he asks so many questions which are irrelevant in the point of view of the seller. As commercial real estate investments usually have greater mass than residential ones and there are a lot of non-serious investigators which do not have the intention to buy but would like to investigate to enhance their knowledge about what’s going on in the market. This makes the seller irritated as a lot of people come and visit and ask a lot of questions. However, the serious buyers are big investors and like taking risks as well, not being too much conscious about small things make the seller feel like you are the one who will take this. But you must do your homework to make sure that you are going in the right commercial real estate deal.
2 — Not knowing much about the property! It negates the first point somehow but asking questions from the owner is not the only source of getting information about the property:
If you are going to buy the commercial real estate for the purpose of investment you much know each and every factor that can affect your future cash inflow or outflow. For example, if you are buying a hotel, guest house or multiple apartments, you must run an inspection of everything on your own. Following questions should be kept in mind while taking a decision to invest in this kind of commercial real estate:
- What is the condition of the building? Future maintenance costs you can see in coming few months or years?
- What is the actual profit and loss of the property? Profit and Loss presented to you by the seller or his representative must be overstated, you need to figure out the original profit the commercial real estate is making.
- What was the vacancy rate (in last few years) of the commercial real estate you are investing in?
If you are not fully confident about the information you have, of the property you are investing in, you are in serious trouble. They are so many factors (some of them are mentioned in above example) which are overlooked at the time of making the investment and come up with cons of the investment decision later. As prevention is better than cure, so you must make sure that you have all the truly relevant information about the commercial real estate you wish to invest in.
3 — Putting all the eggs in one basket!
Huge commercial real estate investment deals are usually risky. All the investors out there believe in a very famous phrase; higher the risk higher the return. But avoiding the risk and disaster is always advised by the experience people, for commercial real estate investment I would also advise diversifying the risk. Investing in multiple small properties is a better investment than acquiring a single huge property. Imagine if you buy the biggest hotel in the town with all the money you have and it doesn’t work like the plan, which is always in every businessmen’s mind while making investments or starting a new venture. However, if you invest in multiple small projects, profits of most them will be able to cover the losses from a very few of them.
4 — Lack of Reserves:
Buying Commercial real estate require a lot of capital amount. Also, there must be some other capital expenses too in making it operational. However, there are so many expenses which might be overlooked by you at the time of planning or buying the property. There could be some work required for making the property operational for the business which was not in your mind while acquiring the property. You must have additional reserves on hand to overcome any such situation and to avoid taking yourself in a panic situation.
5 — Using your own money instead of getting commercial real estate financing:
A common misconception of some real estate investors is that they believe in their own money when it comes to investment. They don’t like getting loans to increase their investments and property but keep waiting to make money from what they have and then invest again after a long time. In the modern world of financing, you can have a lot of commercial real estate financing options and can easily choose the one which suits you best. Try this out if you just sitting on your own money!
6 — Not being on the same page with co-investors:
In the huge real estate investments, people who believe in not putting all their eggs in one basket and/or the ones who like modern financing options available in the market make pool investments. (There are so many financing options through which you partly invest with a group of other investors in commercial real estate). Such investments could become a big problem for you if it comes to your knowledge that your goals are not same as the other co-investors.