Many millionaires and billionaires have built their wealth using commercial property investments. These investments are dependable for wealth building. Commercial real estate investments often have better performance than the stock market because they are much less volatile. However, even these investments have inherent risks. Therefore, you should know the common mistakes people make when they invest in commercial properties and take steps to avoid them.
Lack of Due Diligence
Some new investors don’t do their due diligence before purchasing a property. These individuals are excited to start earning an income, and they may not know what to look for to ensure the property will produce the income they need.
To ensure that you don’t get any unpleasant surprises, work with a reputable, knowledgeable team. Start with finding a great mentor with lots of experience. Then, search for reputable realtors and mortgage brokers. They can give you tips on great properties and warn you about bad properties. You should also have a working relationship with an experienced contractor who can go over any properties you are considering to identify any red flags, such as old electrical, bad plumbing, or updates that need to be made. Finally, you should consult a real estate and tax lawyer as well as a CPA. These individuals will protect you legally.
Miscalculating Your Returns and Ratios
Some new investors think that every property is going to be a huge success because it is a hard asset and real estate typically appreciates. However, this is not always the case. For example, if you purchase a retail building in an area without appropriate support, such as insufficient parking, no other shops or businesses in the area, and little normal traffic, you can lose money because the space may only rent for short periods if it rents at all.
Therefore, you need to ensure that your prospective purchases will make money. Look at occupancy rates from the last several years, average, and current rental income and expenses. Calculate the net operating income and capitalization rate. Review cash flows and calculate accurate projected cash flow.
Lack of Diversity
Some investors look for the same type of property to invest in. However, this can be a mistake. Yes, you shouldn’t move into a new major market until you have in-depth knowledge of the one you are in. Therefore, initially, you may purchase one type of property in one area. However, as you grow in knowledge, you can move to other locations and property types. For example, you may purchase strip malls initially, and when you are more comfortable with the process, you may move into office or small apartment buildings.
Although commercial real estate is typically a safe investment with great returns, you need to understand the mistakes that new investors make and develop strategies to avoid them.
Seek Expert Assistance
At Abel Commercial Funding, we know that part of successful investing is directly related to smart real estate investing. We offer a variety of commercial real estate financing options to help individuals and groups of borrowers obtain commercial properties. No matter how big or small your transaction may be, we can help to structure the right type of financing solution for your needs. We offer a variety of both recourse and non-recourse options, in addition to our extensive program choices.