Learn to navigate the risks and roadblocks that fall on even the most experienced investors.
Don’t let the stories of quick riches and easy money fool you. Investing in commercial real estate is a complex undertaking and comes with its own set of risks and rewards. While knowledge, experience, and building relationships can help you along the way, sometimes the outcome is out of your control. In these times, being both mentally and financially prepared can make all the difference. Let’s review a few dangers when investing in commercial real estate and learn how to best avoid them altogether.
Jumping in with only residential experience
The commercial real estate market is much more complex than its residential counterpart. While an understanding of residential real estate certainly gives you a leg up on concepts, you’re at an extreme disadvantage if you head into deals having only flipped a few houses. There are many factors that affect the value and future appeal of a commercial property and much of the information isn’t readily available. For example, say you’re researching rent prices and comparing two properties. Finding a residential property comparison (or even several) in a similar neighborhood is a piece of cake. The same can’t be said for commercial real estate and it can be difficult to stack properties against each other.
Consider a commercial real estate broker
Bottomline? A commercial real estate broker can save you time and money. A competent agent not only has intimate knowledge of market conditions and trends in your area but also has the connections to close deals efficiently.
Knowledge and contacts aside, one of the main perks to hiring a broker is the properties they can find. Commercial real estate listings are not as centralized as residential listings and only a few of the platforms are open to the public. Essentially, while residential listings are centralized and managed in the MLS, commercial listings are hidden, often behind a costly subscription. Commercial real estate agents drop quite a bit of money to stay well-informed and as a result the public doesn’t have immediate access to the majority of the market’s available properties.
Jumping in without researching market conditions
It pays to check into the local market conditions because today’s trending neighborhood can be tomorrow’s slums. A bad property in a great market can be an incredible investment. Likewise, a great property in a poor market can leave you broke. How do you know the difference, really? To determine which properties types are in demand and where opportunity lies, analyze the demographic trends of population growth, income, and employment in the local market. Dropping money into an area with declining demographic trends is destined for disaster—so it pays to check into your market conditions and trends.
Jumping in without the time
Short of hiring someone to keep you up-to-date on your properties, serious commercial real estate investment is a full-time job. There’s no news ticker on your TV or app that you can check that regularly updates you the value of your buildings—that information takes time and attention to detail to gather. Sure, if you’re managing rental properties and work with a quality property management company (and there isn’t any issues or necessary improvements looming) your monthly time commitment can be minimal. Check the income report, verify money has been deposited, and move on. But if you’re looking to invest in commercial real estate or list your property for sale or lease, make sure you’re ready to devote a sufficient chunk of your life to ensuring the deals go smoothly.
Jumping in with personal assets
A great first step to separate personal credit from business credit is by incorporating your business as a separate legal entity—most likely a limited liability company (LLC). This shields your business from any personal liabilities and also protects your personal assets from the activities of the business, done and done. Once you have incorporated, you can start building business credit that will be used to determine the creditworthiness of the business—which is separate and distinct from an individual’s personal credit.