Top 3 Commercial Real Estate Mistakes
Avoid these common pitfalls when you’re jumping into the commercial estate market.
Don’t let the stories of quick money fool you—plenty can go wrong if you’re not prepared. 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 common hazards and red flags many first-time investors encounter when jumping into the commercial real estate market.
Residential real estate knowledge translates to the commercial market
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.
Mixing personal assets.
While this is pretty common knowledge at this point, it’s a good reminder once in awhile. While using the same accounts and a single card is more convenient in the short-term, separating the finances shields your business from any personal liabilities and also protects your personal assets from the activities of the business. What’s more, keeping individual tax records are crucial when it comes to filing taxes, keeping track of receipts and taking advantage of business tax deductions. Plus, the interest you pay on business financing is usually deductible, which isn’t true for most personal financing like credit cards. In short, combining personal and business assets will create a personal liability problem, fails to help you build your business’s credit profile, and can cause a huge headache of work should the IRS decide to audit you.
Ineffective Property Due Diligence
When it comes to providing information about a potential property or development site, it’s a good idea to include as much detail as possible, including:
- Property name and physical address
- Type (e.g., single-family, mixed use, retail, apartment, office)
- Year built. Include the dates of any remodeling or renovations.
- Number of units (include a breakdown of units/size, if applicable)
- Site details (e.g., purchase price, zoning, utilities, roads/shared driveways, excess land)
- Construction details (e.g., public utilities, parking, deferred maintenance)
- Proposed scope
You should also look into local market conditions. Although any reputable lender will likely conduct their own research (or already have extensive experience around your proposed location) it can be helpful to do your own research to prove you have done your due diligence. Always try and include comparable properties in the area, both active and sold. Other market and location details you could throw in, include:
- Demographic information (check US Census Bureau)
- Maps displaying property and comparables
- Market timing (how long it’s been on the market)