While investing in residential real estate is a good way of building your investment portfolio, commercial real estate offers you the chance to make a substantially larger profit from your investments.
However, as the potential for profit increases, so does the risk.
Read the list below to find out what things a commercial real estate investor should never do if they want to be successful.
MISTAKE #1: DON’T OVERPAY
It’s not unusual for a commercial real estate investor that is new to commercial real estate to overpay for a commercial income property. This is usually due to a misunderstanding of what the key metrics are in determining whether or not a particular property will be profitable.
For example, many investors assume that CAP rate is the best method of assessing a commercial income property’s profit potential. In fact, there are numerous factors that can be assessed that impact heavily on net operating profit – even for triple net properties, which are viewed as sure-fire winners by most investors.
And although you can actually get a rough idea of whether or not a particular property has the potential to be a winner in less than 10 minutes, once you’ve narrowed things down, you need to be clear on what numbers you need to crunch so you can negotiate for the best deal possible.
MISTAKE #2: DO CONSIDER THE AGE OF THE PROPERTY
Don’t rush to purchase old properties because of the great price. Older commercial income properties means a greater chance that major repairs will be needed, eating away at your profit.
If you do decide to purchase an older property, don’t forget to add in the cost of repairing a roof, the electrical or plumbing system, or other critical infrastructure.
MISTAKE #3: DON’T SKIP DUE DILIGENCE
It’s easy to avoid checking out a commercial property thoroughly.
Between the numerous charts, historical data, and other often mind-numbing information, you might be tempted to rely on hearsay, or to stick with the small amount of information given to you by the seller.
Don’t be fooled, however, by smooth-talking sellers assuring you how much money you’ll make from a commercial investment property. Make sure you investigate factors such as population demographics, unemployment rates, and other key metrics. Use a checklist to make the process go smoothly.
MISTAKE #4: DON’T GO IT ALONE
The mark of a true professional is in their willingness to gather a team of professionals who will help them get the job done well.
With commercial income properties, that means putting together an experienced team that includes:
- an experienced real estate lawyer,
- property manager and
- commercial real estate broker.
NOW IT’S YOUR TURN
What are the most common mistakes that commercial real estate investors make?
Have you or yourself fallen in the trap of any of the don’ts in this article?
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