It’s every investor’s worst nightmare: the property that looked great from the outside turned into a disaster not long after the ink dried on the contract.
A great investment that ends up going south can be hard on both your portfolio and your ego. And although with time you’ll learn to spot these too-good-to-be-true properties a mile away, there are several signs you can look for right now that will help you identify a bad commercial property deal without losing skin in the process.
Identify Bad Commercial Property Deal With These Warning Signs:
A problematic property might seem fine at first glance, but dig in deeper and you might find some troubling facts. Things like a great property located in a neighborhood short on basic amenities like schools and stores, low traffic estimates, or zoning changes that allow an airport to be built or re-route a major highway can be devastating to your NOI.
Investigating the neighborhood to determine the trends may take some footwork.
However, spending half a day talking to tenants and small store owners could save you from purchasing a property in a neighborhood that is slowly dying, or beset by increasing levels of crime.
Other factors to look at include rising property taxes, malls moving to the next neighborhood over, public transportation being scaled back, and an increasing number of rentals. Forget about waiting it out – you won’t last the twenty or thirty years it might take to reverse the trend.
Fixing The Numbers
In commercial real estate, it’s critical that the numbers add up.
There are plenty of online tools that allow you to enter your estimates and determine an estimated NOI. However, if
the numbers don’t look good even after you’ve put in several of your best guesses, don’t try to prove the property is a winner by underestimating expenses or being overly optimistic about rent amounts, tenant vacancy, or another important factor.
Instead, move on to a different property – there are plenty more fish where that one came from.
Too Much Money on the Line
It’s natural to want to invest in a property which looks like it will get great returns – especially if the numbers will work out. However if you need to cash out your entire portfolio or use your life savings to purchase it, your best bet would be to consider a smaller property and pass on this one.
The stress of renting out the property combined with a few worry-inducing months of tenant vacancy can be enough to put you over the edge for good.
It’s easy to assume that the numbers given by the seller are accurate. However, it’s not uncommon for a seller to “bend” the numbers to make the property look good.
To avoid this, take a good look at the numbers and try to vet as many as you can. Don’t rely on projections. For example, if the pro-forma report states that rents are due to rise or that tenant vacancy in the area is going down, do the work and verify whether or not those numbers are true.
Be sure to question not only projections, but also to take a careful look at where every dollar comes in, and where it goes out. Also make sure that the seller gives you actual numbers for profit and loss statements from previous years, not estimates.
Property On the Market For Too Long
Most commercial properties get snatched up fairly quickly.
Although market demand may fluctuate, be wary if the investment property you’re considering has been on the market for too long. Do some footwork, or call around to find out why the property is still available; there may be a problem you’re overlooking or not aware of.
Commercial income property is more complicated than residential property, but a commitment to thoroughly checking out a property and a good team will help you find the best property for your portfolio. If in doubt about a particular deal, be patient and take the extra time to investigate the deal thoroughly.