When you enter the commercial real estate market you are entering a far different world than residential real estate. Learn what pitfalls to avoid the easy way before you learn the hard way.
Due diligence is absolutely necessary for all real estate transactions, including commercial transactions. Hire a respected property inspector to research the property and its history. An inspection should include a thorough examination of building systems and structural components of the property. Look into any and all potential land use, survey, zoning, environmental and title issues that the property might have. If any repairs are needed, consult independent experts regarding the cost for repair.
Zoning issues are of special interest. Real estate brokers often misrepresent zoning and rezoning issues, accidentally and intentionally. Always get an independent (preferably local) planning expert to advise you on zoning issues.
As mentioned above, the commercial real estate market values things differently than the residential market. The savvy commercial investor needs to know more information than rents and CAP rate, as is most often the case with residential property. For example, research the population of the surrounding region, as well as unemployment rates and average income. Larger populations, low unemployment, and mid-level incomes are (generally) positive things to look for.
Forgetting about Existing Tenants
When you purchase a commercial property, there might already be exiting tenants with long-term leases inhabiting the space. Remember that many states honor tenant leases over new ownership of commercial property. Carefully examine the rental agreements under contract.
Lack of Professionalism
Many commercial landlords forget that they are running a business. Treating your tenants like customers is good business practice. Develop a budget to ensure that you are turning a profit. Collect rents in a timely fashion, and expeditiously deal with deadbeat tenants as you would with residential property. Consistently maintain the property to ensure that your assets remain marketable against your competitors. Commercial real estate is a very hands-on business model. You will find it difficult to deal with your business from afar.
Too Much Debt
You may need to assume some debt when you purchase commercial property. Before taking out a loan, you should remember that any debt should be backed up by reserves of either capital or cash. A break-even ratio over 80 percent is generally considered dangerous financial territory.
No Exit Strategy
You should have an exit strategy for all of your businesses and investments, including commercial real estate. In fact, you should have several well-developed exit strategies, based on best-case scenarios, worst-case scenarios and everything in between. Exit strategies include information regarding issues like projected profit, anticipated costs associated with repairs, improvements and operating costs and time period for investment.