Investing in commercial real estate is very lucrative and many investors have made a fortune by such investments. It is a business to be in for people looking to make long term profits and earn good returns on their investments.
That said, it’s also important to note that real estate investing can also be a risky venture, rendering many people lose their money in the game, both short term or long term.
The real estate investing game is all about making smart decisions and choices, while adapting to the very dynamic real estate markets that keep changing with regards to trends.
Small mistakes in making decisions might cost huge losses and thus, it’s essential to play the game very cautiously. And it does not end at making well informed decisions. It goes beyond that – where your intuitive perceptions might override your logical conclusions.
The best way to go about it? To be a constant learner – to learn from your own mistakes and to also learn from others’ mistakes and experiences.
Learning from others’ mistakes and experiences in our opinion is the best way to get your commercial real estate investing game right. You don’t have to make all the mistakes first-hand to learn from them.
We’ve made your job easy by compiling a list of most commonly made mistakes by investors while investing in commercial real estate. Learn from these mistakes and be watchful of these pitfalls as you unfold your commercial real estate investing journey.
Common mistakes you should avoid while investing in commercial real estate
#1 – Making decisions based on the gross income of the properties
One of the most common mistakes investors make while buying a commercial real estate property is going by the total revenue generated from the property instead of focusing on the net income, after deducting all the related expenses.
Is a trap to which majority of the beginner commercial real estate investors fall prey? It’s especially frequent because property owners and sellers are very good at painting a flowery picture showing the projected gross income that a property is capable of generating.
Smart investors wear their prudent lenses to analyze the projected profits and compare it with actual profits generated after deducting all the expenses like taxes, loan fees and costs, repairs and costs, sale closure fees, agency fees, legal fees and so on.
Lesson – Look at the longer picture and take into account NET INCOME over gross income that can generate from commercial real estate property.
#2 – Caring less about conducting due diligence on the commercial real estate properties
The next common mistake committed by Commercial real estate investors is failing to do due diligence on properties they wish to buy.
A severe legal mistake can wreak havoc while financing your properties or can come in the way of utilizing your property for any intended use. Checking the title reports of the property with an eye for every small detail is super important here.
No matter how much you trust your commercial real estate broker, legal due diligence is something you should do on your own regardless!
Basic property violations should be looked out for. Check if all the tenants at a commercial property building are paying up their rents on time and be aware of their business purpose and conduct. Ensure no tenant is indulged in carrying out illegal businesses.
Checking for standard building guidelines like having a fire alarm and sprinkling system, an efficient waste treatment system and so on are again necessary diligence that you must carry out to avoid costly mistakes in future.
#3 – Failing to understand the terms of commercial real estate loan financing
Commercial real estate loan financing is a vast subject in itself and the process of familiarizing yourself with all the loan terms can be daunting.
Nevertheless, it’s essential. Signing up for a loan program without fully understanding how it works is probably one of the most common mistakes made by commercial real estate investors as beginners. We cannot lay more emphasis on the importance of research here.
Research and homework is the key to making less mistakes. And if you don’t know, ask! That is as simple as it can get. Ask your agent, broker, or any other form of real estate expert. Do not jump into making decisions.
Take your time to fully understand your lending scenario. Familiarize yourself with loan terms like – Loan To Value Ratio, Debt Service Coverage Ratio, Balloon loans, Commercial mortgage loans, bridge loans, stated income loans, property value, credit score, down payment, pre-payment penalty fees and so on.
The goal is not to just know them but to fully understand what they mean.
#4 – Incorrect assessment of property value
The next major mistake is to incorrectly assess the cost of a property. Unlike gold which is a commodity that has a uniform blanket pricing – where its value is the same in one state as in another, real estate properties vary in cost and valuations.
Various nuances like the location of the property, vacancy rates, occupancy rates, demographics of the location, quality of the materials used in construction, proximity to various public places etc come into picture while evaluating a commercial real estate property.
Considering all these factors is of prime importance to correctly assess the property value. It makes you better positioned to gauge property values based on your understanding and knowledge over directly buying facts at face.
#5 – Not hiring a good property manager to manage your portfolio of investments
While it might be tempting to be a sole show-runner, managing everything on your own – you cannot scale up soon without a good property manager.
It is an extra cost added up to your real estate investing budget but it’s a worthy one at that! What’s more is that good property managers can help you make better returns on your investments while also reducing your stress and making your entire process a smooth one.
This peace of mind will leave you room to explore other areas of commercial real estate investing and you will have all the time you’ll need to become a better investor, as you outsource your management of properties to a team.
A good property management company can reduce stress, mitigate your risks and also increase your profit margins – besides doing everything from finding tenants, maintain good shape of your property, avoiding vacancies, collecting rents on time, solving tenant concerns and so on.
Bottom-line: Hiring a good property management company frees up your mind space and time to pursue more meaningful and lucrative tasks like scaling up.
#6 – Choosing wrong location!
It’s been told enough and it cannot be emphasized upon more – Location, location, location! You are bound to get your commercial real estate investing wrong if you get your location wrong.
While choosing a commercial property to run your business from, your location study goes beyond looking for location demographics and traffic patterns.
You must also look into other important factors like – target market, ease of commute, population mix, income patterns of the people living in and so on.
Same rule goes while you’re planning to buy commercial real estate properties to rent or lease it out. Do all the research you want to, talk to as many people as you deem essential before making your final decision.
#7 – Relying too much on commercial real estate brokers
The next common mistake is to trust commercial real estate brokers blindly. No matter how good a broker is, or how well you’ve known this broker – it goes unsaid that you must conduct your due diligence independently and subjectively.
Remember that you should be prudent and cautious while making your decision and not buy facts at face.
#8 – Underestimating the Financial Mortgage obtaining process
Novice commercial real estate investors assume that the process of obtaining financial mortgage for commercial properties is not very different from getting residential mortgages.
However, the truth of the fact is that the two methods are entirely different from each other. Commercial real estate financing takes longer time and is often a much more involved process than the residential mortgages.
It also comes with various types of upfront costs like commitment fees, property appraisals and site inspections. Making informed decisions for choosing the best Commercial real estate lender in the market is an important aspect too which shouldn’t be ignored.
#9 – Miscalculation of cashflows
Miscalculating your cashflows can come in the way of your real estate investing and can render the risk of occurring huge losses. Your decision of buying a property must based on a long term cash flow.
It should outline your net profits after deducting all expenses related to purchasing and finding suitable tenants for your property – and everything in between including the costs associated with commercial real estate lending scenario.
It’s a good idea to hire a real estate expert who will oversee or supervise your calculations so you have a better and a more accurate picture of your cashflows.
These are some of the most common mistakes which novice Commercial real estate investors make. Be watchful of these pitfalls and remember to always play prudent while making decisions to ensure your success in commercial real estate investing.