The Mistakes To Avoid When Buying Commercial Investment Property
From buying the wrong property type and not knowing the local market to not carefully estimating your investment risk, there are mistakes you should avoid in your search to buy a commercial real estate property.
This post outlines five common mistakes we see many commercial real estate investors make. By learning what to watch out for, and partnering with the right team, you can avoid these time-consuming and costly mistakes on your commercial investment property buying journey.
1. Choosing the Wrong Property Type & Class
One of the first mistakes you should avoid when buying a commercial investment property is investing in the wrong type and class of property. Commercial property is sorted into five main categories, including office, industrial, retail, hospitality, and multifamily. Additionally, each commercial property category is further classified by class, including Class A, Class B, and Class C.
Check out our recent article for an in-depth look at each category and class type.
Choosing the wrong commercial property type can have major consequences. Most cities have a long list of ordinances regulating the use of each type of commercial property. This is why you must carefully avoid choosing the wrong property.
Buying the wrong type and class of building is a mistake you want to avoid when considering your commercial investment property search.
2. Lacking Local Market Research
Ignoring market trends is a huge mistake you want to avoid when buying a commercial investment property. Knowing the classification of other buildings in your area can help you estimate the commercial property’s value and your likely return on investment.
To conduct your own local market research, consider the following:
- Changes in the real estate market as a whole, and then on a commercial property level
- Demand for commercial space
- Rent prices for commercial space
- Market averages for each of the above points
There are an overwhelming amount of real estate market data and trend reports you can find online. You can save time by partnering with a real estate brokerage firm specializing in commercial investment property, like Sovereign Realty Advisors.
Contact us to start your local market research.
3. Not Estimating Risk
You will assume a certain level of risk depending on the commercial type and class you’re interested in investing in; however, don’t be fooled by a seemingly perfect property. Even Class A properties can run you aground if you don’t estimate unexpected repairs and maintenance costs.
This is why you must carefully estimate the risk you’re assuming when buying a commercial investment property. While commercial real estate can be an excellent and lucrative investment strategy, it also comes with a hefty dose of risk. Ask yourself the following questions to determine if you’re in the right financial situation to assume the risk:
- If the property sits vacant, do you have enough cash flow to pay both your personal bills and any related investment costs?
- Do you have enough funding for unexpected expenses or repairs?
- Can you accurately determine the cash flow you will generate with this commercial property? How about in times of vacancies?
4. Not Considering the Financial Big Picture
Avoiding financial pitfalls is one of the most critical components of buying a commercial investment property. While it’s exciting to think about the influx of cash flow you could potentially make, also consider the financial big picture.
Answering the questions we posed in the section above goes a long way in helping you estimate your return on investment. However, take that a step further by modeling the financial viability of the commercial property.
You can do this by analyzing the financial documentation related to the property, including:
- The property’s rental income
- Historical occupancy rates
- Past recurring expenses
- History of repairs and maintenance on the property
- Average utility costs
- Property management expenses
We encourage you to pay attention to assessing the commercial property’s value. This is an essential step in securing financing, and all of the above points plug in easily to several assessment formulas. Here are a few you may consider using:
5. Not Hiring an Expert Team
The last mistake you want to avoid when buying a commercial investment property is not investing in the right team to support you through the process. Having the appropriate professionals on your side when you start your commercial real estate investment journey can save you time and money.
We suggest finding expert professionals in these fields:
You likely already have a trusted accountant on your side. But when buying a commercial investment property, you must ensure your accountant is well-versed in commercial tax requirements. Hiring the right CPA can save you thousands of dollars in taxes and leverage cost-saving expenses.
Real Estate Attorney
Hiring a real estate attorney is one of the most important hiring decisions. Because they know the legal implications involved in financing and buying commercial property, attorneys help you navigate the due diligence of buying, including poring over lease agreements and financial statements.
Property Management Company
Finding a property management company at the beginning of your commercial property search can help you avoid costly mistakes. A property management company that is well-versed in leasing commercial properties can help you with market research and estimating a realistic cash flow.
Commercial Real Estate Broker
If you want to avoid all the mistakes we’ve outlined in this post, hire a real estate brokerage firm specializing in commercial real estate. There’s a lot that goes into the process of buying commercial property. But with a real estate broker on your side, you can find and buy a commercial property that fits your investment goals.
If you need an expert partner on your side as you navigate the complex world of commercial investment properties, look no further than Sovereign Realty Advisors. We give our clients the knowledge and confidence to pursue their investment goals by avoiding costly mistakes.
Contact us to learn more about how we can help you buy the right commercial investment property.