5 Common Mistakes When Buying Commercial Real Estate
Purchasing any property as an investment can be a challenge, but commercial real estate can be particularly complicated. Not only is it essential to analyze the market value of the existing property, but understanding its value to potential tenants or customers is critical to finding a solid opportunity instead of a money losing venture.
Even experienced commercial real estate investors have stories to tell about mistakes they have made and lost revenue due to not properly evaluating the situation before purchasing. Some of the most common mistakes commercial real estate investors make are:
- Not Understanding Why the Owner is Selling
Commercial real estate investments are successful or not based on their market value to either customers or tenants. Learning why the current owner is selling is important. Did they have a similar business plan which failed? If so, why and how would that affect your current plans for the property and its success?
- Poor Selling Terms
Often the purchase will include business or property assets. When buying an existing business, this can also include inventory and customer lists. Before agreeing to the purchase, it is important to clearly understand what is included and what is not.
- Property Market Value
Unlike residential property purchases where finding comparable properties to use when appraising the home, commercial real estate can be much harder to price. When adding inventory or improvements to the transaction, it becomes even more challenging.
- Not Knowing the Value of the Property to You
Investors often overlook the past value of a property and have an inflated view of how much it will be worth once they own it, improve it and run it. It is essential to understand the property from a realistic vantage point. Research traffic flow, employee pool and availability, market saturation and many other considerations to ensure you have a realistic expectation of the future value of the property.
- Buying the Wrong Business for You
Not everyone is suited to each type of business. One common example is the home cook who opens a restaurant and fails because they never learned the business. Commercial properties are all unique. Before purchasing, learn as much as possible about the potential for the property and ensure you are prepared to handle it.
There are many good reasons to add commercial real estate to your portfolio. Avoiding common mistakes can mean the difference between a profitable venture and a financial disaster.