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5 Common Mistakes When Looking for Commercial Real Estate

April 28, 2020 by in Tips

Commercial real estate property offers earning opportunities. You will learn the right steps in this effort to maximize your earning potential. Here are five common mistakes that can disrupt your investment:

Relying on Your Emotions and Instincts

Commercial and personal real estate are different markets. There really could be a place you love for yourself and your family while you are looking for a home. Yet, no matter the property’s look or popularity of its address, never let emotions affect your decision with commercial property. Rather, make your decision based solely on sound business factors.

Misreading the Market

While real estate grows over time, this does not mean that even if the market works well, you can make a quick decision without considering the market and submarket well. You must be confident that a property is a good option for investment, so you do not overpay, which will decrease your return in the long term.

To understand the competition also means understanding the demographics of the region if you are a business owner. Analyzing data is important if the market can support your products or services. You would have to look at population growth and job creation, the unemployment rate, and property taxes. If you cannot do so, you might damage your business.

Disregarding Operating Expenses

The sales price is not the only number you ought to be careful with while thinking about a commercial real estate purchase. No matter the purpose of the building you need it for—be it office, retail or industrial – you must consider the operating expenses. After finalizing the sale, there is no time to figure out the money needed to run the building. Ask current owners to comment on average monthly running costs.

In certain instances, too, you pay a far greater amount than the amount that the appraisal district previously assessed. Be prepared for an instant tax raise until the appraisal district accepts the new price.

Ignoring Tenants’ Leases and Earnings

If you invest in a building with tenants, analyze their current leases carefully. If others have signed short-term leases, in a few months or years you may find yourself with vacancies. Obviously, it would lower your income. If any of your tenants are retailers, then you ask about sales. A major indicator of whether the business has sustainability would be the ratio of rent-to-sales. Leasing does not surpass nearly 5% of revenue in most markets.

Be mindful that some tenants have unique provisions like co-tenancy, which ensures they are entitled to a discounted rent or cancelation of a contract whenever a large tenant vacates within the property.

No matter if you are an experienced buyer or novice, your option is to work with a team of financial professionals who know the business and the commercial real estate process. Get in touch with us today.

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