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5 Do’s and Don’ts of Purchasing Commercial Real Estate

Written by Posted On Thursday, 13 September 2018 07:34

Commercial real estate investing can be a lucrative business, but one failure or misstep can leave you bankrupt. Before you dive head-first into the game, it’s important to educate yourself as much as possible and learn from the mistakes of others.

These five do’s and don’ts can help you get started on the right foot.

1. Do: Know How to Recognize an Investment Opportunity

The first and most important thing is to understand how to recognize a worthwhile investment opportunity. Just like with residential real estate investing, the investment has to be worthwhile.

In other words: you don’t just want to acquire any property. Take the time to calculate how profitable the investment will be in the next five years. Determine how much your investment will be producing.

2. Do: Get to Know the Location

Location is everything, particularly in commercial real estate. Take a look at the local demographics as well as local household incomes. Research crime data as well as housing data and business information.

Commercial property can only be successful if it’s in a good location. High visibility and traffic volume are two indicators of potentially profitable commercial property. But property that is hidden or in an out-of-the-way location will have a harder time keeping its doors open.

There’s a little more flexibility with location when it comes to office space, but it’s still an important factor. Office space situated in a high-crime area or a location that is difficult to get to will be unattractive to businesses.

3. Do: Remember that the Bottom Line is the Most Important Thing

As with any real estate investment, the bottom line is the most important thing. It is absolutely critical to accurately calculate the profitability of a property before investing. Don’t just consider the purchase price and the rental costs; consider the overhead and any other potential expense you can think of, including maintenance fees, community fees, property management, property tax, income tax and vacancies.

All of these expenses add to the overall cost of the property.

It’s also important to consider financing costs. Commercial mortgages typically come with higher interest rates. Comparing commercial mortgage lenders can help you find a better rate, but you’ll still pay more than you would with a residential mortgage. Mortgage costs need to be calculated accurately and added into the mix of property expenses.

4. Don’t: Go into an Investment Without Goals

Don’t go blindly into an investment without some sort of goal or “end-game” in mind. What do you hope to achieve with the property?

It's important to have a clear picture of your budget and a timeline for your investment. You must also consider the risk level you are comfortable with.

5. Don’t: Rush into a Deal That Seems Too Good to be True

Some commercial real estate investments sound too good to be true, and in many cases, they are. Don’t rush into these types of deals.

Before you commit, take some time to truly think about it. What are you not seeing? Why have other people passed up this investment opportunity?

You may get lucky, and it truly may be a great deal that you stumbled onto first. But in most cases, there’s something that you overlooked that’s a deal-breaker. Always vet every investing opportunity to the fullest extent.

 

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James Stevenson

Hi, My name is James and I've been involved in the property and real estate industry for 10 years now. I hope people will like to read about my thoughts and experiences in the industry and please contact me if you want to discuss my articles further!

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