Commercial Real Estate Investment Mistakes and How To Avoid Them
If you are looking for a dependable wealth-building strategy, you have probably considered commercial property investments, which typically perform at the rate of or better than stock market returns without the volatility. However, these investments also have risks. You can overcome these risks by understanding common commercial real estate investment mistakes and how to avoid them.
Not Doing Your Due Diligence
Like every investment, you need to do your due diligence before you invest in a commercial property. Don’t be so eager to gain properties that you don’t crunch all the numbers, have the building inspected, review the current leasing agreements, review any renovation needs and analyze the financial statements of the previous owner. You also need to review federal, state and city or county building codes to ensure the property meets them. You also need an accurate property valuation.
Not Preparing for Your Tax Responsibilities
Although commercial properties provide extensive tax deductions, they also have liabilities. You can deduct depreciation, renovations, utilities and many other things from your taxes, but you need to make arrangements for your property taxes and insurance. These outlays also increase over time, so you should have a plan to pay them every year. You likely will also need to pay capital gains taxes if you sell any of your real estate for more than you purchased it for.
As you begin your investments, you may want to consult with a tax attorney to help you determine what your responsibilities are and how you will meet them.
Buying the Wrong Property
Commercial real estate includes multi-unit properties, manufacturing facilities, storage and warehousing buildings, retail stores and restaurants, as well as raw land and mixed-use properties. Each of these property types is unique and requires different management and maintenance.
As an investor, it is your responsibility to research each property type before you invest. You also need to understand your desired property and the time and energy each type will take to manage. You can start this evaluation by reviewing your personal and financial goals. Then, evaluate each type of property to determine which best meets your needs.
Not Being Fiscally Responsible
Although this type of real estate is typically highly profitable, it has inherent risks. You need to learn how to balance these factors, risk and income. Fiscal responsibility requires that you don’t overextend your finances. You need accurate income and expense numbers. You also shouldn’t leverage every bit of equity or gain too much debt.
Learn about the risks and mistakes others have made as you build a long-term strategy for your commercial real estate investments.