5 Common Pitfalls When Investing In Commercial Real Estate

Since the beginning, real estate investments have always been a dependable source of income. Investing in commercial real estate is one of the most certain ways to build wealth. But just like any other money-making endeavor, there are risks involved in investing.

While it’s true that the real estate industry can move fast, that doesn’t mean investors can’t avoid its traps. It’s when investors get caught in these pitfalls that they make more bad investment decisions that hurt their revenue.

If you are new to investing, it’s important to avoid these five common pitfalls when investing in commercial real estate.

1. Inadequate planning

Planning is extremely important to get the most from your real estate investment. The right investment plan will allow you to earn the maximum possible profit, reduce management liabilities, and allow your business to grow faster.

The amount of time, energy, and effort required in planning is astounding. Before you buy any property, you should make a proper, fool-proof plan, along with an exit strategy when the internal rate of return (IRR) decreases over time. Your investment strategy should cover about five to ten years.

2. Buying the wrong property

Commercial properties have four major classes: industrial, multi-family, office spaces, and retail. Understanding which type of property is extremely important to your success as a real estate investor. 

Before you make the big decision to buy a property, make sure you have set personal and financial goals to determine the type of property investment that is best for you. You can also hire the services of a real estate professional to ensure that you get the most profit from your investments.

3. Doing everything on your own

Seasoned investors know how to leverage different real estate agents because they know that some of the most profitable properties are not made available to the public. While you can start investing on your own, it’s not recommended if you don’t have any prior experience doing it.

According to the National Association of Realtors or NAR, there are an estimated 3 million licensed real estate agents in the United States. These agents have the knowledge and network to find the best deals. If you’re going to seek help with your investment pursuits, make sure you only do business with experienced real estate firms.

4. Ignoring repair and maintenance costs

A property that is overly below-market price means significant repairs should be done before it can generate profit. If you ignore this red flag, chances are, you’ll have lower returns because of the incurred costs of repairs and renovations.

Moreover, buying a cheap property doesn’t necessarily mean you have saved money. Make sure you understand the overall cost of repairs and renovations and are willing to shoulder these costs before you decide to buy the property. Then again, it’s always better to invest in a higher-priced property that’s already making a revenue.

5. Undervaluing taxes

One of the biggest benefits of investing in real estate is its tax advantages. Unfortunately, there are investors who take this for granted and suffer unnecessary tax liabilities.

Property taxes tend to increase over time, which can lead to unexpected costs. You should give important consideration to planning your taxes when investing in commercial real estate. If you don’t know anything about taxes yet, you can seek help from a tax professional to help you with tax planning and its implications.

The Takeaway

You may want to consider investing your spare resources in commercial real estate to further grow your wealth. However, just like in every business investment, there will be risks that you’re forced to take as well as mistakes you may commit, but with a whole lot of carefulness, you may avoid the pitfalls that come with investing. Just make sure to be aware of what actions to avoid and be prepared to face the consequences of your investment decisions,  and you’ll be on your way to growing your investment exponentially. 

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