Investing in commercial real estate, as with any other investment, comes with potential risks. Different investors have degrees of comfort with risk. It is essential for first-time CRE investors to understand their level of risk tolerance and avoid mistakes that can derail even the best investment strategy. Let’s take a closer look at the mistakes that can easily occur for a first-time CRE investor. Working with an experienced CRE agent provides a trusted, experienced professional to help navigate the process and avoid these issues.
Failing to Consider the Investment Costs
One of the most common mistakes made by those new to CRE investment is to underestimate or fail to consider the ongoing costs of owning commercial real estate. Ideally, purchasing a property with a current positive cash flow and a steady tenant base should be a priority. Long-term tenants are always the best option as it eliminates the need for upgrades, modifications, or improvements to the rental space to entice or satisfy the needs of a new tenant. New investors in commercial properties often fail to realize there is a cost associated with finding the right tenant when there is a vacancy. This additional cost is over and above the lost revenue while the space is empty. Having the financial cushion for these situations should be a primary consideration when making an offer on any CRE.
Great Price – Bad Location
Those new to CRE are more likely to look at the purchase price and the condition of the building and overlook the importance of the building’s location. Investing in a building with a low price per square foot, particularly if it is a newer building or recently upgraded, often looks like a solid financial decision. However, if the building is in an inaccessible area or in a new development with limited traffic and visibility, it can be very difficult to find tenants and start generating revenue. This is where first-time investors are easily swayed by “what if” thinking. They often assume that they can drop the rates and attract tenants and then gradually raise the rates over time. While this is a possibility, the higher vacancy rates and the lower income create a double challenge for long-term sustainability.
Rushing to Invest
FOMO, or fear of missing out, is alive and well for many inexperienced commercial real estate investors. They may experience a sense of urgency in making an offer on a property that, on the surface, appears to have significant investment potential. Taking the time to complete due diligence on the property, current tenants, the location, comparable properties on the market, and understanding the risks involved in the investment is time well spent. In addition, commercial properties can often look great in promotional and sales marketing, but only through research can this information be verified as accurate and a complete representation. Rushing to invest is often a sign of a decision based on emotion rather than research and sound financial and investment planning. Taking a step back and talking to those experienced in CRE is instrumental in making the right decision for your financial future.
