Over the past two or more decades, more people have focused on moving from traditional investment strategies to adding real estate to their retirement portfolios. Additionally, the move from residential property investment to commercial real estate investing continues to grow, resulting in a constant stream of new investors.
These new investors often make assumptions about the CRE market. It is a volatile market, offering different levels of investor risk and reward potentials. As a result, new investors need to consider their overall strategy and investment plans to avoid common and costly mistakes.
Shop for Financing
Most CRE investors will use financing to make their purchases. This is true if they are buying the property on their own or purchasing as part of an investment opportunity through a real estate syndication or a real estate investment group. Choosing the right real estate investment group (REIG) and the best option in financing will reduce your costs throughout the ownership of the property.
Avoid One Big Investment in the Potential of a Building
It is easy for new investors to get caught up in the potential of a single big commercial property. While there is nothing wrong with investing in one property to start, CRE should also be diversified, just like any other investment asset. Owning properties all in one area or investing in just one building increases the risk of economic loss if there is a problem with the building infrastructure or the area or neighborhood changes in demographics or use.
Rental Homes Are Not the Same as Multi-Family Buildings
It is common to assume that investors owning a single-family rental property can use the same strategies to make a profit on multi-family buildings. At the same time, small multi-family buildings of two or three units are not always a good investment. They tend to have high vacancy rates and are often older buildings, meaning more upkeep, retrofit work, and modernization requirements.
Many first-time CRE investors have a general idea that they can manage these smaller properties, saving the cost of hiring a property manager. However, these properties need to be actively and effectively marketed, maintained, and managed to ensure they retain their value and make money. Most first-time investors do not have the expertise and experience to handle the day-to-day services and functions provided by a quality property management team.
Flipping Commercial Properties Is Never Easy
The cost of upgrading existing commercial properties on the market, including offices, retail, industrial, and multi-family apartments, is always a factor to consider. There are no shortcuts on these projects. The costs can be substantial to bring the building to the level of features, amenities, and services new and existing tenants expect.
When investing in CRE, it is essential to look at the long-term returns on the investment. While there is always the option to flip commercial properties, it is rarely an effective strategy for a first investor.
