Property market update: Perth, December 2021
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What are the most common mistakes to avoid when buying commercial property?
Investing in a commercial property can be a lucrative venture. For most first-time investors in the sector, it’s easy to get lost in the excitement, see past the risks, and be lured in by the promise of high financial rewards.
Unfortunately, most of these wide-eyed risk-takers won’t get beyond their first commercial property purchase. While there is no shortage of expert advice and information available that can help guide budding investors towards success, there is plenty of room for mistakes that can turn this exciting venture into a financial pit.
However, experienced real estate investors are not exempt from running into errors. Buying commercial property can be a tricky process and can catch even industry veterans unawares. Oftentimes, an investor can be tripped up with simple mistakes and purchase a property that may not hold the best outcome.
With that in mind, here are the most common mistakes investors should avoid when buying commercial properties.
1. Failing to plan
When you fail to plan, you are likely setting yourself up for failure. One of the most common mistakes investors make is letting their emotions take control of their commercial property purchases without having a strategic plan in place. Purchasing a commercial property on a whim is a mistake that can exponentially hurt your wallet.
Investing in commercial property takes a lot of planning. Any veteran in the real estate industry can attest that having a plan or a long-term vision is one of the most fundamental factors to succeeding in the real estate game.
Generally, a commercial real estate investment requires investors to put a lot of money (as well as time and effort) on the line, so it’s important to set your goals and identify ways how you can reach your objectives.
Take a moment to sit down and map out your investment journey based on your financial goals. If you see that buying commercial real estate is realistic for your timeline, you can have a more definitive idea of the direction you want to go, and you can also track your progress more clearly.
2. Not preparing a budget
Making a mistake in the budgeting stage can lead to thousands of dollars in loss. If you don’t get your finances in order before buying a commercial property, you may be in for a shock when things go south very quickly.
When creating a budget, don’t stop when you have secured an investment property loan from a lender. Take into account extra expenses, including property taxes, insurance, furnishing costs etc.
Additionally, it’s important to remember that some commercial property investments don’t always come turn-key ready. Typically, these properties will require some sort of repairs or updating just to get them ready for leasing.
It’s also worth noting that vacancy periods can run longer for commercial properties compared to residential properties, so it’s always best to be prepared with a financial buffer.
3. Not doing your due diligence
Failing to understand commercial property market trends is one of the biggest mistakes property investors make. Sometimes, it’s because they are relying on market hype or word-of-mouth from fellow investors when deciding when and where to buy commercial property rather than making a well-informed decision on their own.
But as with all types of investing, you must always do your research thoroughly before you put your money in. Not paying attention to the important market data and trends can result in buying the wrong property and paying more than you could.
When doing your research, you can start by comparing vacancy rates, average rents, verifying flood areas, state regulations, land zoning ordinances, access to transportation, future infrastructure developments, and more.
4. Getting the location of the property wrong
Another common error made by investors is failing to evaluate the qualities of competitive commercial properties in a chosen location, and how these factors affect asset performance, and more importantly, its rentability.
For example, if you have an office space but the area is not considered by businesses as a desirable location for setting up shop, then you may find you have little tenant interest, and your investment could sit empty for a long time.
Before you purchase a property, try to see the property through the lens of potential tenants.
A commercial property should satisfy all of the key requirements of the intended tenant type, which may include onsite parking and/or access to public transport hubs.
Location, access and zoning are important factors that will impact long-term ability to attract tenants and overall asset performance.
A good way you can find this out before investing is to talk to the storefront business if it’s occupied and ask if they are planning on renewing their lease and check whether there are any indications that more businesses are relocating or emerging in the area.
5. Making the wrong property choice
The most common mistake is failing to choose a property type that suits your financial goals and appetite for risk.
Three of the most commonly cited reasons for buying a commercial property investment are capital growth, income (rental return), or strategic purchase (buying the property for owner-occupation, purchasing for site expansion, or creating a land bank for future development).
Whatever your reason is, it’s important to be clear about your motivations from the get-go to ensure you buy an asset that will be best suited to meet your needs and avoid issues in the future.
Before deciding if a commercial property is the right type of investment for you, make sure it meets your long-term financial objectives. This way, you will manage your risk and improve your property investment outcomes.
6. Failing to do a compliance review
While this sounds like something that should be on any buyer’s to-do list before finalising a purchase, some make the mistake of not doing their own independent investigation to ensure buildings and improvements are in line with local, state and federal regulations and requirements.
Anyone planning to buy commercial property should do a compliance review of zoning, building permits and building code certifications.
They should also analyse existing and planned developments in the surrounding area to avoid future costs and issues.
7. Not keeping emotions in check
While there are a lot of external factors that can distract you when buying commercial property, it’s important to reflect on yourself first. Even if you view a property to be a “good buy”, this will not always reflect the needs of prospective tenants.
A strategic buy should be based on a property’s historical performance, location and yield. Don’t simply buy a property because you consider it to be a google deal or because of high yields alone.
To wrap it up, here are some basic questions you can ask yourself to avoid common mistakes when buying commercial property: