If you are looking to build wealth, you may have considered investing in commercial real estate. This investment has produced untold wealth for many individuals, often performing better than the stock market with less volatility. Although these investments have inherent risks, you can overcome them by understanding and avoiding common investment mistakes.
Inadequate Accounting and Forecasting
Real estate is a numbers game, and unfortunately, many people believe they are in better financial positions than they are because they don’t accurately calculate their potential income and expenses. Therefore, pay attention to your calculations and review this information before you make a purchase. Ask the seller about rental income, expenses and occupancy rates. Look for current and future maintenance issues, renovation requirements and utility costs. Reserve money for unexpected costs as well. Also, gain knowledge about any tax advantages and liabilities, such as property taxes, as well as insurance requirements.
Investing in the Wrong Type of Property
Commercial properties include office, retail, multifamily, RV parks, storage units, multi-use and industrial spaces. Some investors also purchase vacant land for development. With the variety of real estate available, you can see that each has unique risks. For example, apartment complexes, which have high returns, have high maintenance costs and require effective management, while lower-performing assets, such as industrial properties, have fewer financial outlays.
Although all these properties have high profit potential, not all are right for you. You need to understand your goals and the challenges and requirements inherent in each property type so you can choose properties that fit your investment strategy and available resources.
Not Doing the Research
You are responsible for doing your due diligence. If you have found a property you want to invest in, you are responsible for researching it thoroughly. Don’t be too eager to acquire a piece of real estate that you overlook current or future expenses and unpleasant surprises. Instead, analyze the lease agreements and financial statements of the seller, and have the building inspected to ensure it meets code requirements. Don’t be afraid to walk away from a bad investment.
Not Building a Team
The greatest asset on your investment journey is your team. Unfortunately, many new investors think they can do it alone. However, a great team, filled with experts in the field, such as real estate lawyers, realtors, mortgage brokers and construction contractors, can identify potential expenses that will reduce your expected profits. They may also find you properties that will provide a much higher return than you expect.
Commercial real estate can be your path to wealth acquisition if you learn from others and avoid their mistakes.